Tax Planning should be done on a regular basis throughout the year. However, these tips are especially relevant to consider just before the end of the financial year.
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 should not be relied upon without seeking specific personal advice. 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.
2017 presents some unique challenges due to significant tax and superannuation changed announced in the 2017-2018 Federal Budget and last year’s Budget and applying from 1 July 2017.
Deferral of income and bringing forward of expenses is a continuing theme as both company tax cuts apply to a wider range of companies and levies are removed for individuals.
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 <$10 Million) can access concessional rules which make calculating tax simpler. Small business entities can choose simpler depreciation rules. They can get an immediate write-off for assets costing < $20,000 (excl GST). This rule has now been extended until 30 June 2018, then reducing to a $1,000 asset amount. 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. The turnover threshold for the concessions remains at $2 Million. They are also 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. Conversely, if selling assets that will realise a loss, bring it forward.
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 Contributions only deductible when fund receives the money
Only contributions that are received by a superannuation fund by 30 June 2017 on behalf of employees including working directors, are tax deductible to your business in the 2017 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 2017.
Tax Rate Cuts
Companies with a turnover of less than $10 Million for the 2016/17 year will only pay tax at 27.5% of their taxable income (other companies 30%). The 27.5% rate will extend to companies with a turnover of $25 Million in the 2017/18 year and $50 Million in the 2018/19 year. If your company’s turnover is close to the threshold, consider income deferral strategies to reduce the tax payable.
Franking Credit Trap
With the reduction in company tax rates, the franking credit rules have changed. Any dividends paid this year must be franked using the tax rate that would apply this year, assuming this year’s turnover is the same as last year’s turnover.
For example, last year a company had a turnover of $5 Million and paid tax at 30% on its $1 Million of profits. On the assumption this year’s turnover is also $5 Million, it will pay tax this year at 27.5% due to the reduction in rates. Therefore any dividends must be franked to 27.5% even though tax was paid at 30% on the retained profits.
In the above example, this can result in franking credits of $34,483 of tax credits trapped in the company, which can result in double taxation when the profits are finally paid as a dividend.
Companies that will have the same tax rate this year as last year (ie those with more than $10M turnover) can minimise this franking credit trap in the future by paying out dividends this year.
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 43.5% of the R & D expenditure. There is a 38.5% non-refundable tax offset available to companies with turnovers of greater than $20 million.
R & D plans need to be registered with Innovation 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? An annual report will be required.
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. Division 7A can also apply to the private use of a company’s assets by a shareholder (limited exceptions apply).
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.
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.
Removal of 2% Budget Deficit Repair Levy (BDRL) on 1 July 2017
The BDRL of 2% was a temporary levy only and ends on 30 June 2017. This means that taxpayers with taxable income above $180,000 will pay 2% less in tax and levies after 1 July 2017 (maximum rate of 47% reduced from 49%).
Therefore, consider deferring bonuses, capital gains and other income until after this date. Conversely, bringing forward expenditure or prepaying interest on investment loans will reap 2% more benefit before 30 June 2017. Donations to Deducible Gift Recipients before 30 June 2017 will also result in increased benefits.
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 as these will reduce the net capital gain.
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.
20% Tax Offset for Investment in Start-Up Companies
Investment in Early Stage Investment Companies (ESIC) provides a 20% tax offset (capped at $200,000 for $1 Million invested). Non-sophisticated investors may only invest a maximum of $50,000 to qualify. Capital Gains may also be disregarded if the shares are disposed after 12 months but before 10 years. Various criteria apply to ensure the company is an ESIC.
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 reducing to 47% from 1 April 2017 and concessional superannuation caps reducing to $25,000 from 1 July 2017, salary packaging should be reviewed. Tax savings can still be achieved with certain exempt and concessionally taxed benefits
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.
Individual Beneficiaries on trusts with small businesses can get an 8% discount (capped at $1,000 per individual) on the business income received.
Hanrick Curran will be further providing 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 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.
Click here for a printable PDF of this guide.
* 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 2017
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.