Division 7A and expert predictions on the future

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Division 7A under Australian legislation is currently concerned with private company benefits given to shareholders which are taxable under the premise of income tax purposes. For two years, the Australian government has announced that they will be making changes to the law – however, experts predict that the changes may be deferred for the third year in a row.

Despite the proposed changes to Division 7A having been set to take effect from the 1st of July 2020, the Australian government has remained silent on any potential legislation drafts and have not yet consulted accountants nor tax practitioners on the promised amendments either.

There have been non-public consultations with the Australian government on Division 7A since October 2018 and even then, tax accountants were not happy with the changes the government were planning to make and their lack of attention for the recommendations put forward by the Board of Taxation.

Since late 2018, Division 7A has been a critiqued for its complex series of legislation, causing confusion for tax experts as well as the general public. Since the Board of Taxation’s call for major changes to revamp the government’s “band-aid” fixes on the law, the government has remained largely radio silent on its intentions to fix the legislation by following the recommendations from the Board of Taxation.

Such recommendations included the removal of the concept of “distributable surplus” which more broadly refers to the realised and unrealised profits in a company. The removal of the concept was petitioned for so that a deemed dividend can arise where there are no realised profits in the company, especially in the context of corporation laws whereby dividends are no longer required to be paid out of profits.

Perhaps the government’s silence on Division 7A thus far can be interpreted in a positive light, in that the recommendations by the Board of Taxation are being taken seriously and drafts with the respected opinion of tax experts are on the way. On the flip side of things, if Division 7A were to be released as it was originally drafted in the upcoming year, tax experts believe that things will get problematic.

Diversification requirements for SMSFs

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The ATO has identified approximately 17,700 SMSFs where investment strategies may not meet the requirements under regulation 4.09 of the Superannuation Industry Supervision Act (SISA). Records show these SMSFs may hold 90% or more of funds in one asset, or a single asset class.

Diversification aims to maximise an individual’s return by investing in different asset classes that react differently to the same event. Although it does not guarantee avoiding a loss, diversification is an important component of reaching long-term financial goals while minimising risk. This can help to control a super fund’s risk, as the better performing asset classes will help offset the others that aren’t performing very well. Diversification also provides the super fund with the opportunity for long-term growth, as the portfolio is exposed to asset classes with strong growth potential.

SMSF trustees that don’t have the appropriate blend of different asset classes in their fund risk their portfolio experiencing increased and unnecessary volatility. Well-diversified SMSFs include all the major asset classes including cash, fixed interest, shares and property.

To help ensure an SMSF is properly diversified, consider the exposures the fund currently has to the major asset classes and assess how diversified the fund is. Trustees must then engage in the process of working out which asset classes the fund requires to be properly diversified.

SMSF investment strategies must provide evidence on the following requirements to comply with SISA:

  • Adequate diversification of fund assets.
  • Identification of risks of inadequate diversification within the context of the SMSF investment portfolio.
  • The making, holding, realising, and the likely return from the fund investments relating to retirement objectives and expected cash flow requirements.
  • Liquidity of investments, allowing the fund to meet costs and pay benefits as members retire.
  • Whether insurance cover should be held for one or more members.

Director Identification Numbers And What Companies Might Need To Do To Get Prepared

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Did you know that there are 31 different business registers that a business or company may need to be registered with that are a part of ASIC? Some of these registers are being brought together, in what will be known as the Australian Business Registry Services (ABRS).

The Commissioner of Taxation was appointed in April 2021  as the Commonwealth Registrar of the ABRS. In the near future, registering a company will be done through the ABRS instead of ASIC. This is a part of the government’s move towards a more efficient digital economy.

Previously, a company or business was registered through ASIC, where a Tax File Number and an Australian Business Number would be required. These are obtained through the Australian Taxation Office (ATO) and are a critical part of setting up a business or company.

Beginning from November 2021, there will be an additional step introduced in the registering of a company, involving a Director Identification Number (DIN).

This director identification number is a unique identifier that a director will apply for once and keep forever.

