A business checklist for Tax Day

Ten years of real CPI figures, run through both methods. With the 50% Capital Gains Tax discount being replaced by an inflation-indexed cost base, the obvious question is how differently the two methods actually behave. Not in theory — on a real block of land, with the CPI figures the Australian Bureau of Statistics actually published. So here is a Wimmera farming land example, run both ways. The land A farmer buys 250 acres of Wimmera cropping country in June 2015 for $500,000. Ten years later, in June 2025, it sells for $1,750,000. Purchase and selling costs are ignored to keep the comparison clean. That is $1,250,000 of growth over ten years — a 250% increase, or a little over 13% a year compounding. How indexation builds the cost base Indexation lifts what you paid by the movement in the Consumer Price Index. Because the CPI is published quarterly, the calculation uses the index number for the quarter the money was spent and the quarter of the sale. Taking the June quarter each year, here is how the $500,000 would have grown. June quarter CPI Factor Indexed cost base June 2015 107.5 1.000 $500,000 June 2016 108.6 1.010 $505,000 June 2017 110.7 1.030 $515,000 June 2018 113.0 1.051 $525,500 June 2019 114.8 1.068 $534,000 June 2020 114.4 1.064 $532,000 June 2021 118.8 1.105 $552,500 June 2022 126.1 1.173 $586,500 June 2023 133.8 1.245 $622,500 June 2024 138.8 1.291 $645,500 June 2025 141.7 1.318 $659,000 ABS Consumer Price Index, All Groups, weighted average of eight capital cities (2011–12 = 100). Factors calculated from June 2015, rounded to three decimals. Note how flat the early years are. Between 2015 and 2020 the cost base creeps up by barely $32,000, because inflation over that stretch was close to non-existent. The 2021 to 2023 spike does more work in three years than the previous six managed between them. Even so, a full decade only adds $159,000 to what the farmer is treated as having paid — while the land itself went up by $1,250,000. Method one: halve the gain An individual or trust holding the land more than twelve months takes the gain and cuts it in half. Sale price $1,750,000 Less cost base ($500,000) ------------ Capital gain $1,250,000 Less 50% discount ($625,000) ------------ Taxable capital gain $625,000 Method two: index the cost base Nothing is halved. Instead the $500,000 becomes $659,000, and the whole remaining gain is assessable. 141.7 ÷ 107.5 = 1.318 $500,000 × 1.318 = $659,000 Sale price $1,750,000 Less indexed cost base ($659,000) ------------ Taxable capital gain $1,091,000 Side by side Method Taxable gain Tax at 47% 50% discount $625,000 $293,750 CPI indexation $1,091,000 $512,770 Difference $466,000 $219,020 T ax shown at the top marginal rate including Medicare levy, applied across the whole gain for illustration. Handed identical facts, the two methods differ by $466,000 in assessable income — about $219,000 in tax at the top rate. Why the gap is so wide Inflation over the decade ran at about 2.8% a year, totalling 31.8%. The land compounded at 13.3% a year, totalling 250%. Indexation only ever shelters the inflationary slice of a gain. Where an asset has barely outrun inflation, that slice is most of the gain and indexation is generous. Where an asset has comfortably outrun it, the slice is small and almost everything stays taxable. The 50% discount made no such distinction — it halved everything, real growth included, which is exactly why it suited assets that had grown hard. There is a clean test. The two methods produce the same answer when growth over the holding period is exactly twice the inflation rate over that period. Indexation is better only when: growth < 2 × inflation Inflation 2015-2025: 31.8% Breakeven growth: 63.6% Actual growth: 250% On a $500,000 purchase, the two methods break even at a sale price of about $818,000. Below that, indexation wins. Above it, the discount does, and the gap widens fast. What this means across the Wimmera Land across the Wimmera, the Mallee and much of the western district has not merely kept pace with inflation over the past decade — it has left it well behind, on the back of strong commodity prices, farm consolidation, sustained demand for quality cropping country, tight supply and steady productivity gains. Any property growing at more than roughly double the inflation rate is one the discount suited better, and for land bought in the 2010s that describes almost the entire district. The picture reverses for assets that have grown slowly — listed shares that have drifted sideways, commercial property in a soft market, a block bought near the peak of a previous cycle. For those, indexation is genuinely the kinder method, and the longer they have been held the more true that becomes. Farming land here has rarely been in that category. Before any of this matters: the small business concessions One important caveat. Everything