In the fourth and final part of the tax planning series, Mark Beyer looks at some of the tax issues that repeatedly trip up business operators.
STAYING up to speed with Australia’s complex tax system is a daunting struggle for most small to medium-sized enterprises.
As well as the big changes driven by government, there is a continuous flow of rulings from the Australian Tax Office and decisions from the courts.
Amid all of this complexity and change, there are some tax issues that SMEs repeatedly neglect or fail to plan for.
BDO Chartered Accountants and Advisers tax partner Grant Burgess highlighted debt forgiveness, value shifting and shareholder loans as three areas that could cause problems.
The issue of debt forgiveness can arise when corporate groups have inter-company debts.
“When the group restructures, or a subsidiary is sold, these debts are often forgiven without any consideration given to the tax consequences,” he said.
“There are specific tax rules governing debt forgiveness and they can result in the forfeiture of tax losses or future tax deductions.
“Careful planning is required to ensure these rules don’t adversely affect the restructure or sale.”
Mr Burgess said many small business owners often forgot the “nasty” impact of the value shifting rules.
A common example is where the owners of a family business (typically the husband and wife) decide to issue shares to their children for little or no consideration.
“The value shifting provisions would apply in this case,” Mr Burgess said.
“In particular, since value has shifted from the parents to the children, a capital gains tax event is deemed to have occurred.
“This would result in the parents having to pay capital gains tax.”
Mr Burgess said he was still surprised by the number of people who got caught by Division 7A of the Tax Act, which essentially deals with loans made by private companies to shareholders.
Division 7A was enacted to ensure that private companies could not make tax-free distributions to shareholders in the form of loans and debts forgiven.
Mr Burgess said loans needed to be properly structured with appropriate documentation and interest charges, or else they would be treated as unfranked dividends and would be fully assessable.
Another issue that business owners need to be careful of is the new debt-equity rules, which can affect the tax treatment of at-call loans.
KD Johns & Co principal Keith Johns said the new rules, which take effect from July 1 next year, needed to be considered as part of tax planning.
“In particular, owners of SMEs who intend to inject capital into their companies through loans from themselves or related parties need to consider whether the loan will in fact be regarded as equity rather than debt,” he said.
“If so, returns paid on such loans may not be deductible and instead be recorded as frankable dividends.
“Appropriate planning should be considered to ensure such funding is correctly classified for debt and equity purposes.”
KPMG partner middle market advisory Graeme Sheard said business owners wanting to make loans to their companies in future would need to put in place more formal arrangements.
This would reduce the flex ibility of such arrangements.
Mr Burgess said some business people were not aware of Division 13A governing employee share and option issues.
“This division can be beneficial and result in a tax deferral,” he said.
“It can also bring to account an assessable amount that must be included in the employee’s tax return.
“In these cases, the employee would be faced with a tax liability but would not necessarily have the cash to pay it.”
Mr Burgess also advised business operators to be aware of the long reach of State Government taxes, particularly stamp duty.
“In particular, stamp duty can apply to rental agreements and other arrangements that might not be immediately apparent,” he said.
“Also, transferring assets within groups often has stamp duty implications that are not always understood.”