END OF YEAR TAX PLANNING CHECKLIST

Transcription

1 END OF YEAR TAX PLANNING CHECKLIST FOR THE YEAR ENDING 30 JUNE 2014 Cornwall Stodart Level William Street DX 636 Melbourne VIC 3000, Australia Phone Fax cornwallstodart

2 TABLE OF CONTENTS 1 INTRODUCTION 1 2 RESIDENCY 1 3 RATES 2 4 TIMING 2 5 INCOME 2 6 DEDUCTIONS 3 7 TAX OFFSETS 4 8 TRUSTS 5 9 COMPANIES 6 10 PARTNERSHIPS 8 11 CAPITAL GAINS TAX (CGT) 8 12 ANTI-AVOIDANCE INTERNATIONAL TAX SUPERANNUATION GOODS AND SERVICES TAX (GST) CONTACTS 14

3 1 INTRODUCTION Welcome to the Cornwall Stodart 30 June 2014 end of year tax planning checklist. 1.1 Year-end tax planning It is essential to undertake tax compliance reviews at the end of the financial year in order to ensure that audit risks are identified and all annual elections have been made. 1.2 What does this document do? This document provides a checklist of various issues that could potentially affect your tax liabilities for the income year ending 30 June It is intended to be used as a guide only and does not contain comprehensive legal advice. 2 RESIDENCY 2.1 General residency rules Australian residents will be assessed for Australian income tax on their ordinary income and statutory income from all sources, both offshore and domestically. Foreign residents, however, are only assessed for Australian income tax on their ordinary income and statutory income from Australian sources. A range of legislative and common-law rules operate to determine whether a taxpayer is an Australian resident in a particular income year. The residency tests include the 183-day test, the ordinarily resides test, the superannuation test and the domicile test. 2.2 Temporary resident exemption An Australian resident may qualify for the temporary resident exemption if they satisfy certain conditions. The outcome of being a temporary resident is that most of the qualifying Australian resident s foreign-sourced income is exempt from Australian income tax. Any inquiries relating to this exemption should be conducted before the end of the current financial year. 2.3 Changing residence Changing residency for income tax purposes is likely to have consequences for any CGT assets held by that taxpayer. This is because, from 8 May 2012, foreign residents are no longer entitled to the general 50 per cent discount on any capital gains unless certain conditions are satisfied. Australian residents with a period of foreign residency occurring after 8 May 2012 are also likely to be affected. Any implications of a change in residency during the income year ending 30 June 2014 should be considered. Page 1

4 3 RATES The tax rate for Australian residents for the income year ended 30 June 2014 is as follows: Taxable income Tax payable $0 $18,200 Nil $18,201 $37,000 19c for each $1 over $18,200 $37,001 $80,000 $3, c for each $1 over $37,000 $80,001 $180,000 $17, c for each $1 over $80,000 $180,001 and over $54, c for each $1 over $180,000 The tax rate for non-resident individuals for the income year ended 30 June 2014 is as follows: Taxable income Tax payable 0 $80, % $80,000 $180,000 $26, % of excess over $80,000 $180,001+ $63, % of excess over $180,000 4 TIMING 4.1 The basis upon which taxpayers account for income and expenses will affect their income tax liabilities for the income year ended 30 June These two methods are: cash basis income will be derived when it is received, and expenses are incurred when paid for accruals basis income will be derived in the relevant period that it has been earned, and expenses are incurred in the relevant period in which the liability arises. A taxpayer will need to determine whether any income earned (or expenses incurred) are on a cash basis or accruals basis because this will affect whether amounts are assessable (or deductible) in the income year ended 30 June INCOME 5.1 General rules on income Income according to ordinary concepts generally includes: Wages and salary the wages earned in a taxpayer s day to day enterprises will be regarded as ordinary income. Page 2

5 Interest interest gained will be regarded as ordinary income. Dividend income a dividend, whether given its normal meaning or deemed under Division 7A, will be assessable. Whether a dividend is franked or unfranked does not change this fact, but only the amount that is assessable. Trade incentives trade incentives are generally considered to be ordinary business income for tax purposes. Statutory income generally includes: Insurance proceeds payments received from a policy of assurance or insurance as the result of a trigger event occurring are ordinarily treated as capital payments. Trust distributions a beneficiary of a trust will be taxed on their share of the taxable income of the trust. Employment termination payments an employee will be taxed on any termination payment they receive. 6 DEDUCTIONS 6.1 General rules of deductibility A general deduction can be claimed for expenses incurred in the earning of assessable income or the carrying on of a business for the purpose of earning assessable income (for example, interest expenses in obtaining a loan used for a taxpayer s business). Certain deductions may also be available for certain types of expenses specifically provided for in income tax law. Deductions are not available for expenses that are: unrelated to the earning of assessable income capital in nature private in nature incurred in earning exempt income. 6.2 Capital expenditure Taxpayers should determine whether or not their expenses are capital in nature. If so, a deduction under the general provisions will not be claimable. However, specific deductions relating to capital expenditure may be available, such as the black-hole and capital works provisions. 6.3 Bad debt deductions A deduction for bad debts is allowable if the debt has been written off as a bad debt before the end of the financial year, and an amount in respect of the bad debt has previously been included in the taxpayer s assessable income. For this reason it is important to ensure that all necessary steps have been taken to write-off and record these debts. The ATO has published its views regarding the availability of a deduction for bad debts in Taxation Ruling TR 92/18. Page 3

