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| INTEREST RATES REMAIN STEADY |  |  |
The Board of the RBA met this morning and voted to hold interest rates at 4.75%. This is the tenth consecutive meeting where that has been the outcome.
It is obvious that global and domestic nervousness are having a significant influence on its discussions and with talk of looming trouble in the US and local consumer confidence at very low levels it is hard to see a case being made for an increase any time soon.
| PERSONAL LIABILITY OF COMPANY DIRECTORS |  |  |
The personal liability of company directors for withholding of PAYG and Superannuation Guarantee (SG) amounts from employee wages will be increased under a proposed change to the law.
On 5 July 2011, Treasury released an Exposure Draft of a Bill to strengthen the operation of the director penalty notice regime following the announcement of the change in the Federal Budget on 10 May 2011. The changes are intended to protect workers' entitlements to compulsory employer superannuation contributions and to address "phoenix" activity involving companies. However, the changes will apply more broadly, creating an increased personal liability risk for all directors of companies with paid employees, or contractors who principally provide their labour for whom SG obligations therefore apply.
Importantly, these changes can also expose directors to personal liability where the company has under-reported PAYG or SG withholding amounts because it has taken the view that a person is a contractor and not an employee (or a contractor for whom SG obligations apply), if that view is later proven incorrect.
The changes will take effect once the Bill is enacted, expected to be before the end of 2011.
KEY ASPECTS OF THE CHANGES
Under the proposed changes:
· The director penalty regime would be extended to make directors personally liable for their company’s unpaid SG amounts (in addition to unpaid PAYG amounts);
· The ATO will be allowed to immediately commence recovery action if the company’s liability remains unpaid and unreported 3 months after the due day;
· After a company’s liability remains unpaid and unreported for more than 3 months, a director’s personal liability could only be extinguished by payment of the debt or penalty (placing the company into liquidation will not be sufficient);
· The ATO will have the discretion to prevent directors and their associates from accessing the PAYG withholding credits on their own salaries if the company has an outstanding PAYG liability; and
· A new director can become personally liable for the company's outstanding PAYG and SG liabilities after 14 days from the time they commence as director of the company.
EXTENDING LIABILITY FOR SUPERANNUATION GUARANTEE AMOUNTS
Under the proposed changes, directors could be made personally liable for the company's unpaid SG amounts. A director can become personally liable from the SG lodgment date for each quarter, even if the company fails to lodge a quarterly report as required. There are limited defences to the personal liability, if an individual director can prove that he or she was not involved in the management of the company for good reasons (eg because of illness or extended leave), or that they took all reasonable steps to ensure that the directors complied with their obligations (eg placing the company into liquidation). It is important to note that it is not a defence for a director to argue that the company had insufficient funds to pay the PAYG withholding amount or the SG amount.
REDUCTION OF DIRECTORS' PERSONAL PAYG CREDITS
Under the proposed changes, where a company's PAYG withholding liability is unpaid, the ATO will have the discretion to reduce a director's PAYG credits for amounts withheld by the company from the directors' own salary, directly increasing their personal tax liability.
The ATO will also have discretion to reduce the PAYG credits of a director's associate (eg spouse) where the associate knew, or could reasonably be expected to have known, that the company failed to pay its PAYG liability to the ATO.
RECOVERY PROCESS FOR DIRECTOR PENALTIES
The ATO would, under the changes, immediately commence recovery and impose penalties on a director where an unpaid liability remains unreported 3 months after the due date, on the basis of the ATO's estimate of the unreported liability.
Importantly, once the 3 months had elapsed, the ATO would no longer be required to provide 21 days notice to the director before initiating proceedings, and the director's personal liability can only be satisfied by paying the penalty or the underlying liability - placing the company into liquidation will be insufficient.
IMPLICATIONS FOR DIRECTORS
Whilst the changes are targeted at directors engaging in "phoenix" activities, the ATO's new powers reaffirm the importance of directors being aware of their company's employee and contractor tax obligations. Boards may particularly wish to review their company's superannuation obligations in respect of contractors and ensure processes are in place for the payment of SG obligations and for the withholding and remission to the ATO of PAYG amounts.
