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Business tax under the spotlight: get ready for 2014

Now that the gruelling 2013 election campaign is behind us, our attention can turn to the issues of growing debt to gross domestic product and the dwindling tax revenue in Australia.

With the increasing demand on government coffers and an aging population, concerted tax reform is something that will hopefully occupy the focus of the recently-elected Coalition government.

Inevitably the corporate world is going to face tighter review and regulation by the Australian Taxation Office (ATO) – from major corporations to smaller business. In July this year, ATO Second Commissioner for Compliance, Bruce Quigley, outlined the focus for business taxation in 2013-14.

These are the areas that business will need to pay particular attention to:

Profit Shifting

From the government perspective profit shifting is a threat to our sovereignty. When international firms can gain competitive taxation advantages over our hard working Australian organisations that play by the rules – then tax laws need to change. The harsh reality is that Australian organisations that pay the appropriate amount of tax are facing higher burdens of scrutiny and reporting. The only other option left if no change in taxes is made is that every day Australians need to get used to a lower level of government services. For many, this is unacceptable.

Change is already underway. International tax reform is on the ‘to-do’ list for many international regulators and this will level the playing field when fully implemented. In July this year a 15 point action plan from the Organisation for Economic Co-operation and Development will create a domino effect, where national governments protect their corporate tax revenue base and legislate against profit shifting activities.

In the 2013/14 Budget, the  former  government also flagged changes to the ‘gearing ratio’, or more officially the thin capitalisation ratio, which positions debt funding schemes clearly in the spotlight. Legislation may be introduced in the near term to ensure that transfer pricing and gearing ratios no longer are allowed to masquerade as debt funding – closing the loop on what the regulator perceives to be another unfair taxation advantage.

Misuse of Trusts

Following on from the High Court decision in the Bamford Trust, the intricate outcomes of trust structures, capital gains and reducing marginal tax rates are once again under the spotlight.

In the past  trust arrangements have been structured so that trustees can classify gain, notably capital, as trust income to be distributed to beneficiaries.  As an incidence of the misuse of trusts by many business owners and corporate Australia, the ATO has already issued Taxpayer Alert TA 2013/1. This is warning trustees to stop converting income into capital and streaming it to low taxed beneficiaries.  An even stricter approach from the ATO toward streaming by trusts may well be expected. Consider yourself warned.

Tax Benefits for Entrepreneurs

However there is light at the end of the taxation tunnel for those entrepreneurs that are still planning on the next big thing. With the new government’s emphasis on creating a much more business friendly environment in Australia, the proposed changes by the former government to the employee share scheme ‘provisions for employees of start-ups’ will in all probability see the light of day.

The proposals include lower company taxes. The Coalition’s tax policy includes a cut in the company tax rate by 1.5% to 28.5% from 1 July 2015. With the abolition of the carbon tax and the mining resource rent tax (MRRT) this move has the potential to have a significant effect on the company bottom line. FBT certainty for employers and employees

For companies relying on providing their employees with car benefits in salary sacrifice arrangements, the decision not to go ahead with the former government’s decision to remove the FBT statutory formula method from the tax cycle lends certainty and coherence to the already clogged FBT system.

These moves will favour employees of start-ups and, accordingly, encourage new ventures to attract and keep valuable employees.

Anton Joseph is a tax specialist writer at CCH.

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