We are pleased to provide our year end tax planning guide for 2013.
Tax Planning should be done on a regular basis throughout the year. However, these tips are especially relevant during the month of June.
Outlined below are a number of suggestions that may assist taxpayers to legitimately minimise or defer their taxation exposure.
Please note these suggestions are of a general nature only and we recommend that you contact our tax partner, Jamie Towers or your usual Hanrick Curran advisor to assist you with your own specific tax planning requirements.
Review your business's 'state of affairs'
While business owners should be reviewing their year to date performance regularly, if this hasn't occurred, now is the time to be doing it. Prepare up to date management financial statements and cash flows with comparisons with previous years and the budgeted performance. This should help to determine how the business has performed to date and the likely full year performance.
SMALL BUSINESS RULES
Small Business Entities (Aggregated turnover of <$2 Million) can access concessional rules which make calculating tax simpler. In addition to the small business CGT rules (below), small business entities can choose simpler depreciation rules (including an immediate write-off of assets costing < $6,500) and trading stock rules, can deduct prepaid expenses immediately and have simpler GST and FBT rules.
The first $5,000 of a new motor vehicle will become immediately deductible with the balance being subject to depreciation. Other assets will be able to be depreciated in a pool at the rate of 30% (15% first year).
In addition, if you have made a capital gain in relation to an asset used in your small business, various CGT concessions may be available. They are available for small business entities and business taxpayers with net assets of <$6M. If available, the taxpayer may be able to access:
- 15 year exemption (no tax payable)
- 50% active asset discount
- Retirement exemption (up to $500,000 tax free)
Active asset roll-over (minimum 2 year deferral)
Please talk to us before you consider selling your business to avail yourself of the best possible concessions. Tax planning 'after' the event is often less effective or not available at all.
Deferral of Income
If cash flow and business reality allows, defer the derivation or receipt of income until the next financial year. If on a cash basis, consider trying to defer the receipt of cash. If on an accruals basis, defer the derivation of income by holding back invoices if possible until after 30 June.
The Government has announced that Loss Carry Back rules will apply to companies from 1 July 2012. This means if you paid tax in the 2012 year and made a loss in the 2013 year, the company can carry back the losses, amend their 2012 year assessment and get a refund of tax paid.
However, these rules have not yet been passed, so you should not yet count on them applying.
If you have a business with losses in an entity other than a company, you may wish to bring forward the derivation of income if possible.
Income Received in Advance
Consider whether income received is actually derived. Income received in advance may not be derived (and not taxable) until the services are provided. Conversely income such as interest, royalties, rent and dividends are usually derived upon receipt.
Timing of Expenses
Expenses are only deductible when incurred, ie there must be a presently existing liability to pay the expense. Many accruals and provisions are not deductible as they represent an estimate of expenses and do not relate to a presently existing liability.
Most prepayments now are not deductible until the period to which they relate (some exceptions apply), although small businesses and individuals may be able to deduct some prepayments in the year paid.
Review your debtors and if any are unlikely to be recovered, physically write them off as bad before 30 June. This will reduce your income tax and should generate a GST refund (for taxpayers registered for GST on a non-cash basis).
Prepare for a stock take on 30 June. Identify any obsolete or old stock and scrap it or write it down to its correct market value. Individual items of trading stock can be valued at cost, market value, or replacement value for tax purposes. The tax value may differ to the accounting value.
Bonuses are only deductible when they are actually incurred ie at 30 June the business must be committed to paying them and they are not subject to any discretion.
Depreciation (non small business)
Assets purchased during the year can be depreciated using the diminishing value method at 200% of the prime cost rate.
Review your asset register and scrap any obsolete items before 30 June.
If you will be selling any items of plant that will realise a profit on sale, consider delaying the sale until after 30 June.
The ATO considers (in administrative practice statement PS LA 2003/8) that items costing less than $100 can generally be claimed as deductible outright (some exceptions apply). All assets above this amount should be depreciated.
SUPERANNUATION - Employers
Payment of Contributions
Only contributions that are physically paid by 30 June 2013 on behalf of employees including working directors, are tax deductible to your business in the 2013 year.
Remember that all employees' superannuation entitlements must be paid to the superannuation fund by the 28th day of the month following each quarter to avoid Superannuation Guarantee Charge (SGC) implications (including penalties and loss of deductions).
Refer below for details about the concessional contribution caps.
Reportable Fringe Benefits & Superannuation Contributions
When preparing PAYG Payment Summaries for employees, ensure that you disclose:
- Fringe Benefits; &
- Reportable Employer Superannuation Contributions (RESCs)
Failure to correctly report these items can result in penalties for the employer, as they are required to assess the employee's child support obligations, tax rebate entitlements and concessional superannuation caps.
