Insolvency reforms to support small business

The government recognises that despite support to get through the COVID-19 outbreak, not all businesses are going to remain viable.

Many small businesses will have significantly increased levels of debt in order to remain in business during the COVID-19 pandemic. The government is introducing a number of permanent and temporary measures to expand the availability of insolvency practitioners to deal with this expected increase in the number of businesses seeking to restructure or liquidate.

The package of reforms features three key elements:

Debt Restructuring

Currently, requirements around voluntary administration in Australia are more suited to large, complex company insolvencies. The new debt restructuring process will adopt a ‘debtor possession model’ where the business can continue to trade under the control of its owners, while a debt restructuring plan is developed and voted on by creditors.

Liquidation Pathway

The costs of liquidation can consume all or almost all of the remaining value of a small business, leaving little for creditors. Under the government’s new process, regulatory obligations will be simplified, so that they are commensurate to the asset base, complexity and risk profile of an eligible small business.

Temporary Relief Measures Extended

The government announced a further extension of relief measures to 31 December 2020. The

temporary increase in the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000; and a temporary increase in the time companies have to respond to statutory demands they receive from 21 days to 6 months. In addition there is a temporary relief for directors from any personal liability for trading while insolvent, with respect to any debts incurred in the ordinary course of the companies business.

The temporary gives businesses needed breathing space to and highlights the importance of working with financial professionals as soon as required, ensuring that your small business has the best chance of success.

Upskilling Australia

The Budget highlights the government’s commitment to getting people back in jobs and upskilling Australians.

The JobTrainer Fund which falls under the JobMaker Plan will support up to 340,700 free or low-fee training places in areas needed to help upskill and retrain job seekers and young people.

The government will provide exemptions for employer-provided retraining activities from business’ fringe benefits tax and is also consulting on updating the current rules to allow individuals to deduct training costs from their income which relates to their future employment.

The Boosting Apprenticeship Commencements Wage Subsidy will boost the number of new apprenticeships and traineeships. This will support up to 100,000 new apprentices and trainees by paying a 50 per cent wage subsidy. Businesses will receive the subsidy up to a cap of $7,000 per quarter, for commencing apprentices and trainees until 30 September 2021.

Economic security for women is also being prioritised under the Budget. Several initiatives will work to support the increase of women’s workforce participation and improvement of earning potential. They include initiatives to support women’s leadership and development and increasing opportunities for women in science, technology, engineering and mathematics (STEM), business and male-dominated industries.

Lower taxes for businesses and individuals

The Budget seeks to promote tax reform and simplification in an effort to support business investment and help reduce the personal income tax burden.

Business

Businesses are encouraged to invest with the introduction of temporary full expensing. Businesses with turnover up to $5 billion will be able to deduct the full cost of eligible depreciable assets of any value in the first year they are used or installed ready for use, from now till end of June 2022. Costs of improvements to these eligible depreciable assets can also be deducted. Through the reduction of after-tax costs of eligible expenses, full expensing supports businesses that are investing and helping stimulate the economy. Eligible new or second-hand assets acquired under the enhanced $150,000 instant asset write-off by the end of this year will receive an additional 6 months (30th June 2021) to use or install those assets.

Temporary loss carry-back will provide businesses the opportunity to offset tax losses. Companies with a turnover of up to $5 billion will be able to offset tax losses against previous profits on which tax has been paid to generate a refund. Any losses incurred from 2019-20, 2020-21, 2021-22 may be carried back against profits made during, or after 2018-19. To receive this support, applications to receive a tax refund may be lodged during the 2020-21 or 2021-22 tax returns.

Measures have been taken to expand and modernise the tax treaty network. This involves eliminating double taxation in an effort to attract foreign workers, simplify taxing rights between Australia and other countries and boost foreign investment in Australia. The initiative reduces tax barriers to prioritise reinstating Australia’s treaties with important partners to relieve economic burden. The Research and Development Tax Incentive (R&DTI) will ensure businesses of every size are receiving the support they require in these areas.

Changes have been made to recordkeeping provision as the government maintains its efforts to cut down red tape. Businesses will no longer need complete prescribed records, instead they will be able to use existing corporate records to reduce the time and manpower spent on recordkeeping.

Individuals

Both low and middle income earners will also be receiving tax relief in the coming years. The government has brought forward their plans for tax cuts to make sure that families are keeping more of what they earn. Taxpayers will be receiving relief of up to $2.745 for singles and $5,490 for dual income families. The provision of a simpler tax system and lower taxes, which will be implemented in 3 stages, has increased the threshold of the 32.5% tax bracket from $90,000 to $120,000. Tax relief to individuals is expected to encourage spending and stimulate the economy.

JobMaker Hiring Credit

Job losses have been extensive during the COVID-19 pandemic and the JobMaker Hiring Credit will give businesses incentives to take on additional employees aged between 16 and 35 years old.

Eligible employers will receive $200 a week for each new employee aged between 16 and 29. For new eligible employees aged 30 to 35, they’ll receive $100 a week. Businesses and employees will need to satisfy specific eligibility requirements.

For an employer to be eligible they must have an Australian Business Number and be up to date with their tax lodgement obligations, registered for Pay As You Go (PAYG), and be reporting through Single Touch Payroll. Employers will not be eligible if they are also claiming JobKeeper Payment.

To receive the JobMaker Hiring Credit, employers must also meet additionality criteria, requiring an increase in the:

• business’ total employee headcount from 30 September 2020; and
• payroll of the business for the reporting period, as compared to the three months to 30 September 2020.

The JobMaker Hiring Credit will be available to employers for each new job they create over the next 12 months for which they hire an eligible young person. The employee must work at least 20 paid hours per week on average and may be employed on a permanent, casual or fixed term basis. The employee must also have received the JobSeeker Payment, Youth Allowance or Parenting Payment for at least one of the three months preceding the time of hiring.

The JobMaker Hiring Credit will start on 7 October 2020. The Hiring Credit will be claimed quarterly in arrears by the employer from the Australian Tax Office (ATO) from 1 February 2021. Employers will need to report to the ATO quarterly that they meet the eligibility criteria.

Registrations will be open for eligible employers through ATO online services from 7 December 2020.

Insurance for your super

Most super funds offer insurance as part of their super plan. It is important to be aware of what types of insurance you are covered by through your super fund to help you determine if you need extra cover outside your super and if you have adequate support in the event that you cannot work. There are three types of insurance that can be available through super funds:

Life insurance (also known as death cover):

This is the most common of all personal super insurances and is part of the benefits your beneficiaries will receive when you die. Life insurance is typically applied to your super account by default. It is not compulsory with your super, however, if you have a self-managed super fund (SMSF), then you are required to consider insurance as part of your investment strategy.

Total and permanent disability (TPD) cover:

This insurance pays a lump sum if you become permanently disabled and are unable to work again, protecting you against the risk that your retirement income is cut unexpectedly short. TPD cover is often automatically joined with life insurance as a default cover.

Income protection (IP) cover:

This pays you an income stream for a period of time that you are not able to work due to temporary disability or illness. It is only available as a default cover in about one-third of super funds. It may be particularly useful if you are self-employed or have debts.

You can check what insurance you have with your super fund on your annual super statement, your online super account or by contacting them. Through these you can see the type and amount of cover you have, and how much you are paying for it.

What is Salary Sacrificing for Super

One of the most effective ways to add to your super balance is through salary sacrifice. Salary sacrifice involves the employee agreeing to exchange a portion of their salary (before tax) for an increase in superannuation contribution by their employer.

Contributions made through salary sacrifice are classified as employer contributions, not employee contributions. These are taxed at a maximum of 15% (if you earn under $250,000 per year) which is lower than the marginal tax rate most employees are charged. The amount that you ‘sacrifice’ cannot be assessed for taxation purposes i.e. it is not subject to PAYG. Employees should ensure that their contributions per year are not above $25,000 as this is the cap on concessional contributions and if surpassed, will require additional tax to be paid.

Salary sacrifice is an effective way to minimise tax liability and increase super contributions if individuals are earning a greater amount than they require for annual expenses.

After beginning the salary sacrificing process, employees should keep a look out for two important matters. First, the calculation of ordinary time earnings by your employer that super applies to, does not change. Second, the amount which is paid to your super through the salary sacrifice agreement does not contribute towards any super guarantee contributions that are required of your employer. Employees should verify that neither of these occur, and verify any confusion with their employer.

Salary sacrifice is a trade off between income earned in the present, and contributions made for the future. Employees may experience difficulty in finding a balance which suits them or taking different aspects of their finances into consideration for the agreement with their employer. Asking for professional assistance to determine specifications for the agreement could help simplify this procedure.

