BUDGET 2018 >>

THE CEO of Australia’s largest specialist SME working capital provider, Peter Langham of Scottish Pacific, said the 2018 Federal Budget was generally good news for the start-up and small to medium enterprise (SME) sector.

Mr Langham said while there were no major shocks in the 2018-2019 Budget, the key initiatives that will resonate with Scottish Pacific’s SME clients were: reducing red tape and time spent on BAS compliance; continuation of the $20,000 instant asset write-off; and pressure on the black market, which could help create a level playing field for SMEs.

While the government took tax cuts for large companies off the table, the continuation of plans to reduce SME company tax was welcomed, he said.

“Our clients are SMEs, the largest employer group in Australia,” Mr Langham said. “These business owners are mostly mums and dads, who are very busy, and risking it all to run a business and have a go. 

“The personal tax cuts flagged in the Budget are welcome as this will give SME owners more money to spend – and I believe most are likely to spend it on growing the business – because it is their business.”

Anything that encourages spending is welcome by businesses of all sizes, Mr Langham said. Increased dividends through lower tax rates at the higher end should improve superannuation returns and therefore benefit most Australians in retirement.

“Infrastructure spending is good for business because of the immediate demand it creates, but also because it introduces efficiencies that should reduce SMEs’ cost of doing business,” he said.

“There are three obvious areas in the Federal Budget where more could be done for the SME sector – encouraging employment, creating more skilled labour and further simplifying company taxation.

“It wouldn’t be an easy task, but I’d love to see the Federal Government working with the states to reduce the payroll tax regime – this would be a game-changer for small business.

“A growing business gets to a certain size and this tax discourages them from employing people, so in effect it discourages growth.”

Mr Langham said Scottish Pacific experts had identified key areas in the Federal Budget that would affect SMEs:

  1. $20k instant asset write-off extended a further 12 months

This scheme, where business can claim an immediate deduction when buying an asset costing less than $20,000, was meant to come to an end on June 30, 2018, but the Federal Government has extended it for another year.

  1. Infrastructure
  • $24.5b over 10 years for nationally significant transport projects including $3.5b for strategically important roads to boost freight routes
  • $200m for Building Better Regions Fund (supporting regional infrastructure)
  • $41m allocated for national space agency
  • $1b urban congestion fund to improve city traffic flow
  1. Red tape/tax/compliance
  • The Federal Government declared BAS streamlining had saved each SME an average annual $590.
  • No new corporate rate cuts, however previously announced cuts for SMEs were still planned.
  • The government flagged moves to protect SMEs against phoenix companies who don’t pay, or large businesses putting in place unfair contracts.

www.scottishpacific.com

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BUDGET 2018 >>

BUSINESS broker Raine & Horne Business Sales principal Simon Winter believes calls to extend the $20,000 instant tax write off indefinitely are “almost certainly premature given similar incentives in the past were eventually terminated”.

In the May Federal Budget announced last week, the Federal Government extended the $20,000 instant write-off for small business clients with a turnover of less than $10 million to the June 30, 2019.

“Before the budget was released, one media poll declared that 60 percent of respondents were hoping the government would make the scheme permanent,’ Mr Winter said. 

“However, you must look at why they are doing it.

“It’s a carrot aimed at encouraging manufacturing and employment. The instant tax-write off pushes employment and manufacturing along because the write-off gives businesses the incentive to buy something new.” 

Mr Winter said the current write-off regime is also not the first time a Federal Government had introduced depreciation acceleration.

“There have been several tax breaks used by different governments over the last four decades, with different levels of depreciation acceleration used,” said Mr Winter, a Certified Practising Accountant (CPA), and a member of the Australian Institute of Accountants.

“Small businesses earned a 40 percent write-off over and above the value of the plant or equipment about 10-15 years ago that virtually no one seems to remember,” he said.

“You could buy an item for $10,000 and immediately write-off $4,000. However, you could still claim the full depreciation of the article over its lifecycle.”

