This article was written by Gary Zhang.
Although the 2018 Budget allows small businesses to continue enjoying the 20K instant asset write-off initiative of recent years, there has been a renewed focus on integrity changes. In addition to the general tax compliance and integrity changes of the 2018 Budget, specific measures likely to impact on small businesses include:
- disallowing tax deductions for costs of holding onto vacant land and for concessional loans between tax exempt entities in certain circumstances;
- restricting access to small business CGT concessions in relation to partnerships; and
- introducing specific anti-avoidance measures concerning unpaid present entitlements made to private companies and circular distributions involving family trusts.
Extension of the $20K instant asset write-off measure
The Government will extend the accelerated depreciation initiative for small businesses, with aggregated annual turnover less than $10 million, by a further 12 months to 30 June 2019.
The immediate deduction applies to purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019. The immediate deductibility threshold and the balance at which the pool can be immediately deducted are normally set at $1,000.
A small business simplified depreciation pool can also be immediately deducted if the balance is less than $20,000. Current ‘lock out’ laws for the simplified depreciation rules (preventing small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2019.
Specific anti-avoidance measure for circular distributions involving family trusts
Circular or ‘round robin’ distributions made between family trusts enable a distribution to be ultimately returned to the original trustee in a way that avoids any tax being paid on that amount.
From 1 July 2019, a specific anti-avoidance measure will apply to impose tax on such distributions at a rate equal to the top personal tax rate (plus the Medicare levy). This measure is already in place for other closely held trusts that engage in circular trust distributions.
Restricting access to small business CGT concessions in relation to partnerships
From 7:30PM (AEST) on 8 May 2018, partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.
There are no changes to the small business CGT concessions themselves, but the means by which these concessions may be accessed are now tightened. The concessions continue to be targeted at eligible small businesses with an aggregated annual turnover of less than $2 million or net assets less than $6 million.
Clarifying the operation of the Division 7A integrity rule to UPEs
From 1 July 2019, where a related private company is made entitled to a share of trust income as a beneficiary, but has not been paid that amount, that “unpaid present entitlement” will come within Division 7A of the Income Tax Assessment Act 1936 (Cth).
Division 7A operates as an integrity rule – benefits provided by private companies to related taxpayers will be taxed as dividends unless they are structured as Division 7A complying loans or another exception applies. Accordingly, an unpaid present entitlement will either be required to be repaid to the private company over time as a complying loan or subject to tax as a dividend.
The Division 7A amendments announced in the 2016-17 Budget will now also commence on 1 July 2019 and not 1 July 2018. This will enable all Division 7A amendments to take effect as a consolidated package.
Disallowing tax deductions for costs of holding onto vacant land
From 1 July 2019, expenses associated with holding vacant land, either for residential or commercial purposes, will no longer be deductible where the land is not genuinely held for the purpose of earning assessable income (such as the practice of land banking in denying the use of land for housing or other development).
The measure will not apply to expenses associated with holding land that are incurred after:
- property has been constructed on the land and is approved to be occupied and available for rent; or
- if the land is being used by the owner to carry on a business, such as primary production.
Denied deductions will not be able to be carried forward for use in later income years. However, expenses for which deductions will be denied, but would ordinarily be a cost base element (such as borrowing expenses), may still be included in the cost base of the asset for capital gains tax (CGT) purposes when sold.
Disallowing tax deductions for concessional loans between tax exempt entities
Under this measure, concessional loans that are entered into by tax exempt entities, which become taxable after 8 May 2018, will be required to be valued as if they were originally entered into on commercial terms. Tax deductions that arise on the repayment of the principal of a concessional loan will be disallowed.
This measure is to counter the unforeseen consequence between taxation of financial arrangement rules and the rules dealing with deemed market values for tax exempt entities that become taxable.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2018-19.