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What’s in store for tax in 2019? Key tax issues business owners need to watch out for

What’s in store for tax in 2019? Plenty! The upcoming Federal election is already looming as an important one for business owners in light of the possible tax policies that may affect the existing and future business structures of SMEs.

With the May election looming, political parties (especially Labor) have announced a suite of proposed measures and policies that may be put in place if elected. Yet another layer of complexity for business owners and their advisors!

While it may only be mid-January, there is no better time than the present to set out a snapshot of key issues that business owners will need to keep their eye on in 2019.

Taxing trust distributions

On 16-18 December 2018, Labor released a paper called ‘A Fair Go For Australia’ (Labor’s Policies Paper). Labor’s Policies Paper states that Labor proposes to ‘close down loopholes such as those associated with taxation of discretionary trusts’. While the Paper does not specify exactly what this means, Labor previously announced (in July 2017) that if elected, a Labor Government would introduce a standard minimum 30% tax rate for discretionary trust distributions to beneficiaries over the age of 18.

What does this mean for business owners?

 Currently, there can be tax advantages in using discretionary trusts. For instance, the trustee can split income between any of beneficiaries of the trust, and ‘stream’ certain income and capital gains to particular beneficiaries.

However, Labor’s new minimum 30% tax rate on all discretionary trust distributions would, if implemented, significantly water down the tax benefits of using discretionary trust structures. For example, trust distributions would be taxed at a 30% tax rate in the following circumstances:

  • where a discretionary trust distributes income to individuals who have a personal tax rate of less than 30% (e.g. adult children studying at university);
  • where a discretionary trust distributes income to a company that is a ‘small business entity’ (and therefore subject to a tax rate of less than 30%); and
  • where a discretionary trust distributes income to entities with tax losses (whether individuals, companies or other trusts).

Despite various announcements over a number of years to reform the taxation of trusts, not much has actually been implemented (one suspects it really is in the ’too hard’ basket!), and Division 6 of the Income Tax Assessment Act 1936 (Cth) remains. Our expectation is that Labor’s proposals would not fundamentally reform the taxation of trusts, only add another layer of complexity.

Business owners should keep a watching brief on this issue and seek advice on their existing or proposed structures in light of the proposed changes. In addition, it will be important to consider how to best deal with potential legislative change (for example, consideration of other structuring options such as partnerships, unit trusts, companies or other structures).

 Reduction of 50% CGT discount

 Labor’s Policies Paper also states that if elected, a Labor Government would halve the current 50% CGT discount to 25% for individuals and trusts that are tax residents of Australia (non-residents are no longer eligible for the CGT discount, from 8 May 2012). Labor also announced that these reforms would operate on a prospective basis and will only apply to assets purchased after a yet-to-be determined date.

What does this mean for business owners?

 Since the introduction of the 50% CGT discount, taxpayers have generally preferred holding passive assets outside of company structures (e.g. under individual names, family trusts or unit trusts) as companies cannot access the 50% CGT discount.

If the 50% CGT discount is reduced to 25%, the benefits of structuring passive assets under individual or trust ownership will be diluted. Together with the reductions in the corporate tax rate (for base rate entities), business owners will have more incentives to hold these assets under company structures rather than under transparent tax entities.

In addition, more uncertainties arise from Labor’s statement that ‘the CGT discount will not change for small business assets. This will ensure that no small businesses are worse off under these changes’ (contained on Labor’s web page titled ‘Negative Gearing’). In particular, Labor’s reference to ‘small businesses’ and ‘small business assets’ is very unclear. For example, will this mean that the 50% CGT discount will not be reduced for entities that can access the small business CGT concessions? What is the meaning and scope of ‘small business assets’?

Franking credit refunds

 On 13 March 2018, Labor announced that it proposed to end cash refunds of excess dividend imputation credits. Labor has also confirmed that these proposed changes would only apply for individuals and superannuation funds and come into effect on 1 July 2019 (if elected).

This means that imputation credits for individuals and superannuation funds will no longer be a refundable tax offset, and will return to being a non-refundable tax offset. Therefore, a resident individual or superannuation fund could only use franking credits on grossed-up dividend income to offset tax liabilities, and cash refunds will not arise if excess imputation credits exceed tax liabilities. Currently, any excess franking credits are refundable in cash from the ATO.

What does this mean for business owners?

 These changes will likely have a larger impact on retirees and superannuation funds. Individuals (and related superannuation funds) that could be impacted by these proposed dramatic changes to the imputation system will need to consider how their existing business structures should respond to the changes. For instance, where business structures involve SMSFs owning shares in a company which owns business real property.

‘Targeted amendments’ to Division 7A

 On 22 October 2018, Treasury released a Consultation Paper titled ‘Targeted Amendments to the Division 7A Integrity Rules’ (Consultation Paper) for public consultation. The Consultation Paper contains remarkable (and quite worrying) proposed changes to the Division 7A provisions, which are stated to commence from 1 July 2019. Submissions have now closed and were due on 21 November 2018.

A few major proposed changes are set out below:

  •  7 and 25-year term loans to be replaced with 10-year complying loan term, with no transitional rules for existing 25 year loans;
  • the period of review for Division 7A transactions to be extended to cover 14 years (as opposed to the usual four-year period);
  • pre-1997 loans will need to be repaid over 10 years with an increased benchmark interest rate; and
  • the removal of distributable surplus requirement.

What does this mean for business owners?

In summary, we consider that the proposed amendments (in particular, the transitional rules, or lack of) will certainly result in unintended outcomes. In particular, many business owners (in particular those who have entered into 25-year loans) have already structured their affairs around existing circumstances and the existing law.

While the government has planned to update the Division 7A provisions by 1 July of this year, we consider that the upcoming Federal election could see any legislative change delayed. Business owners are encouraged to carefully review their structures (including any existing and future Division 7A loans) and how they may be affected by the proposed changes. However, a change in government could very well see the amendments to Division 7A postponed.

Conclusion

We already see that a tax battle is on the horizon in light of the upcoming Federal Budget and election. The topics set out above are only a glimpse of tax issues that business owners may wish to pay close attention to during 2019.

Beyond these headline proposals, more tax measures and proposals may emerge as we step closer to the Coalition’s Federal Budget in April. No doubt there will be a whole cauldron of issues affecting SMEs!

Level 49, 360 Elizabeth Street,
Melbourne VIC 3000

Level 10, 580 George Street,
Sydney NSW 2000

Level 49, 360 Elizabeth Street,
Melbourne VIC 3000

Level 10, 580 George Street,
Sydney NSW 2000

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