above assumes the gain is fully taxable, and for a great many farming families it is not. Farming land is very often an active asset, and where the basic conditions are met, the small business CGT concessions do far more for a gain of this size than the choice of method ever will. There are four, and they can be applied in combination: • The 15-year exemption — where the asset has been held 15 years and the owner is 55 or over and retiring, or permanently incapacitated, the entire gain is disregarded. • The 50% active asset reduction — halves whatever gain remains. • The retirement exemption — up to $500,000 over a lifetime disregarded, though amounts must go to superannuation if the owner is under 55. • The small business rollover — defers the gain where a replacement active asset is acquired. Access depends on satisfying the basic conditions, principally the $6 million maximum net asset value test or the $2 million aggregated turnover test, along with the active asset test. Land owned by one entity and farmed by a related operating entity can still qualify, which matters given how commonly farms are structured that way. The practical point is this: a farmer who qualifies for the 15-year exemption is largely indifferent to everything discussed above, because the gain disappears either way. Working out whether the concessions are available should come before working out which method produces the smaller number. The transitional rules governing how and when the new method takes effect are a subject for another day. General information only. Not tax, legal or financial advice, and it does not take into account your objectives, financial

Family trusts have long been a popular structure for Australian families and businesses due to their flexibility, asset protection benefits and succession planning advantages. The Federal Government has proposed introducing a minimum 30% tax on discretionary (family) trust income from 1 July 2028 . The aim is to reduce income-splitting opportunities and better align trust taxation with the tax paid by employees. While some trusts & types of income would be exempt (including primary production income & testamentary trusts), the proposal could affect family groups that regularly use trusts to distribute income, particularly where corporate beneficiaries are involved. Under the proposed rules, distributions to companies may not receive a credit for tax already paid by the trust, potentially leading to higher overall tax outcomes. The Government has also proposed a three-year window from 1 July 2027 to allow affected groups to restructure into alternative entities, such as companies or fixed trusts, without immediate tax consequences. However, restructures can involve significant legal, financial and administrative considerations. Importantly, these changes are not yet law . The proposal is currently undergoing consultation, and the final legislation may differ from the announcement. For now, there is no need to rush into major structural changes. Family trusts will continue to offer important benefits beyond tax, including asset protection and succession planning. However, if your business or investment structure includes a discretionary trust, it would be worthwhile to understand how the proposed changes could affect you. If you'd like to discuss your specific circumstances, please contact our team.

You will likely pay tax twice in your first year. Don't stress, you're not being taxed twice on the same income. Here's what's happening. When you're self-employed, tax is generally not automatically withheld from your income like it is for employees receiving wages or salaries.  When you lodge your first tax return, the ATO may ask you to pay: The tax owing for the financial year that has just ended; and An advance payment towards the tax you'll likely owe in the current financial year. This is called ‘PAYG Instalments’. PAYG Instalments are advance payments made throughout the year towards your expected tax bill. This helps spread your tax payments over time rather than receiving one large bill at tax time. For a more detailed explanation, read our blog article: Understanding (PAYG) Pay as you Go Instalments . Generally, you'll only be placed on the PAYG Instalment system if your tax bill exceeds $1,000. Paid too much or not enough? PAYG Instalments are only estimates based on your previous income, so the final amount may differ from your actual tax liability. If your PAYG Instalments are more than your final tax bill, you'll receive a tax refund from the ATO. If your PAYG Instalments are less than your final tax bill, you'll simply pay the difference. Our tip Many new business owners are surprised by their first tax bill because they haven't set money aside for tax. A good habit is to regularly transfer a portion of your business income into a separate savings account, so funds are available when tax time arrives.

