Bucket companies and passive incomes set for tax break

Under a proposed law, a corporate entity is a base rate entity and will receive the lower corporate tax rate from the 2017–18 income year, if they have an aggregated turnover less than the relevant threshold or have no more than 80% base rate entity passive income. This passive income includes:

dividends other than non-portfolio dividends

< >franking credits on such dividendsnon-share dividendsinterest income (some exceptions apply)royalties and rentgains on qualifying securitiesnet capital gainsincome from trusts or partnerships, to the extent it is referable (either directly or indirectly) to an amount that is otherwise base rate entity passive income.carry on a business yet derive a passive income, such as from interest and dividends rather than from day to day business, then currently you still face a tax rate of 30%. Likewise, this rate applies if you manage a bucket company.

Getting smart about reducing your PAYG instalment reduction

Varying your PAYG instalments in Australia is a fairly common practice. It makes sense to lower what you pay to the tax office by half, or even down to zero, if your cash flow is not as good as it once was. Effectively, you can keep varying instalment after instalment so that you rarely pay the full PAYG amount. The Government charges 10-13% interest on the unpaid amount, but realistically this interest has rarely been enforced upon the taxpayer.

The General Interest Charge (GIC)is applied when an amount of tax, charge, levy or penalty is paid late or is unpaid, or when there is an excessive shortfall in an incorrectly varied or estimated income tax instalment. It is calculated on a daily compounding basis on the amount outstanding.

The ATO calculates your PAYG instalment rate based on your previous financial situation and returns. You can vary the rate or amount on your most recently issued activity statement if you feel your financial situation has changed and the rate or amount is too onerous at the present time.

There are a number of factors that can legitimately require you to vary your instalments. Income and cash flow are unpredictable at times. The ATO recognises this, hence there are extenuating circumstances wherein the GIC on a debt may be remitted in part or in full. Keep these in mind when planning to reduce your payments: the delay in payment was not due to your actions (for example, you were the victim of natural disasters, industrial action, the unforeseen collapse of a major debtor, or the sudden ill health of key personnel) and you took reasonable action to reduce the delay; you took reasonable action to reduce the delay, and it is fair and reasonable to remit; payment of the full amount of GIC would result in serious financial hardship for you.

The key is documentation and accuracy. Precise record-keeping can justify to the ATO reasons for lowering your PAYG instalment rates or amounts. Likewise, an accurate understanding of by how much your rate or amount can be lowered will mitigate the potential occurrence of an interest charge.