October 2022 Federal Budget – your planning needs for the year ahead
The good news is there were virtually no tax or superannuation changes that affect small or medium size business. This is very much welcomed.
The bad news is with interest rates rising, high inflation and labour costs rising, businesses looking for assistance from the Government will be very disappointed by this interim Budget.
Based on our analysis, the big winners appear to be:
- Families – Childcare subsidies extended, increased benefits with the Paid Parental Leave scheme.
- Pensioners – Deeming rates are frozen at current rates until 30 June 2024, new measures to incentivise pensioners to downsize their homes, and income levels lifted significantly for eligibility for the Commonwealth Seniors Health Card.
- Retirees – Downsizer superannuation contribution eligibility age is reduced from 60 to 55 years, starting from first quarter after this legislation is passed. This allows each eligible person to contribute up to $300,000 into their super at a much earlier age, benefiting from super’s low tax rates.
There were two headlines without substance. This Budget “sets the pathway for a bright future for small business” (yes, how exactly?). 1,000,000 new affordable homes will be built in areas people want to live (yes, how exactly? Which builders? Without inflation? Which land? And with minimal funding set aside in the budget). We’ll be surprised if either delivers anything apart from newspaper headlines and barbecue talking points.
OUR CONCERNS FOR FUTURE YEARS
This wasn’t the usual Federal Budget held in May where tax and superannuation and other changes are announced.
Instead, it was a Budget to wind back what the previous Government said they would do and to “fix” things and put in place new policies from the new Government.
Based on the negative economic expectations discussed by the Government after releasing their Budget, it appears highly likely that significant tax increases will occur in the 2023 or future Budgets.
Additionally, the ATO is clamping down further on business owners and ramping up its audit activity in an attempt to raise tax revenue to support the new Government’s spending. Your compliance requirements on documentation, record keeping, log books, private use percentages, retaining records is more important than ever.
You need to start planning for this now.
We outline below some of our key concerns and activities for the year ahead…
Single Touch Payroll (STP)
The ATO is continuing to develop the technical capacity behind single touch payroll and the reporting obligations of employers must keep up. When the ATO can see your activity in real time, then your obligations to follow rules such as paying super on time are immediately available for ATO scrutiny and audit.
Our team are trained and ready to assist you to keep up and comply.
ATO Ruling Affects “Professionals” and Profit Allocations
ATO guidance (PCG 2021/4) totally changes the way that professional firm profits can be allocated (or split) among a family group from 1 July 2022 onwards. As a result, most professionals will end up paying larger amounts of tax from the 2023 financial year onwards.
A professional firm is one that offers customised, knowledge-based services to clients which include medicine (doctors, dentists, medical specialists, etc), lawyers, architects, engineers, accountants, financial advisors, IT and consultants.
To stay in what the ATO calls the “Green Zone” and not be audited, the ATO expects a professional and their family group to pay tax at a combined average rate of 30% or higher.
How will this affect you? More Tax to Pay in 2023
1. You need to plan for higher tax payments from 2023 onwards.
2. The ATO requires you to document annually your assessment of your profit allocations along with PCG 2021/4.
Your Business Cashflow may be “Crunched”
With inflation running the highest it’s been in decades, interest rates rising, labour costs increasing and power costs inflating, you need to closely monitor your profit margins and ensure your prices are set at a level that keeps your business profitable.
We believe it is essential for you to plan for the next 18 months by analysing your business and preparing monthly profit and cashflow forecasts to prove to yourself that your business model (i.e. your way of running your business to succeed) is sustainable, or to alert you to the fact that you need to consider immediate changes to your pricing and operations to keep your cashflow positive.
We can help you with this essential work.
Big changes affecting Family Trusts (also known as Discretionary Trusts)
By staying silent, the government has effectively endorsed the ATO position on Section 100A (we shared this with you earlier this year https://portersca.com/ato-views-on-family-trusts/) and the need to ensure your trust deed is up to date (https://portersca.com/trust-deeds-are-you-up-to-date/). These key changes will affect people using Family Trusts in this 2023 financial year.
S100A + Distributions to Family Members
The ATO has released draft Tax Rulings based on S100A of the Tax Act that restrict Trusts making distributions to adult children or family members unless the cash amount of the distribution is paid to the beneficiary.
How will this affect you? More Tax to Pay in 2023
You may be restricted in the amounts your Family Trust can allocated to adult children or parents when compared with prior years.
Our Tax Planning meeting with you in May/June 2023 will be crucial to get this right and not expose you to any penalties from the ATO.
“Owies” Case + Consideration of Beneficiaries
In this recent Court case, the Trustee was removed, and an independent Trustee was appointed when two beneficiaries complained they weren’t considered.
How will this affect you? More Work to Administer your Trusts in 2023
Prior to 30 June, accountants will have to assist all Trustees with the following:
1. Reconsider the default beneficiaries in a Trust.
2. Consider the purpose recited in a Trust.
3. Consider the terms of a Trustee exercising their discretion.
4. Ensure your actions are aligned with the powers and guidelines established in your Trust Deed.
This process will take time and will need to start taking place from the beginning of May 2023.
For your peace of mind, we would like to meet with you before our office closes in December 2022 for an initial review of how these key changes may affect you:
- Single Touch Payroll updates
- Professional Firm Profit Allocations
- Cashflow “Crunch”
- Family Trusts – trust deed review and update alongside S100A and Distributions to Family Members
- Family Trusts – “Owies” Case and Consideration of Beneficiaries
When are you available to meet with us?
We look forward to assisting you!