Added personal liability exposure through phoenix crackdown
Directors must take note of the government's new focus on illegal phoenixing. There are certainly loopholes in the current system, and to deal with this the Treasury announced a significant amount of additional funding for regulators to crack down on suspicious activity.
Moving from a reactive to proactive system is certainly welcome - however, the government has also made directors personally liable for unpaid GST and certain luxury taxes.
Under the current system, directors are only liable for unpaid PAYG withholding and superannuation guarantee payments. To prepare for this expansion in liability, directors need to maintain vigilance about their company's taxation affairs. This must involve developing sufficient flow of information from management to ensure the company isn't exposed.
Another key measure (one that we already knew was coming) is the introduction of better director identity measures. This involves giving each director in Australia an identification number, as well as providing additional resources to improve administration of the Australian Securities and Investments Commission and Australian Business Register.
R&D concessions restricted
For businesses with a turnover of less than $20 million a year, the main change with R&D concessions is that the cash refund will be capped to $4 million a year. Anything in excess of this can be carried forward to future tax periods, but the rebate won't be immediate. Incentives will be calculated at 13.5 per cent above the company's tax rate.
Companies that earn over $20 million will be impacted much more significantly. The government wishes to introduce an intensity test whereby benefit rate is calculated through assessing how much R&D accounts for a business's overall expenditure. This means two identical R&D projects could receive significantly different funding, depending on how much the company spends on other areas.
Businesses have expressed concern about this, because at the beginning of the year organisations will still be uncertain of the exact rebate they are going to get, and therefore can't sufficiently plan out their R&D expenditure. This could lead to significant reductions in R&D spending.
The black economy taskforce
A key positive for directors from the budget has been the creation of the black economy taskforce. In an effort to crack down on people who don't engage with the tax system (normally through cash in hand payments), the government has announced $319 million of extra funding for investigation and enforcement. This money is designed to enhance the ATO's use of data so they can identify those that aren't engaging properly with the tax system.
Another key aspect of this is the denial of tax deductions to businesses who pay wages but fail to withhold tax from those wages. For example, if using a contractor that doesn't have an ABN, businesses are supposed to withhold 47 per cent tax. If they don't do this, they will no longer be eligible for tax deductions under the new system.
Through these measures the government predicts it will raise around $5 billion in extra revenue over the next four years. This is a positive for business - those that are doing the right thing with regards to tax will bear no further cost, so it's a well-targeted anti-avoidance measure.
No company tax deductions
One of the big disappointments of the budget was that few corporate tax deductions were made, despite the government's commitment to them. The only measure to note was that the immediate tax deduction for acquired assets under $20,000 will be extended to the next financial year. If this instant asset write off were to be made permanent, small businesses would be able to plan for their capital needs much better, and is certainly something we hope the government is considering.
Although we are still awaiting more detailed legislation, the budget certainly presents new challenges for directors, some of which may require significant restructuring. BDO looks forward to seeing how the legislation will pan out, and hopes that the best interests of businesses will be considered.
You can find the AICD's budget night analysis here.