Every company director will need to have a DIN prior to 30 November 2022, with Indigenous directors having an additional year (till 30 November 2023) to adhere to the new requirement.

This applies to directors if their organisation is a company, registered foreign company, registered Australian body or Aboriginal and Torres Strait Islander corporation.

In the future, registering a company will be done through the ABRS instead of ASIC. This is a part of the government’s move towards a more efficient digital economy.

Directors will need to apply for their director ID themselves because they will need to verify their identity. Eligible persons that have sufficiently established their identity, will be provided a DIN that they will keep for their lifetime – even if they cease to be a Director.

No one else will be able to apply on their behalf.

The new DIN Requirements apply to appointed Directors and acting Directors of Australian corporations and registered foreign companies, which includes those companies who are responsible for managed investment schemes and registered charities. This is set out under the Corporations Act 2001 (Cth). 

As of the time of writing, the DIN requirements do not extend to unincorporated bodies, de facto or shadow Directors, or company directors.

DIN’s will be recorded in a new database to be administered and operated by the Australian Tax Office and be made available to the public.

The ATO will also have the power to provide, record, cancel and re-issue a person’s DIN. A DIN will be automatically cancelled if the individual does not become a Director within 12 months of receiving the DIN.

Following the DIN, the ARBS will then take over the Australian Company Register, the Business Names Register, and the Australian Business Numbers (currently on the Australian Business Register).

The ABRS is responsible for the implementation and administration of director IDs. ASIC will then be responsible for the enforcement of associated offences.

It is expected that around 10% of all Australians will require a DIN.

Despite the small number, it is a crucial part of the plan to prevent and halt phoenix directors from being appointed to companies, who then rack up significant debts that no one is held accountable for.

It is believed that this change will make the process cheaper, faster, and easier, as companies will no longer need to be first set up through ASIC before dealing with the ATO for an ABN and TFN.

If you currently have a company and do not already possess a MyGov account, now is the time to rectify it in the move towards DINs.

Director Identification Number Compliance Reminder For Businesses

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As of 5 April 2022, new Directors will need to have applied for their Director Identification Number (DIN) prior to their appointment to the position.

Existing directors were required to obtain a DIN prior to the end of the transitional period (30 November 2022), whereas directors of Indigenous Corporation have until 30 November 2023. Failure to do so could result in penalties for non-compliance.

What Is A Director Identification Number?

Previously a company or business was registered through ASIC, where a Tax File Number and an Australian Business Number would be required. These are obtained through the Australian Taxation Office (ATO) and are a critical part of setting up a business or company.

Introduced in November 2021, there will be an additional step introduced in the registering of a company, involving a Director Identification Number (DIN). This director identification number is a unique identifier that a director will apply for once and keep forever.

They were brought in as a part of a broader regulatory strategy to address the issue of phoenixing – this is where controllers of a company deliberately avoid paying liabilities by shutting down indebted companies and transferring assets to another company.

DINs are recorded in a database to be administered and operated by the Australian Tax Office and are made available to the public.

The ATO has the power to provide, record, cancel and re-issue a person’s DIN. A DIN will be automatically cancelled if the individual does not become a Director within 12 months of receiving the DIN.

Who Does A DIN Apply To? 

Director ID only applies to companies and corporate bodies registered under the Corporations Act and CATSI Act.

Director ID does not apply to sole traders, partnerships or trusts unless the trust has a corporate trustee.

Deadlines For Applying For A DIN

When the announcement of DINs was made in April 2021, there were set deadlines in place for those involved in profit and not-for-profit entities, as well as for Indigenous Directors. As of 5 April 2022, those deadlines have changed.

For profit entities, the deadline for applying for a DIN under the Corporations Act must be done before your appointment as a director.

For non-profit entities (including those entities registered under the ACNC Act as either private or public companies), you also need to have applied for your DIN before you are appointed as a director.

For new directors of Indigenous Corporations, the same requirements for applying are advised (prior to appointment).

