What are your terms of sale – shares or business?

• A critical negotiation point is what you are selling – whether you are selling the business and its assets, or whether you are selling the entity which holds the business. This consideration is dependent upon many things, not the least of which is the access to the general Capital Gains Tax Discount.
• If you are selling the shares in the company, a buyer may be reluctant to take over the entity in its entirety, even with the best due diligence on their part. The buyer may have a desire to acquire the assets alone.
• Similarly the buyer may want not just the business, but you as well (especially if you are an integral part of the business success). In such circumstances it may be possible to structure a hand-over period that suits you, or retention amounts or earn-outs that meet both side’s needs.
• Each situation is different, and it may be possible for you to structure the sale to take advantage of the capital gains tax discount as well as other tax concessions, in a way  that satisfies both your interests and those of your buyer.
• Whilst a company selling its business could not access the 50% cGT discount, an individual shareholder selling shares in the company could.

Company or trust

If you’re a company or trust, other than a public entity, you can also choose to disregard all or part of a capital gain where you meet all the following conditions:

• • you satisfy the basic conditions
  • you satisfy the significant individual test
  • you keep a written record of the amount you choose to disregard (the exempt amount) and, if there is more than one CGT concession stakeholder, each stakeholder’s percentage of the exempt amount (one may be nil, but together they must add up to 100%)
  • you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount
  • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and
  • where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset’s CGT exempt amount). If your capital proceeds from the disposal of a CGT asset are increased by one or more financial benefits that you receive under a look-through earnout right relating to that CGT disposal, you are treated as receiving those capital proceeds in instalments.

The SBC’s apply to reduce a capital gain made on the sale of an “active asset”.  There are four SBC’s:

• The 15 year exemption – A capital gain made on the disposal of an active asset that a taxpayer has owned for at least 15 years is fully tax-exempt if the taxpayer or, where the taxpayer is a company or a trust, a significant individual of the taxpayer is at least 55 years of age and retiring when the sale occurs, or is permanently incapacitated. The company pays this amount to the individual tax free.
• The 50% active asset reduction – A capital gain from the sale of an active asset is reduced by 50% (after applying capital losses and the CGT general discount if applicable). The company must pay this amount to the individual tax free.
• Small business retirement exemption – Any remaining capital gain (after applying capital losses, the CGT general discount and/or the Active Asset Reduction if applicable) made on the sale of an active asset, up to a lifetime limit of $500,000 for each individual is disregarded if certain conditions are met. If the taxpayer is less than 55 years old then the funds need to be put into Super otherwise this gets paid to the individual.
• Small business rollover – All or part of a capital gain made from the sale of an active asset can be deferred (after first applying any capital losses, the CGT general discount, the Active Asset Reduction and/or the retirement exemption if applicable) for at least two years.

Active Asset

• A CGT asset will satisfy the active asset test if the asset was an active asset for at least half the period the asset was owned or at least 7.5years if the asset was owned for more than 15 years.
• The definition of an active asset is set out in s52-40 which provides that a CGT asset owned by a taxpayer is an active asset at a particular time if it is used in a business carried on by the taxpayer or by an entity that is an affiliate of the taxpayer.
• Intangible assets (e.g. Goodwill) are active assets if they are inherently connected with the business. Shares or interests held in a resident company or trust may also qualify as an active asset, if the market value of the entity’s active assets is at least 80% of the market value of all the assets of the entity.
• The taxpayer satisfies either the small business entity test or the $6 million maximum net asset value test.

Superannuation consequences

From 1 July 2007, if you’re contributing a retirement exemption amount to a super fund or RSA, the amount is generally a non-concessional contribution. To exclude the amount from your non-concessional contributions cap and have it count towards your CGT cap amount instead ($1,415,000 for 2016–17), you must notify the fund using the Capital gains tax cap election. You must complete this form by no later than the time you make the contribution.

Getting funds out of the company

• Payments of a 15 year exemption are not deemed dividends under s.47 and are not included in capital proceeds. These amounts are paid out tax free prior to deregistration.
• Payments made pursuant to the retirement exemption are also not deemed dividends under s.47.
• Retained earnings are deemed dividends.
• A company can distribute the CGT exempt amount by:
  • Paying a dividend (this is generally unfranked as it has not borne company tax)
  • Liquidate the company – The cancellation of the shares will trigger CGT and the payment received by the shareholder in lieu of the active asset amount will constitute capital proceeds. TD 2001/14 Capital gain from this is reduced by the 50% discount and the SBC’s

Individuals/Partnership of Individuals

• Subject to the non-commercial losses provisions with respect to business losses, individuals can apply the tax losses against their other income. Excess losses can be carried forward for use in future years.
• Can access CGT 50% discount if the asset was held for more than 12 months, as well as potential application of other CGT exemptions.
• The disadvantage of this structure is that when the investment starts to be profitable the income cannot be split and will be taxed at the individuals marginal rates each year.
• No asset protection available to individuals

