When you first went into business, either buying an established enterprise or starting from scratch, probably the last thing on your mind was the day you would close the door for the last time. But it's no use ignoring the inevitable, as one day you will leave the business – whether through pursuing another career, retirement, or even due to health reasons. It's important to know what's involved, and having a succession or exit plan can go a long way to smoothing the transition.
Tax loose ends
The sale of a going concern, as a continuing business, is generally GST free. But if in the process you separately sell "capital assets" (which are usually not intended for sale in the ordinary course of business but kept for the purpose of earning revenue), these will need to be accounted for.
You may be able to claim a deduction for many capital expenditures made in the process of winding-up the business, such as legal costs for terminating employees, or removing fixtures (that aren't depreciating assets) or site rectification costs.
Capital gains tax will come into play of course, but don't forget to account for any capital losses that may be lurking on the books. There are however various tax concessions available for the small business owner (see the details here), and if you are retiring, the profits from the sale of assets may be CGT-free.
If the business is being run from a company structure, getting the money out can also be problematic. You may need to engage a liquidator to get the money out tax effectively.
Retirement exemption on sale of business assets
Your superannuation fund could get a helpful boost if you're selling a small business. If the proceeds of the sale of a business CGT asset are rolled over into a super fund, the capital gain is exempt from CGT – and this "retirement exemption" (one of the small business concessions mentioned above) applies to the gains made on the sales of as many business CGT assets as you like, subject to a total lifetime limit of $500,000.
It's a way of encouraging people to prepare for their own retirement. And if you're at least 55 years old, you don't even need to put the money into a super fund to qualify for the tax exemption.
Taking care of staff
Of course ending a business, or selling it, will affect any staff. If you're selling the whole business as a going concern, staff may be able to keep their jobs, but if you're closing shop employees will need to know of all entitlements and payments owing. There are still legal obligations as an employer, which may include fringe benefits tax, PAYG instalments, compulsory super and perhaps eligible termination payments (ETPs), which are taxed differently to other types of payments made to someone who stops working for a business. There is an ETP calculator available that may help.
Registrations to cancel
Ultimately, as part of the process, you need to cancel your registrations with the ATO when you sell or cease trading. You are required to notify the Australian Business Register within 28 days of ceasing business to close your ABN. You can click here to apply to cancel registrations for the following:
- Australian business number
- goods and services tax
- fuel tax credits
- luxury car tax
- pay-as-you-go (PAYG) withholding.
But before cancelling the ABN, it's best to make sure all activity statements are lodged (even if there is "nil" to report) as well as PAYG withholding amounts. GST registration needs to be cancelled 21 days from ceasing trading, and the final activity statement will need to show any sales or purchases for that period (including the sale of the business, if applicable).
Tying off all the loose ends can be a process, and while it may seem impossible to cover absolutely every topic that will need your attention, here is a checklist to tick off (if applicable) when selling or closing your business.
Top 5 Division 7A watch-out
1/ Transaction caught by Division 7A
Division 7A will arise if transactions fall into the following three categories, for a shareholder or shareholder's associate:
- certain loans from a private company,
- certain payments from a private company, and
- forgiveness of a debt owed to a private company.
Some exceptions and exclusions exist however. These include:
- payments of loans to other companies,
- payments or loans that are otherwise assessable,
- loans made in the ordinary course of business on normal commercial terms,
- if a loan is repaid in full before the lodgment date, and
- Division 7A loan agreement is in place in writing before the lodgment date (for example, minimum interest rate, maximum term).
If being caught, a private company is deemed to have paid an assessable unfranked dividend.
2/ Interposed entities
The tax law deems a private company to have made a payment or loan to an entity (target entity) for Division 7A purposes if:
- the private company makes a payment or loan to another entity (interposed entity) that is interposed between the private company and the target entity, and
- a reasonable person would conclude that the private company made the payment or loan solely, or mainly, as part of an arrangement involving a payment or loan to the target entity, and
3/ Unpaid present entitlement (UPE)
If a private company (corporate beneficiaries) has an UPE from an associated trust but the trust uses the money for its own purposes, Division 7A will apply. Further, a private company that releases all or part of its UPE is making a payment for Division 7A purposes to the extent that the release represents a financial benefit to an entity.
This issue can be avoided if:
- the trust fully pays the UPE to the private company before the lodgment day for the trust's income tax return,
- the parties put a Division 7A loan agreement in place, or
- a sub-trust arrangement is in place for the sole benefit of the private company.
4/ Distributable surplus
The amount taken to be a dividend is limited to the company's distributable surplus calculated at the end of the year of income. The formula is:
Net assets + Division 7A amounts – Non-commercial loans – Paid up share value – Repayment of non-commercial loans
The distributable surplus does not necessarily equal to retained earnings.