As always, you should contact your Pinn Deavin advisor if you require assistance with your particular circumstances.
| COMPULSORY SUPER TO 12% | | |
The Assistant Treasurer has foreshadowed that legislation will be introduced later this year to raise compulsory super, the Superannuation Guarantee, from 9% to 12%. He said actuaries had calculated that the average Australian needs a 70% replacement rate of his or her accustomed income to live in retirement comfortably. Mr Shorten said the 9% won't achieve this. He said the Government's proposed Minerals Rent Resource Tax would pay for "the tax concessional treatment of the additional 3% Superannuation Guarantee - with workers retirement contributions taxed at 15% instead of their higher marginal personal income tax rate".
| NEW R&D TAX CREDIT IS HERE – WHAT ARE THE IMPACTS? | | |
The new R&D Tax Credit Bills have been passed and it has now been confirmed that the new law will replace existing R&D tax concession legislation established in 1986. The new legislation will take effect for financial years commencing on or after 1 July 2011.
There are a number of important components of the new legislation which may be summarised as follows:
· New benefits for more companies – increase in base rate;
· For those eligible, the refundable credit will have no limit on R&D expenditure
· A modified definition of R&D, including a dominant purpose test for support activities;
· Changes to compliance process particularly distinguishing between core and supporting activities;
· Industry impact varies across sectors and business life cycle;
· Potential quarterly payment of refundable credit.
Clients that have been claiming the R&D tax concession, and those that previously may not have been eligible, should reassess their position with regard to the new regime. Please contact your Pinn Deavin advisor for advice.
HOW HAVE THE BENEFITS CHANGED?
There are 2 core components of the new R&D Tax Credit:
· A 45% refundable R&D Tax Credit for eligible entities with a group turnover of less than $20m;
· A non-refundable 40% R&D Tax Credit for all other eligible entities.
The following R&D tax concession deductions will no longer be available:
· 125% base deduction (7.5% tax benefit);
· 175% premium Australian deduction (22.5% tax benefit);
· 175% foreign-owned premium (22.5% tax benefit);
· Refundable offset for companies with turnover less than $5m (37.5% tax benefit).
Importantly, unlike under the R&D tax concession, those eligible for the refundable credit will have no limit on the levels of R&D expenditure which can be refunded.
The change in legislation is an opportunity to review the impact of the R&D Tax Credit on R&D claim profiles and to transition from a retrospective claim process to a prospective R&D approach. Some recommended steps are outlined below:
TRANSITION STEPS
1. Review the impact of the new definition of R&D.
2. Evaluate ongoing projects to transition into the new credit.
3. Make an assessment of the impact and opportunities of the new credit.
4. Understand the new substantiation requirements.
5. Conduct ongoing proactive review and management.
CORE R&D ACTIVITIES
In essence, the definition of core R&D activities under the new R&D Tax Credit is a single composite test of conceptually similar requirements to the past - although removing specific references to innovation or high levels of technical risk. It should also be noted the new R&D Tax Credit retains similar exclusions to Core R&D activities that existed under the R&D tax concession.
SUPPORTING R&D ACTIVITIES
As in the past, the criteria for eligibility of supporting R&D activities requires that they be directly related to the core R&D activities. There has been a narrowing of eligibility of costs incurred in supporting activities; this further test places an additional compliance burden on you as to its practical application in an industrial or commercial context.
DOMINANT PURPOSE
The intention of the "dominant purpose" test is to exclude those supporting activities that would have been undertaken as a part of normal operations. For example, supporting production activities will only be eligible where the "dominant purpose" of conducting them is to support core R&D activities. Production activities are those that produce goods and services, along with their directly related activities. Production activities can range from a "one-off" activity to mass production.
Substantiation of the purpose of R&D activities will be crucial to support a company's R&D claim.
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