We are pleased to provide our year end tax planning guide for 2015.
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 your usual Hanrick Curran advisor or our tax partner, Jamie Towers, to assist you with your own specific tax planning requirements.
2015 presents some unique challenges due to announced but unlegislated tax law changes.
Deferral of income until next financial year, or bringing forward of expenses to this financial year will result in tax savings, not just tax deferral as a result of the announced small business tax cuts commencing 1 July 2015. From 1 July, small business companies will have a reduced tax rate of 28.5%. Unincorporated small businesses will benefit from a 5% reduction (capped). This means that business income will be taxed at a lower rate next year.
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 has been improved and now allows small business an immediate write-off for assets costing < $20,000 (excl GST). Other assets will be able to be depreciated in a pool at the rate of 30% (15% first year).
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 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, 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 reporting income on an accruals basis, defer the derivation of income by holding back invoices if possible until after 30 June.
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, i.e. 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 prepayments in the year paid.
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).
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 i.e. 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.
Only contributions that are received by a superannuation fund by 30 June 2015 on behalf of employees including working directors, are tax deductible to your business in the 2015 year.
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.
We suggest that any contributions you plan to make and claim a tax deduction for are made well before 30 June 2015.
Concessional Contribution Caps
For 2014/2015, employees who turn age 50 during the financial year are eligible for a higher concessional cap of $35,000. If you were aged 49 or over on 30 June 2014, you are eligible for this higher cap, regardless of when you actually turn 50 during the financial year.
For all others, the cap is $30,000.
The applicable contribution cap includes compulsory Superannuation Guarantee contributions of 9.50%.
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.
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 9.50% contributions after the end of the quarter, June quarter contributions paid in July are not tax deductible in 2014/2015, but will be in the following financial year.
If your business requires additional tax deductions in 2014/2015, you may decide to pay June quarter SG contributions early, prior to 30 June 2015.
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 2014/2015.
In prior years, employers were not required to pay compulsory SG contributions for all eligible employees aged 70 or more. From 1 July 2013, the maximum age limit of 70 was abolished. You must now pay SG for all eligible 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.
Reportable Employer Superannuation Contributions (RESCs)
RESCs must be shown on an employee’s PAYG Payment Summary for 2014/2015.
Include all salary sacrifice superannuation contributions which an employee has negotiated to be withheld from their gross “pre-tax” salary.
Exclude the compulsory 9.50% 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 9.50% 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.
Medium and large employers (those with 20 or more employees) have until 30 June 2015 to comply with SuperStream requirements.
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 employers have 19 or fewer employees (small employers), SuperStream starts on 1 July 2015 but they have until 30 June 2016 to meet the requirements.
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 $30,000 or $35,000 for those over 49.
Your concessional cap includes compulsory 9.50% 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 significant non-employment related income.
If you have made a voluntary after-tax contribution, you may be eligible to receive a co-contribution from the Government if you are less than 71 years of age and earn less than $49,488.
The amount received is 50% of every $1 contributed up to a maximum of $500. The amount gradually reduces for incomes over $34,488 until it phases out completely at $49,488.
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.
SELF MANAGED SUPERANNUATION FUNDS (SMSFs)
Minimum pension drawings
If you are drawing a retirement pension or transition to retirement income stream, you must withdraw the minimum required pension amount before Tuesday, 30 June 2015. This will ensure that the earnings on your investments in the SMSF remain tax free.
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.
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.
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, but these laws have not yet passed.
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.
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 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.
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 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 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).
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 the FBT rate having increased 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.
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 $5,100 pa ($2,162 for small income earners). This is being phased out on a ‘use it, or lose it’ basis and will only apply in 2015 year if you made a claim in the 2014 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.
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 are not recommendations 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.
We strongly recommend that you contact your usual Hanrick Curran advisor, or one of our specialists, Taxation Partner, Jamie Towers or Superannuation Partner Clive Todd on 07 3218 3900 with any questions in this regard.