5/ Government's proposed changes to Division 7A
In the May 2016 Budget, the government announced it is proposing to amend Division 7A with effect from July 1, 2018 to include:
- a self-correction mechanism providing taxpayers whose arrangements have inadvertently trigger Division 7A with the opportunity to voluntarily correct their arrangements without penalty,
- new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers, and
- amended rules, with appropriate transitional arrangements, regarding complying Division 7A loans, including having a single compliant loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.
Claiming for work travel: Itinerant "flexibility" not so flexible
It is generally assumed that there is a degree of flexibility within the tax law over particular work travel claims that arise where the nature of the employment is deemed to be itinerant.
If you do itinerant work (or have shifting places of work) you can claim the cost for driving between workplaces and your home. Note that you cannot count your home as a workplace unless you carry out itinerant work.
The ATO says that the following factors may indicate that you do itinerant work:
- travel is a fundamental part of your work due to the very nature of your work, not just because it is convenient to you or your employer
- you have a "web" of work places you travel to throughout the day
- you continually travel from one work site to another
- your home is a base of operations – if you start work at home and cannot complete it until you attend at your work site
- you are often uncertain of the location of your work site
- your employer provides an allowance in recognition of your need to travel continually between different work sites and you use this allowance to pay for your travel.
Flexible, up to a point
In case the above factors give some impression of allowing for a very wide degree of flexibility, one recent Administrative Appeals Tribunal (AAT) decision adds to the factors to be considered if making claims for home-to-work travel in the case of itinerant work.
A taxpayer (Mr Hill) claimed he was entitled to deductions for certain work-related travel expenses for meals and accommodation on the basis that he was employed in itinerant work.
On the face of it, he seemed to fit the bill. During the year, Hill undertook a number of employment arrangements and engaged in various roles. Each job was in a different location, each were short-term and seasonal in nature, and all were in the mining industry.
Mr and Mrs Hill owned a house, which he asserted was their usual place of residence. However with the exception of one location, he stayed with his wife in a motorhome that they towed to rented caravan sites near each of the locations where he had work. It was found however that they returned home for short periods, sometimes weeks, between each job.
The AAT considered some of the ATO's factors and concluded that the taxpayer was not an itinerant worker, and could not make his claims.
Its reasons included the following:
- travel was not a fundamental part of the taxpayer's work as it did not arise out of the nature of his employment with each employer. That is, the taxpayer was under no obligation with any employer to work at multiple sites
- employment duties did not commence at the usual place of residence or at the various caravan parks where he parked his motorhome
- when he finished the work at each workplace, he returned home for up to three weeks before commencing at another workplace
- the taxpayer did not have a "web" of workplaces, and the location of each workplace was known to the taxpayer with a large degree of certainty
- the taxpayer was not required to travel between different workplaces as part of his employment; he would travel between the caravan park where he parked his motorhome and the same workplace for the relevant period of each employment. None of his employers required him to travel from where he was staying to different workplaces
- none of the employers paid him an allowance for travel such that it may indicate that travel was a fundamental part of his employment.
The AAT further remarked as follows:
- the taxpayer's duties did not involve him travelling from workplace to workplace as is essential for itinerancy
- he made a lifestyle choice to work in regional towns and live in his motorhome
- he was not required to travel to these different locations in the course of his employment. Rather, he chose to travel from his home to undertake work in these locations
- each work place may be regarded as a regular or fixed place of employment, even if there was some uncertainty about the length of time that he would be employed at each location.
The key message
Over the past few years, the ATO has been setting its sights on incorrectly claimed work-related travel expenses (for example, car expenses, flights and accommodation). This focus is expected to continue, and the ATO has warned that it will pay extra attention to people whose work-related deductions are higher than expected. As can be seen from the above, your clients' entitlement to a deduction for work-related travel expenses will be subject to, will depend on, their individual circumstances.
DASP explained, and where the revised backpacker tax fits
Whether you've been on a working visa and have been slogging away bagging bananas in Tully for six months, or decided to quit your city job and move to Peru, your employer has been putting money aside for your superannuation. Among sorting out all your affairs, you're probably also wondering what will happen to your super money when you leave.
The adage of "you can't take it with you when you go" is only half true in this case. It all depends on if you were a permanent, or temporary resident.
If you were a permanent resident
Say you have been a permanent resident of Australia who has moved to another country and wish to take your super with you – sorry, but you'll have to wait. You aren't able to access your Australian superannuation savings until you pass preservation age or retire, no matter where you may be living. There are some exceptions regarding this relating to health and hardship – but it's best to contact your fund to discuss your specific concerns.
If you were a temporary resident
Each year in Australia, millions of dollars in unclaimed super is left behind by temporary residents who don't realise they are able to claim their contributions when they leave. Temporary residents who permanently leave Australia are entitled to receive the super money that has been put aside by their employer. This is known as a Departing Australia Superannuation Payment – or DASP.
If you leave the country and haven't claimed your superannuation at least six months before you leave, it goes to the ATO. After that, you'll need to approach the ATO, which will repay it after taxes are taken out.
DASP payments are not considered part of an individual's assessable income; however, the DASP payment will be subject to the normal rates of DASP withholding tax. The tax-free component of super payments lives up to it's name - that is, zero tax.
