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We are pleased to provide our year end tax and superannuation planning guide for 2014.

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.

2014 presents some unique challenges due to announced but unlegislated tax law changes, plus the introduction of the 2% budget repair levy.

Taxpayers must decide between:

  • deferring income and bringing forward expenses to reduce this year's tax; and
  • bringing forward income and deferring expenses as 2015 tax will be 2% higher.

Taxpayers with incomes above $180,000 will need to consider their cost of funding to assess whether bringing forward deductions to this year with a top tax rate of 46.5% is more effective than reducing tax one year later at 49%.

This tax planning guide proceeds on the basis that taxpayers wish to minimise tax in the 2014 year.

BUSINESS

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, the likely full year performance and will establish a platform for this year's tax planning and future budgeting.

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. One of the major concessions provided under the previous Government allows small business an immediate write-off for assets costing < $6,500.  The first $5,000 of a new motor vehicle is also 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).

Proposed Repeal of Concessions?

The Government announced they would repeal these depreciation rules as part of the Minerals Resource Rent Tax (MRRT) repeal bill with effect from 1 January 2014.  This Bill did not get passed, so the rules currently stand.

If a subsequent Bill is passed when the Senate changes on 1 July 2014, then the immediate write-off will fall from $6,500 to the original $1,000.  Further the $5,000 write-off for the car will be removed.  It is not known whether the Government would like to retain the 1 January 2014 start date, or would delay this until 1 July 2014, making tax planning difficult.

Other small business concessions include simplified trading stock rules, GST and FBT rules and the ability to deduct prepaid expenses immediately.

Small Business Capital Gains

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 per taxpayer)
  • Active asset roll-over (minimum 2 year deferral)

Please talk to us before you consider selling your business or major assets to avail yourself of the best possible concessions.  Tax planning 'after' the event is often less effective or not available at all.

ALL BUSINESSES

Deferral of Income

If cash flow and business reality allows, consider deferring 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.

Losses

Another rule designated to be repealed with the MRRT repeal bill is the loss carry back rules.  These rules currently allow a loss made in the 2014 year to be offset against tax paid in the 2012 or 2013 year to generate a tax offset against this year's tax.

The ATO has advised it will administer the law as it stands, but if the rules get repealed, the company's tax assessment will automatically get amended with no penalties or general interest charge to apply.

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.

Bad Debts

Review your debtors and if any are unlikely to be recovered, actually 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).

Trading Stock

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

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.

Research & Development (R & D)

Have you considered whether your company may be eligible for an additional tax concession for R & D expenditure undertaken?

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.

The Government has proposed to reduce the tax offsets by 1.5% from 1 July 2014, so consider bringing forward R & D expenditure to maximise the incentive.

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.

Foreign Transactions

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.

After a company has paid a dividend, it must provide a statement to shareholders noting the amount of franking credits attached to the dividend.  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 – (no change)

However, with the 2% temporary budget repair levy applying from 1 July 2014 on incomes above $180,000, the top marginal tax rate is now effectively 47%.

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.

Non-Commercial Losses

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. Exceptions apply 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 used in the business
Other assets of $100,000 or more used in the business
Commissioner's discretion exercised in relation to that business

In addition to the above, taxpayers with adjusted taxable incomes above $250,000 cannot use these tests and losses are quarantined until a year where income falls below $250,000.

Capital Protected Borrowings (CPB)

CPBs are arrangements that protect an investor's '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).

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.

Salary Packaging

Now is the ideal time to review your salary packaging. With the FBT rate increasing to 49% from 1 April 2015, 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. A limited window tax arbitrage is available from 1 July 2014 until 31 March 2014 when the FBT rate will be lower than the top marginal tax rate plus Medicare and Budget levies.

Miscellaneous Rebates (tax offsets)

Consider whether you may be able to access various rebates.

The Medical Expenses Rebate provides an offset of 10% 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.

TRUST DISTRIBUTIONS

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 providing further guidance to our trust clients about trust distributions before 30 June.

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.towers@hanrickcurran.com.au with any questions in this regard.

SUPERANNUATION

Contribution deductions

Only contributions that are received by a superannuation fund by 30 June 2014 on behalf of employees including working directors are tax deductible to your business in the 2014 financial year.

30 June 2014 falls on a Monday. A cheque for contributions is deemed deductible when "in the hands of the trustee" of the superannuation fund at 30 June, although the cheque may be deposited in July. This contribution is deductible in 2013/2014 provided the cheque is not subsequently dishonoured.

Note however that the ATO have ruled in Tax Ruling TR 2010/1 that internet transfers of contributions are not considered paid until they reach the receiving fund's bank account, not when the employer processes the internet transfer. If transferring to a different bank on Friday 27th June, it is unlikely to be processed over the weekend.

We suggest that any contributions you plan to make and claim a tax deduction for are made well before 30 June 2014.