With this example in mind, Mr Winter said it would be difficult to make an accelerated depreciation break such as the $20,000 instant tax-write- permanent.

“There will be circumstances that arise where it is no longer needed, which are usually related to an improvement in the economy and business confidence,” Mr Winter said.

“It might seem hard to believe but the $20,000 instant tax-write off will run its race and businesses will even forget it’s there, especially if they have sufficient plant and equipment in place.

“Once the business environment gets to this point, the impact of the instant tax-write-off on job creation and manufacturing will be negligible. At this juncture, it will be time to end the tax break.”

WORKS FOR NOW – BUT WATCH CGT

For now, however, Mr Winter said almost 90 percent of the small businesses he supports were taking advantage of the instant tax-write off.

“As such, the value of the plant and equipment owned by many small businesses is almost zero because everything they’ve bought over the last three years they’ve written off,” Mr Winter said.

“We see many businesses such as restaurants and cafes which are plant and equipment rich but with a written down value of almost nothing by taking advantage of the accelerated depreciation attached to the instant tax write-off.

“If they are buying a new refrigerator, it’ll be less than $20,000. It’s entirely tax deductible in that year. Previously these assets were written off over a number year according to the depreciation schedule for that item.”

He said where the instant tax write-off may be causing some angst for small businesses was in relation to the difference between a ‘gain on sale’ and a ‘capital gain’.

“If a business claims the full tax write-off of an asset valued at $19,000, it’s is then deemed to have no value,” Mr Winter said. “However, if the SME sells the asset for $6000 three years later, they must pay tax on this gain at its full marginal tax rate.

“They are forgetting they enjoyed the full benefit of the instant tax deduction three years ago. This sale value is deemed to be a profit by the Australian Tax Office and is called a gain on sale.

“A gain on sale occurs when a business sells an asset for more than what it is written down to.

“A gain on sale is not a capital gain and there are no capital gains tax discounts that apply to this profit. A capital gain only occurs when you sell something for more than you paid for it.”

www.businesssales.rh.com.au

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BUDGET 2018 >> THE FEDERAL Government’s 'surprise-free' Federal Budget will allow the resources sector to invest more, export more and employ more, Queensland Resources Council chief executive Ian Macfarlane said.

Mr Macfarlane said no surprises and no new taxes in the Federal Budget gave the resources sector the confidence to continuing investing, exporting and employing across Queensland.

“In Queensland, coal, minerals and LNG accounts for 78 percent of the State’s exports," Mr Macfarlance said. "The sector supports one in every eight jobs – with 38,000 direct employees and more than 280,000 full-time equivalent jobs dependent on resources. 

“The Federal Budget is based on tax cuts and jobs growth. The Budget papers show the resources sector pay more and more taxes and employ more and more Australians.

“The 2018-19 Federal Budget has forecast growth in mining exports of 4 percent in 2017-18 and 6.5 percent in 2018-19, while mining industry capital expenditure is expected to grow by 3.5 percent in 2019-20,” Mr Macfarlane said.

“The Federal Budget also is expecting an extra $3.7 billion in taxes over the next four years based on improved mining profitability on the back of higher commodity prices.”

Mr Macfarlane said Federal Budget initiatives to promote science, technology, engineering and mathematics (STEM) and develop satellite technology were positive investments for the future of the resources sector.

Specifically, the Turnbull Government is investing over $260 million to develop the satellite technology which will help the resources sector benefit manage mine infrastructure, mine safety and use more precise data for on the mine site, Mr Macfarlance said.

www.qrc.org.au

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BUDGET 2018 >> THE FEDERAL Budget will boost confidence in the building and construction industry overall, according to Master Builders Australia. 

“Building and construction investment is a major driver of the improvement in the Budget position,” Master Builders Australia CEO Denita Wawn said.

“Reducing the tax burden on households and small business is good for the economy and good for builders. People may decide to renovate their kitchen sooner or buy their first home faster,” she said.  

“It’s also great news that our many small builders who are sole traders will also get tax relief in this Budget,” Ms Wawn said. 

