At a glance
By Krunal Patel CPA
Tax law continues to change rapidly and the tax profession is evolving at a similar pace.
The COVID-19 pandemic and rapid economic stimulus measures have transformed the operations of many practitioners and bookkeepers. Digital technology has become an even more important tool in the decision making and advisory process.
Gone are the days when clients used to walk through the door with a shoebox of receipts and bank statements. Accountants are changing to become more than compliance officers and are now being asked to offer more to their clients as they now have real-time data.
Tax professionals now, more than ever, need to provide comprehensive advisory services to prevent post-event discussions with clients when it is more difficult and costly to rectify non-compliance.
It’s also important for accountants to work closely with bookkeepers to ensure transactions are classified in a compliant manner and to identify events for discussion with clients in a timely manner.
Recent legislative changes have created challenges to long established administrative practices in relation to payments in closely held entities. These include:
- Removing tax deductibility of non-compliance payments
- Superannuation guarantee amnesty
- Single Touch Payroll (STP) reporting on a pay event basis
The introduction of COVID-19 economic stimulus measures such as the cash flow boost, JobKeeper and the attendant integrity measures have created potential consequences that require interpretive clarification or detailed records to avoid ATO compliance action.
Elinor Kasapidis, CPA Australia tax policy adviser, says: “Tax advisory services are increasingly the norm for accountants due to the introduction of non-compliant payment rules, STP for closely held payees and the COVID-19 stimulus measures.”
Issues can occur when directors historically haven’t been taking any directors’ fees for various reasons, such as company losses or new business, and then start to take drawings during the 2020 financial year. To avoid Division 7A issues and to meet compliant payments requirements, directors must now report correct withholdings by the end of each reporting period, with many making the shift to STP reporting.
This has created an interaction with the cash flow boost integrity measures, as any substantial increase in PAYGW amounts compared to previous years has been flagged by the ATO as a potential area of concern.
Clear documentation related to the nature of payments to directors and the commercial basis of any changes is important in the event of ATO enquiries.
In some cases, directors have been claiming JobKeeper as an eligible business participant rather than as an employee, given the way they traditionally reimburse themselves in the business.
The annual reconciliation and reporting of directors’ fees and associated PAYGW (Pay As You Go Withholding) obligations may result in the director potentially being instead classified as an eligible employee for JobKeeper purposes.
This means that directors could potentially become ineligible for JobKeeper payments if they had been claiming them as a business participant.
This is because the rules state that a person is not eligible for JobKeeper payments if they are employed by the same entity. CPA Australia has sought clarification from the ATO of its compliance approach to these arrangements as it may require repayment or correction of JobKeeper amounts received.
The ATO has also highlighted that where payments are found to be, in fact, wages, this could trigger an ongoing liability to pay fringe benefits tax (FBT), PAYG withholding, super guarantee contributions and other employee-related costs.
The ATO has also indicated that they may also consider the characterisation of past payments, including whether they should have been subject to PAYG withholding, super guarantee and FBT. In such situations, consideration should be given to the superannuation guarantee amnesty with disclosures required to be made by 7 September 2020.
Transparency key in directors’ fees
Increasingly, practitioners are recommending that PAYG withholding on directors’ fees and any associated employee obligations are reported and paid in the relevant period of drawings, with some amending 2019-20 activity statements to ensure correct reporting. These issues are also prompting changes in bookkeeping practices to ensure that PAYG income statements or payment summaries are properly issued for payments made to directors.
Payments to directors should be classified at the time of payment. Options include:
- Payments reported via STP in real time, or
- Drawings against a credit balance loan account as monies owed to the director
These issues often require detailed conversations with clients to minimise the risk of ATO compliance activity, drawings being classified as non-compliant payments and potential ineligibility for the various COVID-19 state and federal government stimulus measures which are proving essential to business during this pandemic.
Conversations with clients could involve discussion around transitioning to STP-enabled software, which will be mandatory for closely-held payees from 1 July 2021, the use of cloud-based software to enable tax professionals to provide real-time advice, the classification and behaviour of directors’ drawings as well as increasing awareness of the ATO’s improved data-matching capabilities through various sources, including activity statements and Services Australia.
“Talking to clients after 30 June could be too late when you consider the range of tax requirements a business can have,” says Kasapidis.
“The treatment and reporting of directors’ fees during 2019-20 may give rise to tax compliance risks that need to be addressed, and you should spend time with your clients to ensure they understand the law and their obligations tailored to their specific facts and circumstances.”