Discretionary Trust

• Income can be distributed in the most tax effective manner, in accordance with the trust deed.
• Can distribute capital gains to beneficiaries who have capital losses or are able to access the 50% discount, subject to the relevant trust deed.
• There is an added level of protection, particularly where the trust has a corporate trustee, as beneficiaries do not hold an actual interest in the trust’s assets. Note that the effectiveness of this asset protection is undermined by the Family Court.
• Tax losses can only be utilised to offset against other income of the trust where the trust loss rules in Schedule 2F to the ITAA 1936 are satisfied.
• In addition, any excess tax losses are trapped in the trust and cannot be distributed to beneficiaries.

Company

• Tax rate in a company is 30% or 27.5% if the company is an SBE.
• There is the ability for the investment to be structured so that interest deductions are claimed at the shareholder level rather than in the company itself. (The shareholder borrows to acquire or subscribe for shares in the company and then the company uses the funds to acquire the investment without any borrowings. This effectively transfers the benefit of the negative gearing from the company to the shareholder, circumventing the issue of having excess tax losses trapped within the company.)
• Tax losses are subject to the company loss rules.
• A significant disadvantage of holding growth assets in a company is the inability to access the general 50% CGT discount. There is limited options to extract the 50% Active Asset Reduction amount from the company tax effectively.
• A company has limited protection for the shareholders, as the shares are valuable assets and will be exposed to the shareholders creditors. The company provides limited liability as well as asset protection for the shareholders from the company’s creditors.

Unit Trust

• A unit trust has the ability for the investment to be structured so that interest deductions are claimed at the unitholder level rather than in the unit trust itself. The unitholder borrows to acquire/subscribe for units in the unit trust and then for the unit trust to use the funds to acquire the investment without any borrowings. This effectively transfers the benefit of the negative gearing from the unit trust to the unitholder, thereby circumventing the issue of having excess tax losses trapped within the trust.
• Provides asset protection for the unitholders from the unit trust’s creditors.
• Tax losses are subject to the trust loss rules and excess tax losses are trapped within the trust.
• Payments of non-assessable amounts to unitholders can reduce the cost base of their units in the unit trust, to the extent that the cost base is completely eroded then the excess paid to the unit holder will be a capital gain.
• Limited protection for the unit holders as the units are valuable assets and will be exposed to the unitholder’s creditors.

SMSF

• Tax rate is 15% whilst in accumulation mode. Assets supporting a pension are tax-free subject to the $1.6 million transfer balance cap applicable from 01/07/2017.
• Tax losses can be used against the fund’s other income, including assessable superannuation contributions. Excess losses can be carried forward for use in future years.
• Assets in the SMSF are trapped within the superannuation system until a condition or release has been satisfied by a member, otherwise than by way of sale in which case the sale proceeds may be similarly trapped.
• The ability for the SMSF to borrow is limited.

Business Structures

Major Drivers when choosing a structure

• Legal minimisation of tax, including reduced exposure to tax on any future capital gains.
• Loss utilisation
• Asset protection
• Other commercial considerations (financing, industry or professional association requirements)
• Family Considerations
• Flexibility to allow for changes (to allow for parties to enter or exit the business)
• Stamp duty considerations
• Ease of understanding and administration

The most common types of business structures in Australia are:

• Sole trader
• Company
• Partnership
• Trust

Changing business structures

It is important to know that you’re not locked into one business structure for the life of your business. As your business grows and changes, you may decide to move to a different type of business structure.

 

Before changing structures, you need to be aware of the differences and obligations for each.

 

Claiming work related deductions

Car expenses

• When claiming work related motor vehicle deductions remember that you still need to be able to substantiate how you worked out the number of business kilometres you travelled using the cents per kilometre method.
• In order to claim under the log book method – you must have a complete and valid log book.
• Under the log book method, a log book will last for 5 years UNLESS you change the vehicle, your useage pattern changes, your employment changes. If any of these things change you MUST complete a new log book.
• The motor vehicle expense deduction is not available to vehicles over 1 tonne – these expenses get claimed at D2 on the tax return (Travel Expenses).

Travel expenses

• Remember that just because you receive an allowance from an employer does not automatically entitle you to a deduction. Travel allowance claims are only deductive where the tax payer sleeps away from home.
• 1 tonne vehicles are not allowed to claim 100% of expenses – private useage must be taken into account
• Parking expenses are not allowed to be claimed where an employee is traveling to and from work and parking at or near the workplace for more than 4 hours
• Car washing expenses are not allowed where the vehicle is provided for the employee’s exclusive use

Uniform, Clothing & Laundry Expenses

• Everyday clothing is not tax deductible, nor can a claim for laundry be made on these items.   This includes heavy duty conventional clothing such as drill shirts and trousers.
• Only outdoor workers can claim sun protection clothing.
• If your claim for Laundry expenses exceeds $150 you must have written evidence eg diary entries and receipts An estimate of $0.50 per mixed load or $1 for work clothes only loads can be used.
• Conventional footwear including non slip are non deductible

If you are unsure as to the deductibility of your clothing and shoes consider the following tax rulings TR 97/12, TD 1999/62 and TR 98/5 or ask your accountant.