“Master Builders called for more certainty for state and territory governments to sign up to the $1.5 billion Skilling Australians Fund (SAF) and the government has listened. The SAF will focus on funding for new apprentice training initiatives, that are no longer conditional on a levy of skilled migration." 

The Federal Government proposed in the Budget to make $250 million available for state and territories in this financial year, and a share of $50 million is available for governments that sign-up to the SAF prior to June 7 and $50 million per year over four years is available to states and territories who are signed up to the SAF, according to Mastger Builders.

“The government’s infrastructure budget will play a key role in setting the nation up for future prosperity.The additional $24 billion investment in infrastructure across the country will boost the productivity and liveability of our cities,” Ms Wawn said. 

“Small businesses will benefit from the extension of the $20,000 immediate tax write-off scheme until 2019. There are more SMEs in buiding and construction than any other industry and this great news for mum and dad building businesses and tradies. 

“The uncorporated small business tax discount rate will increase from 5 percent to 8 percent allowing SME builders to write-off their assets faster,” Ms Wawn said.

www.masterbuilders.com.au

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BUDGET 2018 >> DESPITE claims of taxpayers over-claiming work related expenses, the Federal Government has refrained from making any ad hoc changes to the eligibility rules -- a decision welcomed by the Institute of Public Accountants (IPA).

“We are pleased that the government has not taken away the right of individual taxpayers to claim legitimate work related expenses,” IPA chief executive officer, Andrew Conway said.

“Improving education and guidance materials in response to over claiming is also welcomed. 

“Taxpayers should consider themselves lucky indeed that that the government has retained the current framework for determining entitlement to claim expenses related to work.

“Tax professionals feared that the government would tighten the WRE eligibility rules or introduce a standard deduction regime to address the rising cost of taxpayer’s claims," Mr Conway said.

“Australia has one of most generous tax regimes when it comes to claiming work related deductions.

“Other countries have either removed this entitlement, or have stricter eligibility requirements or alternatively introduced a standard deduction regime.

“Australia’s tax system has developed a complex deductibility regime that taxpayers need to navigate under our self-assessment rules in order determine their entitlement," he said.

“The IPA does not support a standard deduction as it can lead to unfair tax treatment particularly for some employees who incur legitimate work related expenses which are not reimbursed by their employer whilst rewarding those who are fully compensated.

“Those skirting their obligations and deliberately over claiming should not rejoice as the ATO will be provided with an additional $130 million to increase compliance activities targeting individual taxpayers and their tax agents.

“The funding will go towards new compliance activities, including additional audits and prosecutions, improving education and guidance materials, pre-filling of income tax returns and improving real time messaging to tax agents and taxpayers to deter over-claiming of deductions,” Mr Conway said.

www.publicaccountants.org.au

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BUDGET 2018 >> THE Australian Retailers Association (ARA) believe this year’s Federal Budget brings some much needed relief for retailers struggling in a volatile market with low growth and increased cost pressures with the promise of personal tax cuts which will drive consumer spend.

An ARA statement claimed the Budget brought "some positive news for retailers" with highlights including the GST being applied to overseas purchases from July 1, infrastructure spend and personal income tax cuts to low and middle income earners, allowing consumers to increase their spending across the sector. 

ARA executive director Russell Zimmerman said the Budget measures proved the government was committed to implementing tax cuts but believes these cuts should include all tax brackets, and are needed earlier and faster to drive consumer discretional spending.

“With this morning’s March retail trade figures showing a 3.15 percent trade growth year-on-year, retailers are still expecting the company tax rate to be lowered to sustain growth in the market and overall economy,” Mr Zimmerman said.

The positive outcomes from the Budget included the government’s commitment and investment into the Black Economy Taskforce and their implementation of the Illicit Tobacco Taskforce, to combat the illicit tobacco market.

“The ARA welcome the findings from the Black Economy Report and welcome the measures the Government has announced tonight as these initiatives will create a fairer economy for retailers,” Mr Zimmerman said.