How To Apply For A DIN

All directors must apply for their own DIN. This cannot be done by a third part, unless it can be proven to the Registrar that the director is unable to make the application on their own behalf (such as suffering some sort of incapacity, etc).

There are three ways to apply for a DIN:

  1. Online application via the myGovID app. This is different to myGov and is the quickest way to obtain a DIN.
  2. Phone application.
  3. Paper application (which is the slowest process).

These methods require proof of identity documentation, however, you may be able to use certified copies (witnessed by a Justice of the Peace) if you are using the paper application.

Difference between website and social media for businesses

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Businesses may be questioning whether they need to create a website if they have a social media presence. However, each plays a distinct role in the formation of a brand identity and therefore, both are important. 

Social Media

Social media is straightforward and simple to set up, with no maintenance costs. It allows businesses to build brand awareness and interact with their customers in a more casual and relaxed way. Social media is essentially an in-depth marketing strategy which allows for paid advertising and has the capacity to reach many prospective customers from across the globe. 

On the other hand, businesses could spend many hours working on content that does not end up reaching the expected audience. A lot of time is required to continually create and post content which receives engagement and loyalty from customers. Although there are no costs with having an account, if you want your content to be targeted to your audience, this requires payments which can be expensive. 

Although social media gives access to customers you might not have otherwise had access to, it is difficult to convert these interactions into sales or use of your business services.

Website

Your website means you have full control of the platform. You can create a platform that reflects your business and your values. This also means that there are no external terms and conditions you are required to follow, instead, you determine those conditions. A website is also perfect for referrals, as it demonstrates professionalism and builds confidence in your business. 

Owning your own website means that you are able to track all incoming traffic and monitor the characteristics of your audience. This will provide you with a clear indication of what facilities you need to have on your website. 

However, maintaining a website that is heavy in content can be time and money consuming. There are also a lot more details to be weary about when it comes to marketing – but considering the amount of customisation you can have on a website, this is no surprise. Finally the design and set up of a website can be quite complex, and isn’t necessarily something you can or should tackle on your own. 

In summary, you should have both a social media presence and a website. Social media is an excellent marketing tool but a website is the heart of your brand’s online presence. 

Defining your audience

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Defining your target market is the key to shaping your entire marketing strategy. Knowing who you intend to assist can help to differentiate your business from the competition, tailor your marketing efforts to better meet customer needs and potentially boost sales. Taking the time to identify and understand your particular niche audience can help you dominate it.

A broad target market that tries to appeal to everybody can get lost amongst the crowd. Demographics, such as age, gender, income and occupation, do not necessarily provide enough insight into the attributes of your target customer.

When constructing your market profile, narrow down the typical customer by looking closely at the psychographic, geographic and behavioural characteristics. This can help further develop the vision of your target market.

Psychographics:
Categorising your target market through psychographics uses personality and interests to define your target customer. Psychographics analyses variables such as lifestyle, attitude, values, personality traits, social class, activities and opinions. This explains the “why” element of why your customers want your product. Often closely related to demographics, combining the two forms of data collection can build a complete, sophisticated profile of consumers based on a more detailed picture of who they really are.

Geographics:
Segmenting your target customer through geographics involves considering what continent, country, city or town they may live in. It can also further studies by looking into specific neighbourhoods, the size of that area and even the climate. Geographics require far less personal data and can be performed simply with a map of the area in question. This form of analysis is quite general so it is best when used in conjunction with other methods.

Behavioural:
Behavioural segmentation involves your target customer’s behaviour towards your products or services. This format looks at customers based on what benefits they desire, how often they will use your product or service, loyalty to your brand, readiness to buy your products/services, or if your products/services are used for a specific occasion such as a holiday or an event.

Deferring and refunding GST on imported goods

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Importing goods and services with extra-added GST costs but not sure how you can apply for refunds or deference? The ATO has outlined a series of steps for all Australian businesses to follow when deferring or refunding any GST payments from imported goods to help better manage your cashflow.

Instead of paying GST every time you purchase an imported good, the ATO is now introducing a deferred payment scheme, where you can defer GST payments until the first activity statement lodged after your goods are imported.