Concessional Contribution Caps

For 2013/2014, employees aged 60 or more are eligible for a higher concessional cap of $35,000.

If you were aged at least 59 on 30 June 2013, you are eligible for this higher cap, regardless of when you actually turn 60 during the financial year. For all others, the cap is $25,000.

The applicable contribution cap includes compulsory Superannuation Guarantee contributions of 9.25%.

Salary sacrifice arrangements

Concessional contributions on behalf of employees and directors are tax deductible.

There is actually no limit on how much contributions are tax deductible to an employer, however if the employee's personal concessional cap is exceeded they may face adverse personal tax consequences.

Employees with salary sacrifice agreements in place for additional superannuation contributions are ultimately responsible for ensuring their cap is not exceeded.

However, as well as a salary sacrifice agreement we recommend that employers and employees have a clear understanding between them as to who is monitoring compliance with the contribution cap. Any breakdown in communication on this issue can be the source of much angst between employers and their employees if they exceed their concessional cap.

Superannuation Guarantee

Remember that all employees' superannuation entitlements must be paid to a superannuation fund by the 28th day of the month following each quarter to avoid Superannuation Guarantee Charge (SGC) implications (including penalties and loss of tax deductions).

For employers who usually pay the compulsory 9.25% contributions after the end of the quarter, June quarter contributions paid in July are not tax deductible in 2013/2014, but will be in the following financial year.

If your business requires additional tax deductions in 2013/2014, you may decide to pay June quarter SG contributions early, prior to 30 June 2014.

Note that accelerating your regular payment terms in this way may have an adverse effect on employees with salary sacrifice arrangements in place who are budgeting to remain within their concessional contribution cap in 2013/2014.

In prior years, employers were not required to pay compulsory SG contributions for employee aged 70 or more. Note that from 1 July 2013, the maximum age limit of 70 was abolished. You must now pay SG for all employees regardless of age.

Reportable Fringe Benefits & Superannuation Contributions

When preparing PAYG Payment Summaries for employees, ensure that you disclose:

Fringe Benefits and
Reportable Employer Superannuation Contributions (RESCs)

Failure to correctly report these items can result in ATO penalties for the employer, as the amounts 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 2013/2014.

Include all salary sacrifice superannuation contributions which an employee has negotiated to be withheld from their gross "pre-tax" salary.

Exclude the compulsory 9.25% 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 9.25% 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.

SuperStream

The Government's SuperStream initiative takes effect from 1 July 2014 and will mandate the way employers pay their employee's superannuation contributions.

Under SuperStream, employers will be required to make super contributions on behalf of their employees by submitting data and payments electronically in a single transaction.

If on 1 July 2014 you have 20 or more employees# (medium or large employer) you must start using the standard from 1 July 2014.

# includes full-time , part-time and casual employees on your payroll at 1 July 2014.

By 31 May 2014 each superannuation fund you contribute to for employees will be required to supply you with an Electronic Service Address (ESA), Australian Business Number (ABN) and bank account details of their fund to add to your business payroll systems.

PERSONAL

SUPERANNUATION CONTRIBUTIONS*

Concessional Contribution Deductions

You will only be entitled to a personal tax deduction for superannuation contributions where:

  1. Less than 10% of your assessable income is from the sum of:
    Salary/wages + Reportable Fringe Benefits + Reportable Employer Superannuation Contributions, and
  2. You have advised your superannuation fund in writing of the deduction you are claiming and received a written response from the fund.

Concessional Contribution Caps

For 2013/2014, employees aged 60 or more are eligible for a higher concessional cap of $35,000.

If you were aged at least 59 on 30 June 2013, you are eligible for this higher cap, regardless of when you actually turn 60 during the financial year. For all others, the cap is $25,000.

The applicable contribution cap includes compulsory Superannuation Guarantee contributions of 9.25%.

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 your employer makes contributions on your behalf and your income is below $48,516, you are able to make a non-concessional "undeducted" 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 $33,516. You must also be under the age of 71.
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 Monday, 30 June 2014. 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 of the minimum required for the year, the ATO have ruled that they will remove the exempt investment earnings status of the SMSF for that year, and reinstate it at 15% for that entire financial year.

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.

Super contribution deductions

Ensure that any contributions you plan to make to superannuation are banked into your SMSF by Monday 30 June 2014. Beware that last minute internet transfers, which may not count, as mentioned in our section on Contribution deductions.

If you have any queries in relation to superannuation, we recommend you contact Chris Campbell on 07 3218 3900 or email chris.campbell@hanrickcurran.com.au

* This is not a recommendation to make a financial investment, but a reflection of the tax attributes of such and accordingly should not be regarded as financial advice.  Always seek professional advice from an AFS license holder before investing in any financial products.

© Hanrick Curran 2014