Self education expenses

There must be a nexus between the self education expense and the current income producing activity (Employment) otherwise these expenses can not be claimed.

Other work related expenses

• Sunscreen and sunglasses – outdoor workers can claim these but you must adjust for private useage.
• Home office – running costs can not be claimed on a floor percentage basis, you must use the ATO rate of $0.46 cents per hour only
• Home Office – Occupancy costs – (Rent, mortgage interest, rates) you can not claim theses if the home is not a place of business – (A place of business would include signage and stationery nominating the address as a place of business and the area should not be readily suitable or adaptable for use as a private or domestic purpose such as a bedroom) Having a room set aside for doing admin work at the end of the day does not constitute a place of business.
• Bank fees – you cannot claim these
• All other expenses including computers, mobile phones, internet etc MUST be apportioned between private and business useage.
• Vaccinations are not deductible
• Subscriptions to staff associations or social clubs are not deductible

What are the requirements of your Tax Accountant?

• Reasonable and direct questions need to be asked, we have also provided various checklists for you to use. (Available on our website)
• It is not necessary for you to provide to us or have us view/sight all your receipts, we only need you to advise that you have adequate substantiation. REMEMBER, in the event of an audit you will be required to provide that substantiation to the ATO.
• If we have suspicion that a client is making fraudulent claims we have the right to request to see the substantiating evidence, if the client refuses to provide the substantiation we can refuse to input the deduction and also terminate our services to the client.

What is written evidence?

The following can be used to substantiate your claims:

• A document in English
• Document from the supplier of the goods and services showing the name of the supplier, amount of the expense, nature of the goods and services, date incurred
• Bank statements
• credit card statements
• BPAY reference numbers
• email receipts
• Invoices
• Delivery notes
• PAYG payment summary
• Paper or electronic copies of documents
• Warranty documents

Probationary Employees and Reasons for Dismissal

If an employee is dismissed within their probationary period, do I have to give them a reason?

Short answer = no. Long answer = no, but we generally recommend you do.

Note:  Hereafter the term “probationary period” is replaced by “minimum employment period”.

The ‘short answer’ option

An employee dismissed within their minimum employment period does not have to be given reasons for the dismissal because they will not have achieved the required period of service to pursue unfair dismissal, which means they do not have a right of reply to the employer’s decision.

As the employer is not obligated to engage the employee in a warnings process or be drawn into a debate as to the merits of their decision, the employee can simply be given written notice of termination and dismissed with minimal process.

The ‘long answer’ option

Whilst an employee dismissed within their minimum employment period cannot pursue unfair dismissal, every employee can trigger the general protections provisions of the Fair Work Act 2009 (the Act) from day one of employment.

An employee could pursue a general protections dismissal claim if they believe they were terminated for a discriminatory reason (e.g. pregnancy, age, sex, carer’s responsibilities, etc) or for taking personal/carer’s leave; sought to lodge a WorkCover claim; suggested they were being bullied or queried their wage rate or award entitlements, for example. If an employer made the mistake of dismissing an employee for any of these reasons, it would be a breach of the general protections provisions of the Act.

 

An employer terminating an employee for performance reasons within their minimum employment period will be acting within their rights so when you have bona fide reasons for concluding employment, even if only minor issues, why not identify them? Failing to explain, even broadly, the performance issues that have led to termination within the minimum employment period may encourage an employee to fabricate their own reasoning as to what led to dismissal.

When a general protections dismissal claim is lodged by an employee, the onus is on the employer to PROVE that the employee was not terminated for the reasons they allege.

Identifying the performance reasons that led to dismissal within the minimum employment period at the time the employee is terminated – and including a summary of those issues in the termination letter – may not prevent a general protections dismissal claim being filed by an antagonistic ex-employee, but it will provide the employer with an evidence base to draw from in the hope of successfully defending against a fabricated or inaccurate claim.

Concluding thought – if you feel you can’t identify to an employee why they’re being terminated, maybe there isn’t a valid (i.e. lawful) reason for the dismissal.

Information provided by Employer Services Pty Ltd.

To find out more about how Employer Services can assist your business contact them on (07) 3220 3500

Chris Muir

DIRECTOR

Ph 07 3220 3500 l F 07 3220 3511

M 0432 711 885  l W www.employerservices.com.au

Level 7, 490 Upper Edward Street, SPRING HILL, QLD, 4000