Reportable Employer Superannuation Contributions (RESCs)
RESCs must be shown on an employee's PAYG Payment Summary for 2012/2013.
Include all salary sacrifice superannuation contributions which an employee has negotiated to be withheld from their gross "pre-tax" salary.
Exclude the compulsory 9% Superannuation Guarantee (SG) amount from RESCs.
Include contributions by directors of companies who have superannuation paid on their behalf, but only the amount over and above 9% of their salary.
Ensure that if an employee or director sacrifices 100% of their salary as superannuation contributions, they must still receive a PAYG Payment Summary showing the RESC amount even though no salary may have been paid or PAYG withheld during the year.
Research & Development (R & D)
Have you considered whether your company may be eligible for an additional tax concession for R & D expenditure undertaken?
The rules changed on 1 July 2011 to make the concessions more attractive for smaller companies. If your company's turnover is less than $20M, it can access a refundable tax offset of 45% of the R & D expenditure (equal to a tax deduction of 150%). There is a 40% non-refundable tax offset available to companies with turnovers of greater than $20 million.
R & D plans need to be registered with Innovations Australia before claiming the concession. Cut off is 10 months after the end of the financial year.
From 1 January 2014, R & D Credit payments may be claimed quarterly, so lodge your 2013 claim early.
Do you own > 10% of the shares or units in a foreign company or trust? If so have you considered whether the Controlled Foreign Company or other attribution rules will have application and attribute income to you?
If you have foreign transactions, have you correctly recorded any foreign exchange gains or losses under the Forex realisation rules?
Have you withheld and remitted non-resident withholding tax on payments of dividends, interest or royalties to non-residents?
Company Loans – Division 7A
Any payments, loans or debts forgiven from private companies to shareholders and their associates could be deemed to be an unfranked dividend.
The deemed dividend rules in Division 7A can also include deemed loans from trusts to shareholders where the company has an unpaid present entitlement (UPE) to income of the trust.
Action can be taken to prevent deemed dividends from occurring.
Ensure that such loans are either repaid or documented and made subject to minimum interest and repayment terms before the lodgement day of the company / trust's tax return.
Ensure that interest is charged and minimum repayments are made before 30 June in relation to prior year loans.
The Division 7A rules also apply to the private use of a company's assets by a shareholder (limited exceptions apply).
Company Dividends & Interest
When paying dividends or interest to non-bank lenders, there may be a requirement to complete a dividend and interest schedule
The new Corporations Law rules provide that dividends can be paid where the following is satisfied:
- Assets exceed liabilities and the excess is sufficient to pay the dividend; and
- Payment of dividend is fair & reasonable for shareholders as a whole; and
Payment of a dividend would not materially prejudice its creditors.
Old company constitutions only provide for payment of dividends out of profits, so you should seek advice to ensure the payment of the dividend is legal and allowed under your constitution.
After a company has paid a dividend, it must provide a statement to shareholders noting the amount that the dividend is franked. The ATO have released some draft fact sheets giving guidance on the franking of dividends under the new Corporations Law rules.
INDIVIDUALS & FAMILIES
In addition to the above business planning ideas, further ideas may be available for individuals and families with business or non-business income.
Current Personal Resident Tax Rates
Personal Resident Tax Rates – 2012/13 and 2013/14 (no change)
2012/13 & Threshold
In addition to the change in rates, the low income tax offset is being altered to provide an 'effective' tax free threshold of $20,542 in the 2012/13 year.
Minors have special tax rates so they pay tax above $416 of passive income.
Capital Gains Tax (CGT)
Have any assets sold been held for more than 12 months? If so the general 50% CGT discount may apply?
Do you qualify for the small business CGT concessions – refer above?
If you have realised capital gains during the year, consider crystallising assets that have underlying capital losses before 30 June.
Losses of a business carried on by an individual or partnership may be required to be quarantined until future years against income of that or of a similar / related business. The exceptions are:
- If there is assessable income from the business of >$20,000
- Profit in 3 out of the last 5 years
- Real property of $500,000 or more is used in the business;
- Other assets of $100,000 or more are used in the business;
Commissioner's discretion is exercised in relation to that business.
In addition to the above, taxpayers with adjusted taxable incomes above $250,000 have additional loss quarantining rules even where the above conditions are satisfied.
Capital Protected Borrowings (CPB)
CPBs are arrangements that protect an investors 'capital' against the fall in market value of a security against which they have borrowed. Usually the capital protection involves a higher interest rate on the loan.
A portion of the interest on loans that facilitate a CPB may not be deductible (to the extent of any capital protection premium).
