The 2015-16 federal budget had small business front and centre with many positive changes being announced. The increase in the small business instant asset write-off threshold and the small business tax cut changes for both incorporated and unincorporated entities received most of the attention.
There were also a number of other changes announced on budget night which practitioners need to plan for in the year ahead. One relates to how taxpayers can claim for work related car expense deductions.
Another relates to costs incurred when starting up a business, and last but not least, limiting the concessional treatment of salary packaged entertainment.
Practitioners need to plan for and communicate these changes to clients who are likely to be impacted by these measures.
Car expense deductions
The government announced that it will simplify the car expense deductions for individuals. Prior to 1 July 2015, taxpayers could use one of the following methods to claim
car expenses:
- cents per kilometre – capped at 5,000 kilometres
- logbook – unlimited kilometres
- 12 per cent of original value
- one third of actual expenses.
To simplify the rules, from 1 July 2015 the government abolished the one third of actual expenses method and 12 per cent of original value method. The cents per kilometre method (with the existing 5,000 kilometres cap) and the logbook method (with unlimited kilometres) will remain.
The cents per kilometre method will be simplified to use a standard rate of 66 cents per kilometre rather than a rate based on the engine size of the car. Individuals using larger cars that have an engine capacity greater than 1.6 litres will be disadvantaged. The logbook method is the most onerous option for calculating car expense deductions but some taxpayers may now find this option more popular given that the cents per kilometre may now not reflect actual running costs of running a larger vehicle.
Practitioners need to ensure affected clients are aware of these changes especially if they want to consider a change to the logbook method. In the first year of using the logbook method, one must be kept during the income tax year for at least 12 continuous weeks. That 12-week period needs to be representative of travel throughout the year.
If you started to use your car for business purposes less than 12 weeks before the end of the income year, you can continue to keep a logbook into the next year so it covers the required 12 weeks.
Immediate deductibility for small business start-up expenses
From 1 July 2015 small businesses have been able to immediately deduct a range of expenses associated with starting a new business, including professional, accounting and legal advice. Such outlays could only previously be deducted over a five-year period. This allows small businesses and individuals to immediately deduct costs incurred when starting up a business, including government fees and charges as well as costs associated with raising capital.
This amendment does not extend the scope of what is currently deductible as they only apply to amounts that would otherwise give rise to a deduction under Section 40 880 of the ITAA 1997, commonly referred to as black hole expenditures. Instead the amendments bring forward the time at which certain deductible expenditure can be recognised.
Immediate deductibility under these amendments is only available for a subset of expenditure that is deductible under section 40-880 — expenditure incurred in relation to a business that is proposed to be carried on.
The amendments do not apply to expenditure incurred in relation to an ongoing business or a business that has ceased to operate (including expenditure relating to the liquidation or winding up of an entity).
The amendments also further limit immediate deductibility to two categories of expenditure:
- expenditure on advice or services relating to the structure or the operation of the proposed business
- paying an Australian government agency fees, taxes or charges relating to establishing the business or its operating structure.
Advice or services relating to the structure of a business encompasses, for example, advice from a lawyer or accountant on how the business may be best structured as well as services such individuals or firms may provide in setting up legal arrangements or business systems for such structures.
Similarly, advice and services obtained in relation to the operation of the proposed business includes professional advice on the viability of the proposed business (including due diligence where an existing business is being purchased), and the development of a business plan.
It also covers the costs associated with raising capital (whether debt or equity) for the operation of the proposed business including, for example, costs incurred in accessing crowdsourced equity funding, but not the direct costs of the capital itself such as interest, dividends or capital repayments.
Deductibility for advice and services does not include other expenses an entity itself may incur in relation to the operation of a proposed business (such as the cost of travelling to a particular location as part of assessing locations for a business).
If the claimant entity carries on a business in the income year, it must itself be a small business entity. Broadly speaking, the tax law defines a small business entity as an entity with an aggregate annual turnover of less than $2 million.
FBT concessions on salary packaged entertainment benefits
The last of the budget changes to be covered by this article relates to salary-packaged entertainment. The government proposes amendments to the FBT rules to introduce a separate grossed-up cap of $5,000 for salary-sacrificed meal entertainment, and entertainment facility leasing expenses for certain employees of not-for-profit organisations. In addition all use of these salary-sacrificed benefits will become reportable.
The changes propose to limit the concessional treatment of salary-packaged entertainment benefits by:
- Removing the reporting exclusion in respect of salary-packaged entertainment benefits. This ensures salary-packaged meal entertainment and entertainment facility leasing expense benefits will always appear as part of an employee’s reportable fringe benefits total which is included on their payment summaries.
- Removing access to elective valuation rules such as the 50/50 rule when valuing salary packaged entertainment benefits to prevent unintended and excessively concessional values being applied to those benefits.
- Introducing a cap on the total amount of salary-packaged entertainment benefits that employees can be provided by exempt employers (covered by section 57A) and rebatable employers (covered by section
65J) that are subject to a reduced amount of FBT.
The changes are proposed to apply to the 2016-17 FBT year and all later FBT years.
For many years, the IPA has been advocating that the government should introduce a cap on the total amount of salary-packaged entertainment that employees can include as part of their remuneration package. There has been ample evidence over many years that this concessional treatment has been exploited beyond its original intended purpose. While we support the introduction of a cap for salary sacrificed meal entertainment and entertainment facility leasing expenses, the proposed threshold of a grossed-up amount of $5,000 may be deemed too low for cash strapped
NFPs trying to attract and retain employees. The introduction of a cap will remove the exploitation of the concession and ensure that it is not unevenly used by employees on higher salaries.
As stated in the opening paragraph, it is important that these changes are communicated to practitioner’s clients who might be impacted. All these changes have now been passed into law
and taxpayers may want guidance from their trusted adviser on how best to adapt to the changing tax laws.
