While tax-effective structures may be in place to reduce tax, end of year tax planning strategies look at the position of each business or individual and seek to take advantage of legitimate tax minimisation opportunities and techniques.
The following strategies and commentary should be reviewed immediately, however, it is important to note that the information provided is general in nature and we therefore strongly recommend you contact our office before proceeding with any year end planning opportunities discussed below.
Personal Tax Rate Changes:
2011/12 (includes Flood Levy) (Add M/L of 1.5%)
|Taxable Income||Tax||% on Excess||Av RateRounded|
2012/13 & 2013/14 (Add M/L of 1.5%):
|Taxable Income||Tax||% on Excess||Av RateRounded|
Changes to Medicare Levy Thresholds
Medicare Levy Low Income Threshold
Effective 1 July 2012, the Medicare Levy low income thresholds was increased to $20,542 for individuals and $32,743 for couples.
The threshold increases by $3,007 for each dependent child. The Medicare levy threshold for single pensioners below Age Pension age will be increased to $32,279 for the 2012/13 year (in line with Seniors and Pensioners Tax Offset (SAPTO).
The ability to prepay expenses is limited to small business taxpayers (aggregate turnover <$2mil), Individuals who prepay non-business expenses (such as interest on a negatively geared property) and prepaid excluded expenditure for non small businesses, including:
1) Payments required to be incurred by law eg Workers Compensation policies.
2) Prepayments under $1,000.
3) Prepayments under a contract of service eg payments made under an employment agreement (eg salary, bonuses or commissions).
Accelerating Allowable Deductions
Look at any expenses that are due to be paid in July, August and September. If you bring payment of these expenses forward in June you can reduce your tax (ie Insurances, Seminars, Subscriptions, Repairs). Non-small business entities are subject to the prepayment rules above (ie $1,000 expense limit) if the expense is a prepayment.
New Deprecation Rules – Major Win for Small Businesses
Taxpayers carrying on a small business with an aggregate turnover of < $2million (small business taxpayers) will be eligible for a 100% deduction on plant and equipment items costing less than $6,500 (exclusive of GST) for items purchased after 1 July 2012. This has increased from $1,000 from previous years.
Motor Vehicles Eligible for Large Up-Front Deduction
From 1 July 2012 small business taxpayers will be entitled to claim an accelerated deduction of up to $5,000 for motor vehicles. It should be noted second hand motor vehicles are also eligible for the additional deduction.
It should be noted that assets that are leased by business taxpayers will not benefit from the accelerated deductions, as the rules only apply to assets owned (purchased outright, hire purchases) in order to claim the upfront depreciation deductions.
Deferral of Income
In certain circumstances you may be able to delay invoicing your clients which may help defer your income for the current year, however cashflow implications must be considered. You also need to be very careful here because you may unwittingly invoke harsh anti avoidance provisions with the potential for severe penalties.
Income Paid in Advance
Some businesses receive income paid in advance for fixed term service contracts, which may be treated as advanced payments (unearned income) and not assessable until the services are rendered or performed. It will be important for you to make a note of these receipts so that we can show them in the accounts as unearned income. Such advance receipts should be held in a separate and distinct account until they are earned.
Bad Debt Write Off
To write off a bad debt, a deduction will be allowable where a taxpayer makes a bona fide, commercial decision that a debt or portion of a debt is irrecoverable.
However, the debt must have been brought to account as assessable income and must be written off during the year of income in which it is claimed. Normally, this means that it must be physically written off in the books of account, although the Australian Taxation Office (ATO) will accept minutes of a board meeting authorising the write-off of a specific debt before year end.
It is important to note that a bad debt owing from a related party may not be deductible from 8 May 2012.
PAYG Payment Summaries and PAYG Withholding
Please ensure you remit your June or quarterly PAYG Withholding by 21 July 2013 or 14 August 2013 respectively (if lodging via a tax agent) to the ATO, and finalise preparation of the PAYG Payment Summaries for Employees by 14 July 2013. Once completed, send the original PAYG Payment Summaries and Annual Statement to the ATO by 14 August 2013 (and keep a copy). Don’t forget to include the grossed up value of reportable fringe benefits in excess of $2,000 (per employee). If you don't know what we mean by this please contact us before completing the PAYG Payment Summaries.
Additional super contributions made on behalf of an employee, under a salary sacrifice agreement may need to be reported on the employee’s PAYG payment summaries. These are called reportable employer super contributions. These amounts have to be reported for the income year that the contribution relates to where certain conditions are met.
Motor Vehicle Log Books and Claims
When claiming motor vehicle expenses under the log book method and/or the one-third of actual expense method, please ensure you record your odometer readings at the end of each financial year to assist in substantiating the claim. (Note log books need to be replaced every 5 years).