An online application for the deferred GST scheme must be submitted for eligible businesses. To be able to apply for the deferred GST scheme, businesses must meet the following requirements:

  • Have an ABN
  • Be registered for GST
  • Lodge your activity statements monthly and online
  • Make your activity statements electronically
  • Comply with customs regulations on imported goods and services

According to the ATO, you can also apply for GST refunds when you return a low-value imported digital good or service. If your purchase possesses a custom value of $1000 or less, there are almost always GST costs attached to the product. While the GST added cost for one product may not be much, these tax payments do add up and it is important to consider applying for a refund when you choose to return these imported items.

When returning an imported good, your overseas supplier should always refund the paid amounts including GST but on the off-chance that they don’t, the ATO is always open to helping out with refund requests for imported GST costs. The ATO encourages contacting them directly for any GST-related problems concerning your business.

With the recent outbreak of COVID-19 and its resulting negative economic impacts on small Australian businesses, it is also worth noting that the ATO has also introduced some tax relief options including GST refunds, whereby businesses can acquire their GST refunds faster by reporting GST monthly rather than the usual quarterly reports.

Defamation law in Australia

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Defamation is a statement published or spoken that negatively impacts the reputation of a person. Individuals or corporations that employ less than 10 people, not related to another corporation, can sue another person in court for defamation.

As there is no constitutional right to free speech, defamation in Australia is harsher and more difficult to avoid than in other countries. Each state and territory has slightly different rules regarding defamation, with Tasmania being the only state in which the estate of a deceased person can sue for defamation. Usually handled as a civil case solved financially, defamation is rarely treated as a criminal issue with jail time. The cap on general damages allowed to be received is currently $389,000, although aggravated damages and costs can be awarded on top of the cap amount.

There are three areas of defamation that can be used in a case:

  • Imputation
    The act of accusing, defamation through an imputation can be a statement or a visual. Imputation has to injure the defamed’s ability to make money or induce a loss of work as well as affect other people’s opinions of them.
  • Identification
    Identification is specific to a person or group of people, usually by adding personal details such as their place of work or physical description. There is no need for the defamed to outrightly be named if there are enough details to reasonably identify them.
  • Publication
    Defamatory material is made known to a third party other than the person being defamed. The publication can be oral, written or in picture form, where every time the material is viewed or heard, a separate publication occurs.

Whilst defamation in Australia is easier to come across, there are means of defence, the most common being truth. Truth as a defence is the justification, with evidence, that the defamatory material doesn’t lower a reputation but rather, corrects it. There is a standard of proof upheld in regards to this defence.

Deduction rules for small businesses

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Spending on capital assets usually cannot be deducted immediately. Instead, small businesses claim the costs over time in accordance with the asset’s depreciation. There are many different processes that businesses can employ to make claims on their assets. For small businesses with lower-cost assets, methods such as simplified depreciation or the threshold rule can help to make more effective claims.

Simplified depreciation:
Under simplified depreciation rules, business owners can immediately deduct the business portion of each depreciating asset that was first used or installed ready for use up to:

  • $30,000 from 7.30pm (AEDT) on 2 April 2019 until 30 June 2020.
  • $25,000 from 20 January 2019 until 7.30pm (AEDT) on 2 April 2019.
  • $20,000 before 29 January 2019.

Owners can also pool the business portion of most other depreciating assets that cost more than the relevant threshold in a small business asset pool. Then they can claim a 15% deduction in the first year, regardless of whether they were purchased/acquired during the year, and then a 30% deduction each year after. When less than the relevant threshold, the balance of the small business pool can then be written off at the end of an income year. This is calculated before applying any other depreciation deductions.

The threshold rule:
The threshold rule allows owners to claim an immediate deduction for most expenditure of $100 or less, including any GST, to buy physical assets for the business. The rule is designed to help save time as purchases don’t have to be specified if they are of revenue or capital nature. The threshold rule doesn’t apply separately to expenditure on an element of a composite asset. This means items that are not functional on their own wouldn’t normally be classified as a separate asset. Some examples of items costing $100 or less that fall within the threshold rule are:

  • Office equipment – staplers, pens, books, etc.
  • Catering items – cutlery, glasses, table linen, etc.
  • Tradesperson small hand tools – pliers, screwdrivers, hammers, etc.