“Funding is a great first step to tackling the Black Market as the rise in illicit tobacco consumption has severely affected local retailers and their bottom line.”

The ARA also welcomed the government’s $75 billion infrastructure investment to metro and regional areas to increase efficiency, freight, tourism and consumer access.

“Retailers are looking forward to major infrastructure projects such as the Melbourne airport rail link, Sydney’s rail freight corridor and Hobart’s new river crossing being implemented and completed as these long-awaited developments will increase consumer access and retail growth,” Mr Zimmerman said.

“Although we welcome the Treasurer’s predicted Budget surplus and fall in net debt, the ARA calls on the Government to develop a real plan to put Australia back on a track to zero debt and long-term lower taxes to ensure the longevity of Australian retail.”

About the Australian Retailers Association

Founded in 1903, the Australian Retailers Association (ARA) is Australia’s largest retail association, representing the country’s $310 billion sector, which employs more than 1.2 million people. As Australia’s leading retail peak industry body, the ARA is a strong pro-active advocate for Australian retail and works to ensure retail success by informing, protecting, advocating, educating and saving money for its 7,500 independent and national retail members throughout Australia.

www.retail.org.au or call 1300 368 041

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TRANSFER PRICING >>

Face it, business in Australia has rarely been about playing on level fields. The juggernauts of the big four banks and the supermarket duopoly, that run right over the top of enterprising small and medium businesses in Australia, seem manageable in comparison with the diabolical genius of the (mostly) multi-national organisations who ‘transfer price’ tens of billions of dollars out of the Australian economy. By doing so, they profit from all tax paying Australians.

 

 

IT IS DIABOLICAL that two generations of Federal Governments have, at best, miscalculated the scourge of transfer pricing. At worst, Federal Government taxation and trade policy has been blindsided by a problem partly of its own design.

Transfer pricing – the dark art of manipulating money flows so that little or no profit is taxed in the country in which that profit is generated – is alive and diabolically well in Australia. It has been turbocharged by digital transformation and new-era companies that are internet-central in operations.

One example is American Express, a company reported by Fairfax Media last year to have not paid tax on profits in Australia for more than seven years.

It is an example of how the key to minimising tax among these internet-centric companies is to be headquartered – and conduct billing – out of a low tax jurisdiction. One particularly popular low-tax jurisdiction for the Australian market is Singapore – used by multi-nationals such as American Express and several major oil companies. That’s right, Australian American Express financial payments are directed to Singapore.

If you were sceptical, you would wonder what the real advantage to Australia could possibly be from linking our petrol prices to the Singapore and Tapis crude oil markets, for the oil refined in this country. The issues of what happens to prices – and transfer pricing of oil profits – as Australian refineries steadily close and are modified as storage depots (which has happened recently at the giant Botany Bay site) are disturbing to consider both economically and in terms of national security.

The most emotive transfer pricing outcry example in Australia right now concerns ride share group Uber, which has not only disrupted thousands of family taxi companies day-to-day, but for some it has helped bring about their rapid financial demise.

In Queensland, where the State Government was selling operating licences for up to $500,000 just a few years ago and still legislates taxi fares and charges, the impact of Uber and other ride-share companies has seen those licences become comparatively worthless.

Many owners who planned to use the value of their (often multiple) licences as ‘superannuation’ will instead only receive a $20,000 compensation from the Queensland Government – per licence and for a maximum of two licences. This is a regulated industry that has been totally transparent for decades and been forced to pay its fees and taxes accordingly. Its devastation will have a corresponding effect on taxable incomes of those (largely) family businesses.

Some family taxi businesses in Queensland have reported to ABC Brisbane talkback radio host Steve Austin that they are most likely headed for bankruptcy – and some have already lost their family homes.

Uber, created in San Francisco, has effectively been domiciled in the Netherlands (a low tax jurisdiction that has, in the past, been utilised by former Australian companies such as James Hardie) since 2013 according to Forbes magazine and – most likely, but it is opaque – pays tax on its global profits there. Uber bills Australians from the Netherlands and the driver’s share, usually about 75 percent of the fare, is repatriated back to the driver’s Australian account.

