The Federal Budget was delivered last week. The good news is there was really no tax or superannuation changes that affect business. The bad news is that with interest rates still rising (expect the Cash Rate to finish around 3.5%) and labour costs higher with continuing staff shortages, don’t expect any assistance from the Government.
Families – childcare subsidies extended, increased benefits of Paid Parental Leave
Pensioners – deeming rates frozen until June 2024, new measures to downsize homes using pension incentives, and income levels increased significantly for eligibility for the Seniors Health Card.
Retirees – the Downsizer $300,000 Superannuation contribution eligibility age is reduced to 55 years.
Concern for Future Years
This wasn’t the usual Federal Budget, it was about Labor winding back what the previous government had planned and to put in place its new policies.
The Treasurer and Prime Minister have expressed very negative economic expectations. Past experience tells us most estimates from Treasury are wrong, so actual economic outcomes may not be that bad. However, government debt is high, so tax increases could be made in the next Budget (May 2023).
ATO Audit and Collection Activity
The ATO has received extra funding to increase its audit activity, and to collect outstanding debt. Consider what could trigger an ATO audit:
Being in a target industry – where cash is common and so the potential for avoidance is higher.
Your income is low compared to ATO and industry benchmarks.
Not declaring all income – the ATP has a sophisticated data matching system, for employment, interest, dividends, crypto, rentals, and other contract sources.
Having a lifestyle that does not match declared income.
Anonymous allegations or tip-offs.
Poor lodgement and payment records for income tax, GST, superannuation, etc.
ATO Ruling on Professionals and Profit Allocations
A new ATO guidance (PCG 2021/4) changes the way professional firm profits can be split among a family group, applying from 1 July 2022. A professional firm is one providing knowledge-based services, such as medical, legal, financial advisors, etc.
To avoid an audit, basically, the family group needs to pay tax at a combined average rate above 35%. Our end-of-year Tax Planning meeting will be important to get this right.
ATO and Family Trusts
The ATO believes sec. 100A of the Tax Act means that distributions made on paper need to be supported by cash paid to the beneficiaries. In a recent Court case, ‘Owies’ case, the trustee was removed and distributions changed because two beneficiaries complained they had been excluded from distributions.
These matters need to be considered before the end of the financial year – the default beneficiaries, the purpose in the Deed, and the terms of a Trustee exercising their discretion. It may even mean changes in the trust to provide asset protection and estate planning advantages.
Costs are increasing spurred on by inflation, interest, labour, and power prices. That means you need to closely monitor your profit margins and ensure prices are set at a profitable level. We think it is essential to look forward for at least 12 months, and prepare both a monthly Profit and a Cashflow forecast (timing may be different for cashflow).
This provides confidence in your business model (the way the business runs) and to ensure that pricing, operation and cashflow are working for you.
The Budget was not the topic for this Newsletter, it is the assumptions and scenarios underlying it that raises concerns, together with the changes to trusts and professional profits.
These can’t be dealt with “eventually”, but need to be considered before 30 June, and is the reason we keep stressing the importance of trusts and tax planning before the end of the financial year.
We suggest we have an initial call or meeting to see if these key changes may affect you. Economic conditions, government policy, tax office activity will all be factors to watch and be aware of in the next one to three years, so please don’t get caught out.