Increased superannuation deductions may be available for persons in business who wish to contribute additional amounts to a superannuation fund. Where funds are not immediately available, employers can claim interest on loans for super contributions.
Employers are able to make maximum deductible contributions (including SGL (9%)) on behalf of employees as follows for 2012/13:
Less than 50 years of age $25,000
50 years and over $25,000.
Note: Any contributions which exceed the $25,000 cap as per above will remain tax deductible in the hands of the employer, however the excessive amount may be taxed at 46.5% in the hands of the employee.
The Superannuation Guarantee Levy (SGL) amount for 2012/2013 is 9% (increasing to 9.25% for 2013/14), of gross wages. SGL is only payable where the employee receives gross wages of more than $450 in any one calendar month.
Note, the maximum contribution base for 2012/2013 is $183,000 ($45,750 per quarter) ie SGL is not required for salary amounts in excess of $183,000.
Employers are required to contribute the SGL on a quarterly basis.
Due dates for SGL:
SGL Quarter Due Date
01/07/2013 – 30/09/2013 28/10/2013
01/10/2013 – 31/12/2013 28/01/2014
01/01/2014 – 31/03/2014 28/04/2014
01/04/2014 – 30/06/2014 28/07/2014
If the payments are made after these due dates the contributions will revert to a Superannuation Guarantee Charge and will be non deductible to the employer.
Even though Employers have a liability to pay the superannuation guarantee by 28 July 2013, for the quarter 1 April 2013 to 30 June 2013, this amount cannot be claimed in 2012/2013 unless the payment is actually made by the employer and received and banked by the Superannuation Fund by 30 June 2013.
A maximum dollar for dollar government co-contribution payment up to $1,000 may be received where a non-concessional Super Contribution up to $1,000 is made if certain criteria are met. For the full co-contribution payment the taxpayers assessable income plus reportable fringe benefits must be below $31,920, and below $46,920 for a part payment. Please contact us to determine eligibility prior to making such a contribution.
Rebate on Spouse Superannuation Contribution
|Spouses Income||Contribution Amount||Offset Amount|
|$10,800 or less||0-$3,000||18% of contributions|
|$3,000 or more||$540 maximum|
|$10,800 - $13,799||Any Amount||18% up to$3,000 (minus $1 for amounts over $10,800)|
|More than $13,800||Any amount||Nil|
Stock Write Offs
The value of trading stock on hand at the end of the year of income is effectively added to assessable income. Therefore, scrapping unwanted stock or writing off obsolete stock has a direct effect on the bottom line of the business.
Obsolete stock includes stock which is going out of use, going out of date, or becoming unfashionable or outmoded. Unwanted stock on hand should be physically scrapped or sold for scrap by 30 June 2013.
Valuing Stock on Hand
If you have stock in your business you must complete a physical stocktake at 30 June 2013.
This annual stocktake report must be provided to us as part of your 2013 tax information.
Taxpayers are entitled to value their stock on hand at cost, replacement value or market value. You can even use any combination of all three methods providing you can specifically identify each item so valued.
There is an opportunity therefore to decrease (or possibly increase) net profit and taxable income by simply changing the method of valuation of stock according to the circumstances.
Obsolete Plant & Equipment
A review of your businesses depreciation schedule may uncover some items that are obsolete or that were scrapped during the year. A tax deduction can be claimed for the written down value of these items at year end.
Building Allowance Write Offs
If you own commercial property investments (built after July 1982) or residential property investments (built after July 1985) you can maximise your depreciation and building allowance write offs by engaging a quantity surveyor to prepare a Depreciation report on your behalf. Please call us if this applies to you.
Year End Directors’ Fees and Employee Bonuses
For a company to be entitled to claim a deduction for directors’ fees, it must have either paid the amount or be definitely committed to payment of a specified amount by 30 June. Provided a properly authorised director’s resolution has been passed by 30 June to pay the amount, it will be deductible in that tax year, even if not actually paid by 30 June.
A similar situation applies to employee bonuses whether paid by a company, trust, partnership or sole trader.
The director’s fee or employee bonus will only be assessable to that person in the tax year in which it is actually paid or otherwise made available. In other words, it should not be credited to a director’s or employee’s loan account. PAYG instalments will not need to be deducted until the amounts are actually paid to the director/employee or credited to a loan account in his or her name.
The Directors bonuses should be paid out within 12 months of resolving to pay them.
Capital Gains Tax (CGT) Planning Deferring Capital Gains
In relation to CGT, properties are normally deemed to be disposed on the date when the contract is signed. For real estate sales, this means that the date of the contract is normally the date the Offer & Acceptance (or similar document) is signed rather than the settlement date. If a property is liable for CGT on disposal it may be worth considering delaying signing until after 30 June. This may have the advantage of deferring CGT until the following financial year.
It is of vital importance that you contact our office prior to purchasing or selling any significant assets and that means before executing any relevant documentation.
