Posted on July 18, 2016 by Chris Grieve
Have you ever heard a family member, colleague or business partner say that they are carrying out business activity like an olive farm or a hobby and that they claim the losses as a tax deduction? From 1 July, 2009 the Australian Taxation Office brought in Non-Commercial Loss legislation that further restricts the circumstances where a business loss can offset other income; most specifically for individuals whose adjusted taxable income is $250,000 or more.
To be eligible, you must meet the income requirement of adjusted taxable income of $250,000 or less and pass one of the four tests. You can only claim losses from genuine business activities.
Income requirement of $250,000.00 Attributable Taxable Income is made of the following amounts:
- taxable income (ignoring any business losses)
- total reportable fringe benefits amount
- reportable superannuation contributions
- total net investment loss (ie: negatively geared investment properties)
Once you meet the income requirement you must then pass one of the four tests.
The four tests are:
- The assessable income test – the business has assessable income of at least $20,000.
- The profits test – the business had a profit for tax purposes in three out of the past five years (including the current year).
- The real property test – the value of real property or of an interest in real property that is used in the business on a continuing basis was at least $500,000.
- The other assets test – the value of assets (excluding real property, cars, motor cycles and similar vehicles) used on a continuing basis in carrying on the business was at least $100,000.
If none of the above apply, then losses are deferred and carried over each financial year until a financial year where one of these tests are passed, meaning that they are never lost.
There are exceptions to these tests where losses can be claimed:
Primary Production & Professional Arts – If you have a primary production or professional arts business and your assessable income from other sources not related to that business is less than $40,000, you can claim the loss in that income year.
Commissioners Discretion – An application can be sent to the Commissioner of Taxation where the following applies:
- there are special circumstances outside your control that have prevented you passing one of the four tests, or
- because of the nature of the business, there is a lead time before your business can pass one of the four tests or make a profit.
Where the business activity is carried out in a partnership arrangement, then you (as an individual) may offset your share of a partnership loss against your other income, subject to the non-commercial loss rules. The non-commercial losses income requirements are applied to the individual partners the same as for an individual.
From looking at the Non Commercial Loss Provisions and 4 Business Tests we can see that simply running a hobby business to make a loss, does not mean a reduction in a taxpayers taxable income. With income requirements on your adjusted taxable income and quarantining of losses, accessing these losses can be rather difficult and should be discussed in detail with one of accountants. If you would like further clarification with what has been discussed above, please contact our office.
Share this:
Posted on June 15, 2016 by Chris Grieve
The director penalty regime has been in place since 1993 and most directors have at least a “working knowledge” of how the provisions operate and when they could become personally liable for the pay as you go (PAYG) withholding tax liabilities of their company. However, from 30 June 2012, the director penalty regime was expanded to include the superannuation guarantee obligations of the company, as well as restricting the application of some of the statutory defences.
The purpose of these reforms was to protect employee entitlements.
Who can be liable under the regime?
The following persons can be liable under the director penalty regime:
- Directors at the time the ATO sends out the notices (even if they weren’t directors at the time the obligation arose);
- Directors at the time the obligation arose (even if they are no longer directors);
- Alternative directors; and
- “shadow directors”.
What can Directors be held liable for?
In addition to PAYG withholding amounts, the director penalty regime, from 30 June 2012, applies to unpaid superannuation guarantee payments. Directors become liable for such superannuation guarantee payments on the day the company must lodge its superannuation guarantee statement. This is on the 28th day of the month after the end of a quarter.
So, for example, for the quarter ending 30 June the lodgement day is 28 July. Therefore, directors can be liable from that date for the company’s superannuation guarantee charge relating to the June quarter.
The liability includes not only the company’s superannuation obligations (for the 2014/15 year, being 9.5% of the employee’s ordinary times earnings), but also an interest component (10% p.a.) and a penalty component ($20 per employee per quarter).
Defences
A director has broadly three defences:
- commence winding up the company within 21 days of receiving the notice (this has now been modified, as discussed below);
- establish, because of illness or some other valid reason, the director did not take part in the management of the company at the time when the company incurred the withholding obligation; or
- the director took all reasonable steps to ensure the directors complied with their withholding obligations.
A new defence has been added that will ensure that a director is not liable to a director penalty relating to the superannuation guarantee charge, where they can establish that the penalty resulted from the company treating the Superannuation Guarantee (Administration) Act as applying to a matter or identical matters in a particular way that was reasonably arguable. In addition the director must show the company took reasonable care in connection with applying the Superannuation Guarantee (Administration) Act to the matter or matters.
For example, the company could take a view that certain persons are contractors and therefore the company does not need to make superannuation guarantee payments in respect to them. If the ATO, or the Courts, subsequently find that the persons were covered by the Superannuation Guarantee legislation, and that superannuation contributions should be made on their behalf, then, although the company will remain liable for the superannuation guarantee charge, directors will not be liable; provided that the view taken by the company was reasonably arguable and the company took reasonable care in relation to its superannuation guarantee obligations.
The “wind up defence”
The ability of directors to avoid director penalty obligations by winding up the company has been restricted to a period of three months after the debt is incurred. After that three month period the only way a director will not be liable for the company’s withholding or superannuation guarantee obligations is to pay the debt or satisfy one of the other two defences (ie the winding up of the company will not absolve the director of the penalties).
So to continue the example set out above, where a director becomes personally liable for the June quarter superannuation guarantee obligations, on 28 July, the “wind up defence” will lapse three months later (ie on 29 October).
New directors “grace periods”
New directors have two “grace periods”. First, they will not be liable for either PAYG withholding obligations of a company, or the superannuation guarantee obligations of a company, for the first 30 days of their appointment. This gives a new director time to conduct due diligence on the company and resign if necessary. If the director does not resign within that 30 day period then the director will be potentially liable for both past and present PAYG withholding and superannuation guarantee liabilities of the company.
Discretion to reduce PAYG withholding credits for directors and their associates
The Commissioner of Taxation has been granted the discretion to reduce credits for tax withheld from the salary of directors and their associates. So for example, if a company has withheld $15,000 of tax from a director’s fees, the Commissioner has the discretion to reduce those credits, with the effect that the director will have to pay full tax on his or her director fees (even though that tax has previously been taken out of the director’s fees).
What should Directors do?
Directors must ensure that their company has met all of its PAYG withholding and superannuation guarantee obligations on an ongoing basis. Where directors do not have day to day control of the company, they should ensure that management regularly confirms that the company’s PAYG withholding and superannuation guarantee obligations are met.
Where directors become aware that the company’s PAYG withholding and/or superannuation guarantee obligations have not been met, they should ensure that within the three month period after the liabilities arose, that either the liabilities are paid or that the company commenced to be wound up. If they fail to do this then unless one of the limited defences apply, the directors can be liable for those liabilities.
New directors should ensure that they conduct proper due diligence before or soon after their appointment. If that due diligence shows up unpaid PAYG withholding or superannuation guarantee liabilities, or the director cannot satisfy herself/himself that all liabilities have been met, the director should strongly consider resigning within the first 30 days of their appointment to ensure that they are not personally liable.
Share this:
