2008 ends with tax “bang” for SMEs

The taxman has a new year gift for us to look forward to, writes TERRY HAYES, but after that the reality of a tough 2009 begins.

The year is rapidly drawing to a close – and this year’s close could not be more different to that of last year.

The pressure is on and times are very tough, but at least the Federal Government has seen fit to grant some relief via a 20% cut in the next quarterly PAYG tax instalment for small businesses with aggregated turnover of $2 million a year or less.

That is, the PAYG instalment payable in respect of the December 2008 quarter will be cut by 20%.

The 20% reduction applies to the instalment amount shown on the BAS dispatched by the tax office in December 2008 for the quarter ending on 31 December 2008. This instalment amount is due on or before 28 February 2009 (which will be extended to 2 March as 28 February falls on a weekend) for most small business taxpayers.

The Government also announced that it will introduce a 10% temporary investment allowance to encourage capital investment by Australian businesses. The investment allowance will be equal to 10% of the cost of qualifying assets, and will be available to businesses that acquire new tangible depreciating assets which cost more than $10,000.

That $10,000 threshold won’t suit all SMEs, but many may find the allowance an attractive proposition. Tangible depreciating assets include most types of plant and equipment, vehicles and other assets that are used by businesses.

SMEs should be aware that there is a limited window for claiming the investment allowance. It will be available for new assets that are acquired, held under a contract or constructed after one minute after midnight (AEDT) on 13 December 2008 and before the end of 30 June 2009. These assets need to be installed and ready for use by the end of June 2010 in order for the investment allowance to be claimed.

So, how will the allowance deduction work?

Let’s says that on 10 February 2009, a bakery enters into a contract to purchase a new oven at a total cost of $50,000 and with an effective life of 20 years. The oven is installed ready for use on 10 August 2009.

When the business lodges its 2009-10 income tax return, the taxpayer will be able to claim a total deduction of $7500 in respect of the oven – the depreciation deduction of $2500 ($50,000 divided by 20) using the straight line method; plus the investment allowance of $5000 ($50,000 x 0.1).

Christmas parties and tax

Maybe Christmas parties have been more frugal this year (and some may have disappeared altogether!), but no doubt many SMEs will still want to thank their employees for a job well done in a difficult year.

However, SMEs should also not forget about the possible FBT implications that can flow from this. For example, the $300 minor benefits exemption generally means that Christmas-time entertainment up to a value of $300 per employee is exempt from FBT. And don’t forget that the $300 limit applies to each benefit provided. Also, if the entertainment or gift is exempt from FBT, it will not be deductible for income tax purposes.

At Christmas time, if an employer provides say a good bottle of wine or a store voucher to each employee, provided the value is below $300, it will generally be exempt from FBT.

Where the employer provides such a gift at a Christmas party for employees, the gift and the value of the party are each considered separately for FBT purposes. If each is below $300, they will generally be exempt from FBT.

Note however, if the employer is in the habit of regularly giving gifts to employees, the FBT situation might change. Regular small benefits such as those provided under an employee incentive scheme are generally not exempt from FBT.

The cost-conscious SME might consider holding a Christmas party on the business premises. Some decorating might be needed, but at least providing things like food and beer or wine would be exempt from FBT if only employees attend. If wives and partners attend, the cost will still be exempt from FBT if it is less than $300 per head. Even if the cost is above $300, there are no FBT consequences for employees because the FBT rules provide an exemption.

Where a Christmas party is held say at a restaurant, a slightly different set of rules apply. The FBT exemption still applies for employees attending. However, where the cost is above $300, FBT will be payable in respect of employees and their associates.

In both scenarios, there is no FBT payable in respect of clients who attend.

Glad that’s all clear!

Tax system in review

Here is one area of the tax law that is crying out for simplification. The Henry tax system review is due to report at the end of 2009 and it is to be hoped that issues affecting SMEs receive some much overdue attention.

Notwithstanding all the attention that review will receive, the tax system is certain to stagger on its merry way in 2009. The tax office will continue its attention on many tax issues that affect SMEs.

You can be sure to see more action on matters like the cash economy, unpaid tax bills, FBT issues (such as regarding company cars), superannuation (especially self-managed super funds), selling a business (and disposal of assets generally), record keeping, lodging returns on time, accounting for CGT, and correctly claiming losses.

As this is my last column for 2008, I would like to wish readers a very happy Christmas and prosperous (and less taxing) 2009.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.