This means that about 25 percent of each ride share fare that goes to Uber remains in the Netherlands and therefore is not subject to profits tax in Australia. The driver is responsible for their own tax affairs.

How much of that 25 percent ride income actually is profit is irrelevant as is it ‘earned’ offshore, beyond the ATO’s jurisdiction. The Australian Government certainly does not know. It has no way of knowing what ‘profit’ Uber has actually earned in Australia, based on current legislation, because it is regarded as being Australian dollars earned in the Netherlands

Not so long ago, a process like Uber’s would have been regarded as an ‘import’ of a product or service. Today it is being treated like an export, where GST is also being argued by Uber as not being applicable.

Yes, these are customers in Australia being serviced by an Australia-based tax-paying driver in a vehicle sold and maintained in Australia, on Australian roads paid for by Australian taxpayers. So, while about 75 percent of the fare generated ends up being taxable in Australia the other 25 percent of this service definitely happened in cyberspace, so there’s no taxable income on that component.

The Australian Government is nodding its head remorsefully that this is the case, for now at least. Thankfully, they have refused to keep nodding in the case of ride share services avoiding GST – that’s Goods and SERVICES Tax, for those in the government who may have overlooked the entire acronym – although Uber is again contesting this through the courts.

Yet, in Uber’s case and others, what seems a straightforward case of transfer pricing ‘sleight-of-hand’ is actually complicated by a whole range of international trade conventions and agreements entered into by the Australian Government as part of its free trade mantra over the past 30 years.

In practical terms, you cannot blame Uber, or other multi-nationals, for playing the game their way, on the playing field Australia has cultivated.

 

TPP: TRANSFER PRICING PARTNERSHIP?

Uber is a highly visible example right now of the problems facing Australian taxation revenues – but there are many, many more flying well under the radar.

In fact, as Australian business at large comes to understand the insidious workings of transfer pricing, it could help to alert the Australian Government to similar threats.

One potential threat may ironically have been averted by the election of Donald Trump as President of the United States: the Trans Pacific Partnership (TPP).

The TPP on the surface would seem to be a very progressive agreement, effectively establishing a free trade zone around much of the Pacific Rim – although the way it had excluded China was questionable.

Countries involved in the TPP were the United States (under President Barack Obama) Australia, New Zealand, Malaysia, Vietnam, Singapore, Brunei, Canada, Mexico, Chile and Peru. Together, they contributed about 40 percent of the world’s annual economic output.

Australia has been instrumental in TPP negotiations, most recently through Foreign Minister Julie Bishop. Australian business in general seemed to be too busy to bother to get its head around details on the TPP, and paled to insignificance against the contributions and lobbying of the big US multi-nationals.

Some concerns that emerged included fears that US multi-nationals would have the ‘right’ to challenge and possibly sue governments whose legislation changes negatively impacted their business in that country.

The flashpoint on this issue in Australia was likely to be pharmaceuticals. It was argued by some sectors that the TPP would promote complaints and financial claims by US drug companies in issues such as the availability of generic competition under Australia’s Pharmaceutical Benefits Scheme (PBS).

But among the accounting and legal organisations who manage transfer pricing for international companies – and in the main this is a complicated and legitimate practice for these multi-nationals – there has certainly been an undercurrent of a re-focus on transfer pricing under the proposed TPP.

For example, a report from The International Tax Policy Forum suggested “potential tax effects from the Trans-Pacific Partnership to highlight the link between aggressive upstream transfer pricing and downstream earnings stripping”. 

Indeed, BDO Australia’s Transfer Pricing Practice is happy to point out that it “helps groups navigate this fast changing transfer pricing environment”. BDO’s online promotion for its expertise in the field says: “Aided by dedicated transfer pricing practitioners around the BDO network, we provide a range of planning, compliance, audit defence and benchmarking services. We can work with you to develop transfer pricing policies that are defensible, flexible and in line with your overall tax planning strategies.”