The threshold rule doesn’t apply to expenditure on:

  • Establishing a business, business venture, building-up a significant store or stockpile of assets.
  • Assets held under a lease, hire purchase or similar arrangement.
  • Assets acquired for lease or hire to (or that will otherwise be used by) another entity.
  • Any part of a collection of assets that are dealt with commercially as a collection.
  • Trading stock or spare parts.

Declaring Superannuation Contributions On Your Return

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In some circumstances, superannuation contributions can be claimed on your tax return if made to a super fund or retirement savings account. However, these circumstances are limited and may require professional advice to maximise the benefits.

Superannuation contributions paid by your employers directly to your super fund from your before-income tax cannot be claimed. These contributions include:

  • The compulsory super guarantee (increasing to 11% on 1 July 2023)
  • Salary-sacrificing super amounts
  • Reportable employer super contributions.

However, your superannuation contributions to your super fund from your after-tax income can be claimed. The personal super contributions you claim as a deduction will count towards your concessional contributions cap.

Super contributions that can be claimed as deductions may include

  • contributions made prior to 1 July 2017 if
    • they were made to a complying super fund or a retirement savings account (we’ll refer to both as ‘your fund’)
    • your earnings as an employee were less than the maximum allowed
  • for contributions made on or after 1 July 2017, you made contributions to your fund that was not a
    • Commonwealth public sector super scheme in which you have a defined benefit interest
    • Constitutionally protected fund (CPF) or another untaxed fund that would not include your contribution in its assessable income
    • super fund that notified us before the start of the income year that they elected to either treat all member contributions to the
      • super fund as non-deductible
      • defined benefit interest within the fund as non-deductible
  • you meet the age restrictions
  • you have given your fund a Notice of intent to claim or vary a deduction for personal contributions (NAT 71121)
  • your fund has validated your notice of intent form and sent you an acknowledgment.

Specific contributions cannot be claimed as tax deductions. These include:

  • a rolled-over super benefit
  • a benefit transferred from a foreign super fund
  • a directed termination payment paid into a super plan by an employer under transitional arrangements that applied until 30 June 2012
  • contributions paid by your employer from your before-tax income (including the compulsory super guarantee and salary sacrifice amounts)
  • First Home Super Saver (FHSS) amounts that you have re-contributed to your super fund(s)
  • contributions to
    • a Commonwealth public sector super scheme in which you have a defined benefit interest
    • a super fund that would not include the contribution in their assessable income, such as an untaxed fund or a constitutionally protected fund (CPF)
    • other super funds or contributions specified in the regulations
  • contributions made from 1 July 2018 to a super fund that are identified as downsizer contributions
  • re-contribution of COVID-19 early release of superannuation amounts.

When deciding whether to claim a deduction for super contributions, you should consider the super impacts that may arise from this, including whether:

  • you will exceed your contribution caps
  • Division 293 tax applies to you
  • you wish to split your contributions with your spouse
  • it will affect your super co-contribution eligibility.

If you exceed your cap, you must pay extra tax, and any excess concessional contributions will count towards your non-concessional contributions cap.

Your super fund must be notified before claiming the tax deduction against your personal super contributions. You must give a notice of intent to claim or vary a deduction to your fund by the earlier of either the:

  • day you lodge your tax return for the year in which you made the contributions
  • end of the income year following the one you made the contributions.

Your fund must send you a written acknowledgment telling you they have received a valid notice from you. You must receive the acknowledgment from your fund before you claim the deduction on your tax return.

Maximising your superannuation’s potential could start with boosting your savings with contributions. However, seeking professional advice or guidance before commencing is advisable, as failure to lodge a notice of intent to claim or vary can become an issue.

Why not start a conversation with us to see how we can assist?