Selling or closing a business involves more than simply stopping work or making your final sale. Before you finish up, you need to properly deal with the business’s tax obligations, registrations, employees, assets, debts and legal affairs. The exact process will depend on what entity you operate in.  Steps that generally apply to every business Following is a list of tasks that need to be ticked off for most ceasing business: prepare final invoices and collect outstanding customer debts; pay suppliers, loans and other liabilities; deal with remaining stock, equipment, vehicles and other business assets; terminate or transfer leases, contracts, licences and insurance policies; make final employee payments, including wages, leave entitlements and superannuation; finalise Single Touch Payroll reporting and PAYG withholding obligations; lodge any outstanding business activity statements, tax returns, fringe benefits tax returns and taxable payments annual reports; and retain relevant business and tax records, generally for at least five years. Selling, transferring or personally retaining business assets may have GST, capital gains tax, depreciation and other tax consequences. These issues should be reviewed before assets are distributed or registrations are cancelled. Sole traders A sole trader normally reports the final business income, expenses and asset disposals in their individual income tax return. If you are permanently closing all business activities, your GST, PAYG withholding and other registrations may need to be cancelled, followed by your Australian Business Number. If you are only closing one activity but intend to continue operating another business as a sole trader, you may be able to retain your existing ABN and update the business details instead. Remember to cancel any business names, permits or industry licences that are no longer required. Partnerships A partnership will need to prepare final accounts and lodge a final partnership tax return. Each partner must then include their share of the partnership’s final income, deductions and capital gains in their own tax return. The partners should review the partnership agreement and document how the partnership will be dissolved. This may include a written dissolution agreement covering: the closure date; responsibility for outstanding debts; the collection of unpaid accounts; the sale or distribution of assets; and the division of remaining funds. State or Territory partnership laws may impose additional requirements. Legal advice should be obtained to ensure the partnership is properly dissolved and the partners are protected from future liabilities. Trusts Closing a trust usually requires more than lodging a final tax return. A legal process called ‘Vesting’ is the formal process for closing down a trust. This needs to be done by a legal professional. The trustee should review the trust deed, settle liabilities, deal with loans and distribute all remaining trust property in accordance with the deed. Trustee resolutions, asset valuations and distribution records should be prepared and retained. Transferring assets directly to beneficiaries or unitholders can result in capital gains tax, GST or stamp duty consequences, even where no cash changes hands. Do not distribute trust assets without first obtaining appropriate tax and legal advice! Once the trust has been fully wound up, a final trust tax return should be lodged. Beneficiaries must also report their share of the trust’s final income and capital gains. Companies A company continues to exist until it is formally deregistered or wound up. Merely ceasing to trade does not end its obligations. Until deregistration, the company must generally continue meeting ASIC requirements, including paying annual review fees, updating company details and passing required solvency resolutions. Voluntary deregistration may be available where all shareholders agree, the company is no longer conducting business, its assets are worth less than $1,000, it has no outstanding liabilities or legal proceedings, and all ASIC fees and penalties have been paid. All outstanding tax lodgments should be completed before deregistration. Once ASIC deregisters a company, it ceases to exist and can no longer lodge forms with the ATO. Company assets should also be transferred or disposed of before deregistration. Assets left in the company may vest in ASIC or the Commonwealth after deregistration. Where a company cannot pay its debts, directors should seek immediate advice from a registered liquidator and lawyer rather than applying for voluntary deregistration. Plan before you close The order in which you sell assets, pay liabilities, make distributions and cancel registrations can significantly affect the outcome. Speak with us early so we can assist with the tax and reporting requirements and coordinate with your lawyer or financial adviser where necessary. Important: This article provides general tax information only. It does not constitute legal or financial advice and does not take into account your individual circumstances. We are registered tax agents and can advise on taxation matters within the scope of our engagement. You should obtain advice from an appropriately qualified lawyer regarding legal documents, dissolution, deregistration, insolvency and other legal obligations, and from a licensed financial adviser where financial product advice is required.