The taxed element is the amount of the taxable component of the super lump sum that represents the return of amounts that have been subject to tax in the fund, for example, taxable contributions and fund earnings. The tax rate for the taxed element is currently 38%.
The untaxed element is the amount of the taxable component of the super lump sum that represents amounts, other than the tax-free component, that have not been subject to tax in a fund. This usually occurs because the super lump sum is sourced at least in part from a scheme that is not subject to tax. The tax rate for the untaxed element is currently 47%.
You can apply for your DASP online here.
The backpacker fly in the DASP ointment
The announcement of the "backpacker tax" before the last federal election caused something of a stir, as the proposal would have hit working holidaymakers with a 32.5% tax on earnings (from the first dollar of income) plus a 35% tax on employer super contributions when they left the country.
But the government has now decided (pending a Senate committee review) that the proposed 32.5% tax rate will revert to 19% from January 1, 2017. This will still be applied from the first dollar.
Also in the revised backpacker package however is an increase in the tax rate applied to super payments when they leave Australia. This is proposed to apply at 95%. To rub salt into this wound, the departure tax (passenger movement charge) is also proposed to go up by $5.
How to get an Australian business number (ABN)
It's not mandatory for a business to have an Australian business number (ABN), but there are a few good reasons why you should. Foremost among them will be that without one, your business will probably feel a whole lot poorer than it should.How to get an Australian business number
Other businesses that deal with you are legally bound to withhold tax from any payments they make to you if your business does not quote an ABN on invoices – and they must withhold it at a rate of 47%.
Having an ABN also gives your business the ability to claim back goods and services tax (GST) credits, claim fuel tax credits you quality for, register to use the pay-as-you-go withholding system, be able to offer fringe benefits to employees, and just generally make dealing with other businesses much smoother.
Where to register
To get an ABN, you can apply online for free at the Australian Business Register, but before you do you need to determine if you are indeed entitled to an ABN. There is an online entitlement checklist here to help you decide if you are entitled. The Australian Business Register is also the central collection point for basic information about every business with an ABN. Separate registrations are needed for GST, PAYG and so on, as well as business name registration.
If your turnover is more than $75,000 a year (before GST), you are required to register for GST, and to do that you need an ABN. (Taxi and Uber drivers, by the way, need to be in the GST system no matter what their annual turnover.)
Entities, not businesses
Every business that applies only needs one ABN (whether sole trader, partnership, company or trust) but can then run as many enterprises as they like from that single ABN as long as these operations are conducted under the same entity structure – one business can operate for example a furniture shop, a separate curtain outlet and an online fabric supply outlet. But if any of these operations are run by a different business entity, a separate ABN will be needed for it.
You will also need an ABN to register a website domain name with an extension that ends in ".au", if your business intends to have an online presence.
If you choose a company structure for your business, the first registration undertaken will probably be with the Australian Securities and Investments Commission, which will issue you with an Australian Company Number (ACN). You need this when registering for an ABN (and the ABN will actually be the business's ACN plus two digits at the beginning). You don't need to show both numbers on invoices or stationery, just your ABN.
New fleet "safe harbour" approach for car fringe benefits
The ATO has announced that, after consultation and collaboration with business taxpayers and industry representatives, it has developed what it calls a "safe harbour" mechanism for calculating car fringe benefits under the operating cost method.
In ATO parlance, a safe harbour is a guideline that allows taxpayers to make use of a simplified and efficient way to calculate their tax obligations where certain conditions are met.
In this case, the ATO has come up with a streamlined approach to working out the business use percentage of car fringe benefits for fleets of 20 cars or more, which it says will be applicable from the 2017 FBT year onwards (from April 1, 2017).
"The new approach reduces the record-keeping burden for your business clients," it says, adding that it allows taxpayers "to use an 'average business use percentage' when using the operating cost method".
How does it work?
Business taxpayers can access the safe harbour and use this new simplified approach if:
- they are an employer with a fleet of 20 or more "tool of trade" cars
- the vehicles are not part of salary packaging arrangements, and employees cannot elect to receive cash instead
- the cars have a GST-inclusive value of less than the luxury car tax limit in the year acquired
- employees are mandated to maintain logbooks and there are valid logbooks for at least 75% of the cars in the logbook year.
After all of the above is in place, an employer can use the logbooks to calculate the fleet's average business use percentage.
The ATO says this simplified record-keeping approach can be applied for a period of five years in respect of the fleet (including replacement and new cars) provided the fleet remains at 20 cars or more.
The last condition is subject to there being no material and substantial changes in circumstances. An example of such a change would be a relocation of the employer's depot that would substantially alter the business use percentage of the fleet.
The ATO developed the new safe harbour method after taking on board relevant feedback from practitioners and business taxpayers which showed that compliance with record-keeping requirements of the operating cost method can be difficult and time-consuming for employers with larger fleets.
See the relevant ATO practical compliance guideline for more details.