December 2018
CHRISTMAS PARTIES
Many people are planning their Christmas party for their staff. Such celebrations have tax implications and we are happy to provide this guide.
Fringe Benefits Tax (FBT) applies where an employer provides a benefit to an employee other than their regular salary or wage.
While a Christmas party could attract at FBT depending on the circumstances, the Christmas party could be exempt from FBT if its value is less than $300 per employee.
The below tables contain general information on the different types of Christmas parties that may be held and the FBT implications for such parties.
Christmas party held on the business premises
Example: Your business decides to have a party on its premises on a working day before Christmas and you provide food, beer and wine.
The implications would be as follows:
If… | When… |
Current employees only attend | For employees – there is no FBT implication as it is an exempt property benefit. There is no tax deduction and no GST claimable. |
Current employees and their family attend at a cost of less than $300 per head (GST inclusive) | For employees and family – there will be no FBT implications as the benefit is considered minor and infrequent. There is no tax deduction and no GST claimable. |
Current employees, their family and clients attend at a cost of $300 or more per head (GST inclusive) | For employees – there are no FBT implications as it is an exempt property benefit. There is no tax deduction and no GST claimable. For family – a taxable fringe benefit arises where the value is $300 per person or more. For clients – considered entertainment however no FBT implications but no income tax deduction either and no GST claimable. |
Christmas party held off the business premises
Example: You decide to hold your Christmas function at a restaurant on a working day before Christmas and provide meals, drinks and entertainment.
The implications would be as follows:
If… | Then… |
Current employees only attend at a cost of less than $300 per head (GST inclusive) | There will be no FBT implications as the benefit is considered minor and infrequent. There is no tax deduction and no GST claimable. |
Current employees and their family and clients attend at a cost of less than $300 per head (GST inclusive) | For employees – there will be no FBT implications as the benefit is considered minor and infrequent. There is no tax deduction and no GST claimable. For family – there will be no FBT implications as the benefit is considered minor and infrequent. There is no tax deduction |
Current employees, their family and clients attend at a cost of $300 or more per head (GST inclusive) | For employees – a taxable fringe benefit arises where the value is $300 per person or more. A tax deduction and GST credit can be claimed. For family – a taxable fringe benefit arises where the value is $300 per person or more. A tax deduction and GST credit For clients – considered entertainment however no FBT implications but no income tax deduction either and no GST claimable |
Christmas gifts
The following table briefly summarises the general FBT (and other tax) consequences for an employer providing Christmas gifts, based on the ATO’s guidelines.
Type of gift | Gifts to employees and their family | Gifts to non-employees (clients, suppliers, contractors, etc.) |
Non-entertainment gifts.
For example:
|
Subject to FBT (unless exempt – e.g., the minor benefit exemption applies) and income tax deductible*. To be an exempt minor benefit the total cost of a gift must be less than $300 (GST inclusive) and provided infrequently. If the gift is FBT exempt, then no income tax deduction and no GST credit can be claimed. |
No FBT applies.
Income tax deduction is allowed. * GST input tax credits can generally be claimed. |
Entertainment gifts.
For example: ■ Theatre / movie tickets ■ Tickets to a sporting event ■ Holiday accommodation |
Subject to FBT (unless exempt – e.g., the minor benefit exemption applies) and income tax deductible*. The total cost of a gift must be less than $300 (GST inclusive) and provided infrequently to be an exempt benefit. If the gift is FBT exempt, then no income tax deduction and no GST credit can be claimed. |
Not subject to FBT.
No income tax deduction can be claimed. GST input tax credits cannot be claimed. |
* No deduction is allowed for any GST input tax credit entitlement
In summary, the key here is to know your limits keeping in mind the $300 “minor and infrequent” benefit threshold for FBT is the key to your Christmas party and gifts remaining tax free. Note that the $300 threshold applies to each benefit provided, not to a total value of associated benefit. Where does taxi travel stand in all of this? Any benefit arising from taxi travel by an employee is an exempt benefit if the travel is a single trip beginning or ending at the employee’s place of work.
GIFTS AND DONATIONS
Australians are generous to a fault and this can have adverse tax consequences. Some of us may reflect that after giving say $1,000 to various charities in a year, we have very little documentation to substantiate tax deductibility.
In such a situation and with an assumed individual marginal tax rate of 39%, then a refund of $390 from the A.T.O. has been foregone.
Organisations that are entitled to receive tax deductible gifts are called ‘deductible gift recipients’ (DGRs). You can only claim a tax deduction for gifts or donations to organisations that have a DGR.
Deductions for gifts are claimed by the person that makes the gift (the donor).
To claim a tax deduction for a gift, it must meet four conditions:
- The gift must be made to a DGR. Check whether your donation was made to an endorsed DGR atABN Look-up.
- The gift must truly be a gift. A gift is voluntary transfer of money or property where you receive no material benefit or advantage.
- The gift must be money or property, which includes financial assets such as shares.
- The gift must comply with any relevant gift conditions. For some DGRs, the income tax law adds extra conditions affecting types of deductible gifts they can receive.
You cannot claim a tax deduction for donations made to crowdfunding platforms if they are not a DGR.
How much to claim…
The amount you can claim depends on the type of gift. For gifts of money, it is the amount of the gift, but it must be $2ormore. For gifts of property, there are different rules, depending on the type, and value of the property.
A tax deduction for most gifts is claimed in the tax return for the income year in which the gift is made. However, you can elect to spread the tax deduction over five income years in certain circumstances.
Bushfire and flood donations
If you made donations of $2 or more to bucket collections conducted by an approved organisation for bushfire and flood victims, you can claim a tax deduction equal to your contribution without a receipt, provided the contribution does not exceed $10.
What you can’t claim…
You cannot claim gifts or donations that provide you with a personal benefit, such as:
- raffle or art union tickets
- items such as chocolates and pens
- the cost of attending fundraising dinners, even if the cost exceeds the value of the dinner
- membership fees
- payments to school building funds made, for example, as an alternative to an increase in school fees
- payments where you have an understanding with the recipient that the payments will be used to provide a benefit to you.
TAX TIP
At the start of a financial year, determine which organisations will receive your donations after establishing they are a valid DGR. After careful consideration, make the donation, ensuring you retain the receipt, typically this may involve making around 5-6 larger donations in a year, rather than numerous “out of pocket” donations. Always be clear that if you received consideration e.g. meals raffle tickets, or any goods (charity auction) … then you cannot claim a tax deduction.
PERSONAL USE ASSETS
Often when an individual has a capital gain to deal with, they have to consider whether they have incurred any past capital losses. All too often personal use assets are mentioned, and it should be noted that any capital losses on personal use assets are disregarded.
Personal use assets are CGT assets, other than collectables, used or kept mainly for the personal use or enjoyment of you or your associates. Any personal use asset you acquired for less than $10,000 is disregarded for CGT purposes.
Personal use assets include:
- boats
- furniture
- electrical goods
- household items.
A personal use asset is also:
- an option, or a right, to acquire a personal use asset
- a debt resulting from
- a CGT event involving a CGT asset kept mainly for your personal use and enjoyment
- you doing something other than gaining or producing your assessable income or carrying on a business (for example, making a private loan to a family member or friend).
Your main residence and car or motorcycle are not classed as personal use assets.
If you dispose of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.
As mentioned, capital losses you make on personal use assets are disregarded. This means you can’t use capital losses on personal use assets to reduce your capital gains on other personal use assets.
Depreciating assets
CGT doesn’t apply to most depreciating assets you use solely for taxable purposes (such as business equipment or items in a rental property).
Gains or losses made on these assets are treated as assessable income or claimed as deductions, unless the assets were part of a depreciation pool. However, if you’ve used a depreciating asset for a non-taxable purpose (for private purposes, for example), CGT may apply.
CHANGE MANAGEMENT
Many cases of workplace change or restructuring are derailed or ineffective, though they may start with the best of intentions and are put in place due to necessary operational or financial imperatives.
One of the key factors for this outcome is lack of communication at the employee level where the changes are introduced. This makes effective implementation of change management a key component of an organisation’s tool kit, especially where there is some form of change on the horizon.
Employees in general are fearful and resistant when change is considered, basically because change brings uncertainty and often, the possibility that their employment may be in jeopardy.
The benefits of planning and executing an effective change management process throughout an organisation can deliver ongoing flexibility and enables the business to introduce changes which may require meeting financial and/or marketing variances. An organisation which has introduced and promotes a culture of change management will have increased flexibility, adaptability, innovation and if hard decisions are made, they can be more readily implemented without resistance from the workforce.
The Dunphy and Stace matrix of change strategies defines the types of change which occurs as:
1. Consultative, collaborative with participative evolution e.g. Local work area
2. Consultative, collaborative, charismatic transformation e.g. business improvement
3. Coercive, directive, forced evolution e.g. taxation, legislative, world events
4. Coercive, directive, dictatorial transformation e.g. merger of two organisations, business restructuring, survival, national competition policy
The forces of change can be planned, unplanned, internal or external and can be driven by:
- Economic forces
- Political changes
- Technological advancements
- Government restrictions
- Policy development
- Taxation changes
When attempting to manage a change within an organisation it is important to plan the steps involved in the process. This includes:
1. Identifying the forces of change (as above)
2. Identifying past and predicting future organisational and individual responses to change
3. Understanding the difference between managing change and managing transition
4. Recognising your own reactions and how this may impact on the change process
5. Learning effective communication strategies to facilitate and ease transition
6. Identifying possible resistance
7. Overcoming the resistance
Variables that can affect change and must be considered include:
People, Tasks, Structure and Technology
One of the most important parts of any transition to change or change management strategy is people. In order to get people on board and to embrace the change, it is necessary to be aware of staff:
Motivation, Perception, Feelings and Values.