Nothing wrong with that. In fact, under the current rules of the game in Australia, companies would be crazy if they didn’t use transfer pricing to keep more of their profits.

The moral dilemma is that the same advantages are not available to most Australian businesses – who want to stay domiciled here – and the Federal Government has lately been coming down hard on companies that even look as if they may be re-structuring into international entities.

Of course, you could simply leave Australia and sell back to it, or set up your new Australian subsidiary from the Netherlands or Ireland … as former local iconic companies including James Hardie and BHP (now BHP Billiton) have done.

Such arrangements can work really well, unless that loan from head office to the Australian entity, which has to be repaid at levels remarkably similar to the levels of potential profit made in Australia, is called by the ATO for not being ‘at arms length’.

Of similar ilk  is the ATO’s $1.01 billion tax and penalty claim against BHP Billiton – which is being vigorously contested – at the moment targetting the Big Australian’s Singapore marketing base operations, which primarily conducts iron ore sales around the globe and enjoys a mark-up for doing so.

The dilemma for Australian tax authorities is that the iron ore has been bought in Australia by BHP Billiton’s Singapore marketing entity for a much lower price than it has been then sold to, say, Japanese and Chinese steel mills. It used to be a ‘clean’ transaction, in which overseas steel mills would buy direct from Australia. That’s what has the ATO miffed and seeking to tax the money in the middle.

BHP Billiton argues forcefully that it is operating with the law and is conducting its sales and marketing operations fairly. Rio Tinto, which has a similar Singapore marketing hub set-up, argues the same. What is for certain is that this is going to be a long drawn-out argument.

 

RUBBERY UNDER ARMS LENGTH

It was all so much simpler just a few decades ago when some of Australia’s big name organisations managed their transfer pricing – or as it was called back then, ‘profit shifting’— closer to home.

Back then, the game was about shifting profits offshore through a web of trusts and companies – sometimes based in the South Pacific, Asia or Europe – in a way that supposed they could not be found. But money was not so easily moved back then through ‘telegraphic transfers’, without today’s internet-fuelled secure financial transfer systems.

Some of Australia’s most successful companies and wealthiest families, who utilised this ‘offshore’ method, have since transitioned into much more savvy structures, often with the help of the Big Four accountancy firms and modern secure internet communications

It was often rumoured about time of the ATO’s Operation Wickenby, which started in the 1990s, that the web of offshore trusts and hidden offshore bank accounts that many Australian business moguls had would be exposed – and they would then be forced” to pay their fair share of tax” in Australia.

Take sharemarket guru the late Rene Rivkin, for example, who has since been shown to have secured his wealth in ‘untouchable’ Swiss banks and financial structures.

It’s a sentiment not dissimilar to what we hear today with regard to transfer pricing.

But it’s not really how it worked out, is it?

The original ‘offshore’ system was simple and so well known in accounting fraternities that it beggared belief that the ATO was not all over it. The owners of an Australian company would use local accountants to establish companies in a tax haven such as the British Virgin Islands. Often this was done through an intermediary marketer of such companies in a jurisdiction with strong financial services capability – say, Hong Kong, Singapore or Cyprus.

One such ‘deep cover’ company or trust would own another would own another, so that the secrecy of ownership increased layer by layer. Then the Australian company would take ‘loans’ from overseas ‘investor’ entities … which would have to be paid back at remarkably fluid levels of interest, of course.

It was ironic how these structures would almost invariably produce a result in which there was precious little profit to be taxed in Australia …

The end result, then as now, is that the gulf left by these transferred profits ends up being burdened upon income tax payers and small-and-medium enterprises.

Today, it’s a much more open card game in which one arm of a multi-national organisation simply bills another and another. All within the existing house rules.

The deck is stacked against the Australian Government as it shuffles around in court with the multi-nationals, their Big Four accountancy firm transfer pricing advisors and their combined armies of lawyers.

 

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