Tax-effective investment options

Determining where to invest requires multiple factors to be taken into consideration. One such factor may be tax efficiency. The tax charged on income from a tax-effective investment is less than the individual’s marginal tax rate.

Superannuation

The government provides incentives to save through Super, which make it one of the most tax-effective investments. Contributing to your super and salary sacrifice is only taxed at 15% if yearly income is under $250,000 (30% if over $250,000 which is still tax-effective). The maximum tax that can be charged on investment income in super is 15%, and 10% on capital gains. This is lower than marginal rates at which taxation occurs for most individuals.

Employees should ensure that contributions are not above $25,000, as this is the cap on concessional contributions. Additional tax needs to be paid on any amount claimed higher than the cap.

Insurance Bonds

Insurance companies offer insurance bonds as long term investment options. Earnings in an investment bond are taxed at 30% (Corporate tax rate), which makes them tax-effective for those whose marginal tax rate is above 30%. They are further tax-effective if one is looking to invest for over 10 years. This is because although withdrawals can be made during the 10 years, if no withdrawals are made, no further tax is payable.

The ATO warns against tax-driven schemes, which offer tax concessions for investing in certain assets that provide income in the future as these may be high risk or part of a scam. Investing in superannuation or insurance bonds are safe and reliable methods which don’t pose these concerns.

Amnesty means that 24,000 businesses own up to underpaying Aussies superannuation

An amnesty scheme which ended earlier this month has caused around 24,000 businesses to admit to underpayment of their worker’s super. A total of 588 million dollars will be distributed to almost 400,00 individuals.

The scheme, which covered payments from the introduction of super in 1992, gave employers the opportunity to come clean without any consequences as long as they paid the unpaid super as well as 10% interest for every year the money was overdue.

The ATO will be directing its attention at any businesses that did not admit fault and these businesses will face severe penalties.

Many individuals are looking to access their superannuation early in order to have support during these times. Although there is criticism of early access to super, this facility has been helpful to many families to keep afloat.

Income Tax cuts in Federal Budget Benefiting high-income earners

In its efforts to boost the economy, the Federal Government is considering bringing the planned income tax cuts forward. The intention behind these cuts is to boost the economy by boosting consumption.

Initially, income tax cuts were to take place in three stages, the first of which has already been rolled out. The following stages aim to facilitate a reduction in tax for individuals earning from $90,000 to $200,000 over the next 4 years at the cost of billions of dollars to the Parliamentary Budget.

There has been criticism of the government’s suggestion that these stages be moved forward because they are unlikely to have the desired effect. Rather than boosting consumption, beneficiaries of this plan are likely to keep the additional money in the bank. This is because these plans are directed at high-income earners who will not need to spend the money on necessities, that low-income earners would.

Additionally, the uncertainty of the current climate which the government is relying on to justify this change may be the very reason that people save their money rather than spend it.

Critics of this change are suggesting that focus should be placed on ‘Social Spending’. An example of this could be an increase in pension – which pensioners are a lot more likely to reinvest into the economy.

What to consider when consolidating your super

The ATO reported that 45% of working Australians were not aware that they had multiple super accounts in 2016. Having multiple super accounts is particularly common for individuals who have had more than one job. If this is you, it is important to identify and manage your super accounts because having more than one can be costly as a result of account fees from multiple funds.To combat this, you may want to consolidate your super, which moves all your super into one account. Not only does this save on fees, but it also makes your super easier to manage and keep track of.

Before consolidating your super, it is important to do the following:

Research your funds’ policy
Compare your active super accounts so you can make the right choice about which one you should close. Things to assess include:

• Exit fees
• Insurance policies
• Investment options
• Ongoing service fees
• Performance of the funds

Check employer contributions
Changing funds may affect how much your employer contributes, as some employers contribute more to certain funds. Check your current accounts to see if changing funds will affect this. Once you have selected a super fund, regardless of whether you choose a new super fund or one of your existing ones, provide your employer with the details they need to pay super into your selected account.

Gather the relevant information
When consolidating your super, you will need to have the following details ready:

• Your tax file number.
• Proof of identity. This could include your driver’s license, birth certificate or passport.
• Your fund’s superannuation product identification number (SPIN).
• Your fund’s unique superannuation identifier (USI).
• Details of your previous fund.