Superannuation Contributions *
Concessional Contribution Deductions
You will only be entitled to a personal tax deduction for superannuation contributions where:
Less than 10% of your assessable income is from the sum of:
Salary/wages + RESCs + Reportable Fringe Benefits
You have advised your superannuation fund in writing of the deduction you are claiming and received a written response from the fund.
The maximum concessional (tax deductible) contribution cap for individuals is $25,000.
Your concessional cap includes compulsory 9% Superannuation Guarantee Contributions paid by your employer. Generally, employees, including working directors can only make further deductible contributions as part of a salary sacrifice, and cannot claim any personal deduction for superannuation.
Personal deductions for superannuation contributions are generally only available to those who do not have employment income, i.e. are self-employed or have other non-employment related income.
Superannuation Co-Contribution *
If you are not able to make a concessional contribution to a superannuation fund (eg if your employer makes contributions on your behalf), if your income is below $46,920, you are able to make a contribution to superannuation and the Government will also make a contribution to your superannuation fund (up to $500). The co-contribution rate is 100% for individuals with income less than $31,920.
If your spouse has an adjusted taxable income of less than $13,800 pa and you make a contribution of up to $3,000 to his/her superannuation fund, a tax offset of 18% is available.
Tax Products *
If you are considering investing in any 'tax effective' investments, ensure they have been granted a Product Ruling which sets out the tax treatment of the income and expenses in relation to the investment as the ATO are continuing to scrutinise these investments. Always seek professional advice from an AFS license holder before investing in any financial products.
Employee Share Schemes
The employee share scheme rules are quite complex. Employees are no longer allowed to elect that they be taxed up front. Instead, they are either taxed up front, or taxed at a deferred taxing point depending on how the scheme is structured. Employers are now required to provide employees with a statement advising of values of shares issued.
Now is the ideal time to review your salary packaging. With personal tax rates having been reduced, salary packaging may not be as effective for people with salaries below $180,000. However, tax savings can still be achieved with certain exempt and concessionally taxed benefits.
Adjusted Taxable Income
The Government has tried to align many thresholds for accessing various benefits based on a concept of 'adjusted taxable income'.
This means taxable income, plus any 'reportable fringe benefits', plus any 'reportable superannuation benefits', plus any 'net investment losses' (eg losses from rental properties, geared share investments).
Miscellaneous Rebates (tax offsets)
Consider whether you may be able to access various rebates;
The Medical Expenses Rebate provides an offset of 20% of net medical expenses above $5,000 pa. This is being phased out on a 'use it, or lose it' basis and will only apply in 2014 year if you made a claim in the 2013 year.
Trustees of discretionary trusts need to consider which beneficiaries they will make presently entitled to the income or capital of the trust on or before 30 June.
The trust deed should be reviewed to consider how trust income is to be determined and to which beneficiaries income can be distributed.
Hanrick Curran will be further providing guidance to our trust clients about trust distributions before 30 June.
SELF MANAGED SUPERANNUATION FUNDS (SMSFs)
Minimum Pension Drawings
If you are drawing a retirement pension or transition to retirement income stream, ensure that you will have drawn the minimum required pension amount by Friday, 28 June 2013. This will ensure that the earnings on your investments in the SMSF remain tax free. If your pension payments are more than 1/12th short for the year, the ATO have ruled that they will remove exempt investment earnings status of the SMSF for that year, and reinstate it at 15%.
Leasing to Related Business
Where your SMSF is leasing premises to your business, ensure that all rent has been paid up to date and on an arms length basis. If the lease contains a rental review clause, this may also need to be addressed.
If you believe you may be near your contribution cap for total contributions made on your behalf since 1 July 2012 to date. Contact us if you believe further contributions in June will cause you to exceed your contribution cap.
Ensure any intended contributions are banked in the SMSF bank account by Friday 28 June (30 June 2013 is a Sunday) . Note that the ATO have ruled that internet transfers made at the last minute will not count as a tax deduction until received in the superannuation fund's bank account, which is often the next "working" day if transferred on a weekend
General Anti-Avoidance Provisions
We note that the tax legislation contains specific anti-avoidance provisions which target schemes entered into with the dominant purpose of tax avoidance.
Accordingly, it is essential that you consider your specific circumstances before proceeding with any tax planning ideas to ensure these rules do not apply.
While legally minimising tax should always be a consideration, it should not be the main driver in any transaction.
These tax planning ideas are of general nature only and have been provided to assist taxpayers with some general ideas in relation to their tax affairs. Accordingly, they should not be relied upon without seeking professional advice in relation to your own circumstances.
We strongly recommend that you contact your Hanrick Curran advisor, or Hanrick Curran's Taxation Partner, Jamie Towers on 07 3218 3900 or at Jamie.firstname.lastname@example.org with any questions in this regard.
For a pdf version of the 2013 Year End Tax Planning Guide, please click here