Writing Off Capital Losses Against Gains
If you expect to incur a capital loss next year, you may consider deferring any gains until then. Capital losses can be carried forward, but they can only be offset against a capital gain, not other income. This can often apply to assets such as shares. If you have made capital gains this year consider selling assets (eg shares) that have unrealised capital losses before 30 June 2013 to offset the realised capital gains.
The ATO have previously announced that part IVA may apply to certain “Wash Sales”. This occurs where an asset is said to crystallise a capital loss, but there is no substantial change in economic interest in the asset (ie immediately bought back by individual or related entity.)
Losses on Leased Equipment
From time to time, clients terminate a lease on an item of equipment used in the business and then trade it in on another replacement item. The most common circumstance relates to motor vehicles.
The problem is that unless the taxpayer is careful, he or she can lose a potential tax deduction where the trade-in valuation is less than the residual on the lease.
For example, a taxpayer will not be entitled to a deduction for a loss incurred where a motor car is traded in on a new car, the dealer pays out the residual and the taxpayer obtains finance for the new car and the difference between the residual and the trade-in.
However, if the taxpayer pays out the lease to the leasing company, he or she will be entitled to a deduction for the lease shortfall payment - (income tax ruling IT2420). Please contact our office whenever you are considering changing over items of plant.
It is our preferred advice that you, the lessee, pay out the lease, own the piece of plant for at least one day and depreciate it before selling it. This only applies for leases and does not apply to hire purchase agreements.
ATO Approved Tax Effective
If you are contemplating any end of financial year tax effective investments then please contact our office to discuss the tax consequences and confirm it has ATO approval.
Please remember that the sale/purchase of property and plant/equipment may be subject to GST when certain conditions are met. Many clients are still failing to recognise the need to account for GST when purchasing/selling property (and other assets). This can lead to significant financial loss for the client eg 1/11 of the sale price is required to be remitted to the ATO after the sale has been finalised if the transaction is subject to GST. It is therefore important to contact our office prior to entering into any agreement to confirm the GST treatment of selling/buying assets.
Low Income Tax Offset
From 1 July 2013 individuals will be entitled to receive the Low Income Tax Offset if their taxable income is less than $66,667. The maximum value of the Low Income Tax Offset will be reduced from $1,500 to $445 and will be phased out at a rate of 1.5 cents for every dollar of taxable income over $37,000.
2013 Trust Distributions & Trust Deeds
Trust structures are under increasing attack from the authorities including further changes to legislation.
It is therefore now clearer than ever that a trustee needs to appoint income of the trust by 30 June of the relevant income year (or even earlier depending on the terms of the trust deed) to avoid a potential for additional tax. This means that resolutions in relation to each of your trusts for the 2012/13 year must be prepared and signed before 30th June 2013 to avoid the potential for paying tax at 46.5c in the dollar.
If you have not participated in our year end tax planning program and you think this may apply to your situation you should contact us immediately to discuss.
If your trust deed/s are deficient in certain areas there is a possibility that any distributions of income made to beneficiaries (per the trustee resolution) may be deemed in-effective and could result in the Trustee being assessed on all trust income at the highest marginal tax rate (currently 46.5%) plus penalties (up to 75% of the tax amount) plus general interest charge. If your deed has not been reviewed and updated in the last year or two then we strongly recommend you contact our office to organize a review of your Trust Deed/s.
2013 Budget Announcements
The key initiatives in this years’ Federal Budget include:
- The Medicare levy will increase by 0.5% to 2% pa from 1 July 2014.
- The $5,000 Baby Bonus will be removed from 1 March 2014. Instead, families eligible for Family Tax Benefit (Part A) will receive $2,000 following the birth of their first child, and $1,000 for each subsequent child.
- From 1 July 2014, all pension asset earnings above $100,000 will be treated as income and taxed at 15%.
The Government has also confirmed that:
- The superannuation concessional contribution cap will increase from $25,000 pa to $35,000 pa from:
- 1 July 2013 for people 60 and over, and
- 1 July 2014 for people 50 and over.
The key takeout of this budget is that many of the announcements are unlikely to be legislated prior to September’s election, and therefore significant uncertainty remains as to whether many of the announcements will ever become law.
5th April 2013 Announcement re Super Reforms
A number of announcements were made including:
- Cap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15 per cent applying thereafter, and apply the same treatment to defined benefit funds;
- Simplify the design and administration of the higher concessional contributions cap;
- Reform the treatment of concessional contributions in excess of the annual cap;
- Extend the normal social security deeming rules to superannuation account-based income streams;
- Extend concessional tax treatment to deferred lifetime annuities; and
- Further reform the arrangements for lost superannuation.
Note that these announcements are dependant upon the Labour Party being re-elected at the next Federal Election (September 2013).