Change management in an organisation is not only about the staff. The next level of the organisation, being supervisory and management, is imperative to the change process. These are the frontline managers who are interacting with staff on a daily basis and who staff will approach to discuss any concerns.
Two simple descriptions of ways management can assist with the change process are to ‘walk the talk’ and lead by example and to practice ‘management by walking around’ which is simply talking to staff at all levels on occasion just to see how they feel about the company and any recent or contemplated changes.
This usually unexpected and informal method of communication can be invaluable in demonstrating that management is serious about change management and employee communication and can greatly improve workplace relations outcomes.
Communication at the management level should be consistent and structured so that a uniform approach to change is seen across the organisation.
CAPITAL LOSS? WHEN A TRUST CANNOT REPAY A LOAN
Consider ‘Stan’ who has lent monies to a unit trust to help fund a deposit on a rental property, and to fund rental losses.
The trust sold the property with a shortfall in funds to pay out the loan. It is likely that the trust will be vested.
Can a capital loss be claimed by Stan for the unpaid loan?
If Stan forgives the outstanding balance of the loan, then this could potentially be a capital loss. However, Stan is unable to be entitled to a capital loss unless he charged interest on the loan.
A loan receivable is an asset for CGT purposes. Therefore, the loan would be Stan’s CGT asset. When the loan is forgiven/released, CGT event C2 will be triggered as ownership of the asset will end. There may be a capital loss if the proceeds received from forgiving/releasing the loan are less than the outstanding balance of the loan.
It is the market value substitution rules that apply in this situation (s116-30(2) ITAA 1997). Stan will be deemed to have received capital proceeds equal to the market value of the loan receivable just before it was forgiven. If the trust does not have the ability to repay the loan at the time the loan is waived, then it is arguable that the value of the forgiven portion of the loan is nil (or close to nil). However, if the trust does have the ability to repay the loan then the value of the loan may be its face value in which case there would be no capital loss to Stan. This is a valuation question and will depend on the facts.
Assuming that the trust does not have the ability to repay the forgiven portion of the loan, the forgiveness of the debt by the client should give rise to a capital loss.
However, the main exception to this result is where the loan is a ‘personal use asset’. Insection 108-20 ITAA 1997the definition of a personal use asset includes a debt arising other than:
(i) in the course of gaining or producing your assessable income; or
(ii) from your carrying on a business.
It is necessary to establish whether the personal use asset rules could apply to deny a capital loss for the lender. If interest has been charged by Stan on the loan, then this rule should not apply to deny the capital loss. However, if interest has not been charged by Stan on the loan then there is a risk that the loan will be treated as a personal use asset. If the trust is a discretionary trust and Stan does not have a fixed entitlement to the trust’s income, then it is very likely that the personal use asset rules will deny any capital loss.
The take out here is that if you make a loan to a family entity, that interest be charged on loan to maximise the possibility of claiming a future capital loss. If it is possible, consideration could also be given to taking a registered charge over the assets of the entity.
CONSULTATION ON IMPROVEMENTS TO DIVISION 7A OF THE INCOME TAX ASSESSMENT ACT 1936
On 22.10.2018, The Assistant Treasurer, the Hon Stuart Robert MP, today released for public consultation a paper on the amendments to improve the integrity and operation of Division 7A of the Income Tax Assessment Act 1936.
Division 7A is an integrity rule that is designed to prevent shareholders from using private company profits without paying tax at their marginal tax rates. Typically, this happens when shareholders (or associates) withdraw funds form the company by way of loan account after having only paid company tax of say…27.5%.
The amendments draw on recommendations from the Board of Taxation and will provide clearer rules for taxpayers and assist them in meeting their compliance obligations, while maintaining the overall integrity and policy intent of Division 7A.
The Consultation Paper seeks comments on the proposed approach to implementing the amendments.
In particular, the Consultation Paper seeks stakeholders’ views on unpaid present entitlements (UPEs) being brought within the scope of Division 7A following the 2018-19 Budget announcement.
At present certain trust distributions to private companies when the amounts remain unpaid (referred to as ‘unpaid present entitlements’ (UPEs)) have been subject to administrative guidance provided by the ATO. Clearly these trust distributions take place to enjoy the lower rate of company tax.
To clarify these trust distributions to a company are normally done by way of book entry – with individual beneficiaries of a trust often accessing the available funds by way of loan account.
The Government will introduce measures to ensure that from 1 July 2019 a UPE will come within the scope of Division 7A and will either required to be repaid to the private company over time as a company over time as a complying loan or will be subject to tax as a dividend. This will bring the treatment of UPEs into line with other Division 7 A loans, requiring a written loan agreement and repayments of principal and interest over a seven-year term (or 25 years where secured over real property).
The Consultation Paper is available on the Treasury website Interested stakeholders were encouraged to provide their views by Wednesday, 21November2018.
We can expect to see increased focus on Div. 7A issues given the differential between highest individual marginal and company tax is now 19.5%.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.