6 6.4 Capital deductions A deduction may potentially be claimed for certain assets that a taxpayer holds if that asset is held ready for use or has been used for earning or producing assessable income. It is important to keep a record of all such assets so that allowable deductions for the cost of those assets can be calculated for the purpose of determining deductions available to the taxpayer for the income year ending 30 June Various depreciating asset rules exist and can apply; these should be carefully navigated. They include: normal depreciation rules outright deduction rules pooling rules small business concession rules. 6.5 Gifts and donations A taxpayer may claim a deduction for a gift or donation made over the value of $2 to deductible gift recipients. Other specific provisions, such as the provisions allowing a deduction for artwork donated to certain recipients, should be considered where relevant. It is important to retain proof of the gift or donation in the event documentation is required to substantiate the claiming of a deduction. 7 TAX OFFSETS 7.1 Foreign taxes paid on your behalf If foreign taxes have been withheld from income earned by a taxpayer, then that taxpayer may be required to gross up their income for tax purposes. A taxpayer will however be entitled to a foreign income tax offset in such a situation if: the foreign tax is income in nature the taxpayer has actually paid or is deemed to have paid the foreign income tax the income on which the tax was paid is to be part of their assessable income in Australia. 7.2 Other offsets private health insurance offset research and development tax offset primary production tax offset franking credit tax offset. Page 4

7 8 TRUSTS 8.1 Tax on trust distributions As a general rule, the trustee of a trust is liable for tax on amounts of income from a trust estate to which no beneficiary is presently entitled. The generally applicable tax rate to trustees in this scenario is 46.5% (the trustee is eligible to be taxed at a reduced rate in certain circumstances, for example where the trustee is the trustee of a deceased estate for a limited period of time). For this reason it is important to ensure that individual or corporate beneficiaries are made presently entitled to the income of a trust estate to reduce the tax payable on trust distributions before the end of the financial year. Trust streaming rules allow the trustee to make certain beneficiaries specifically entitled to dividend income or capital gains made by the trust, and to pass benefits relating to those distributions (such as franking credits or capital gain discounts) to those beneficiaries. Under the trust streaming rules, trustees have until 31 August following the end of each income year in order to grant specific entitlements in respect of capital gains. Care should be taken because, if the trust deed specifies that trust income (including capital gains) is to be dealt with before 30 June of each income year, then this statutory extended period will not apply, and the trustee will be required to distribute capital gains (if any) before 30 June of each income year. Trustees should be aware of the 45-day holding period rule in order to pass the benefit of franking credits attaching to dividends to beneficiaries of a trust. It is important to consult the terms of the trust deed in order to determine if, how and in what manner trust distributions can be made. 8.2 Income of the trust estate A trust deed can define income in different ways. Common expressions include: income according to accounting standards income according to taxation law. Trust deeds often have a provision that allows the trustee to determine the income of the trust to be according to whatever they determine in their absolute discretion, or to treat certain capital receipts as income (or vice versa). The ATO takes the view that notional amounts (eg franking credits or tax offsets) cannot be treated as income of a trust estate even if the trust deed specifically allows those notional amounts to be treated as trust income. For this reason, it is important to read the trust deed in order to determine how the income of the trust estate is defined. Page 5

8 8.3 Family trust elections (FTEs) It is important to ensure that any FTE distributions are compliant; otherwise a family trust distribution tax penalty of 46.5% will apply to any distribution in breach. For this reason distributions should be made strictly to the members of a defined group. Commercial transactions on arm s length terms are generally not subject to the penalty tax rate. 9 COMPANIES 9.1 Payment of dividends Company distributions to shareholders will be regarded as dividends, so long as they do not arise from the share capital of the company. With regard to a private company comprising less than 50 shareholders, a loan arrangement or financial accommodation provided to a shareholder may also be deemed to be a dividend under Division 7A. If a dividend is paid by a company, that company should comply with the relevant dividend statement requirements for time and form. 9.2 Division 7A Division 7A was introduced as an integrity provision to ensure that private companies could not make distributions (eg, payments, loans or debt forgiveness), which had been taxed at the company rate, to shareholders (or associates of shareholders) without paying the top-up tax at the recipient s marginal rates. In all but exceptional circumstances, the ATO will deem a company that provides financial accommodation to a shareholder (or his or her associate) to have paid an unfranked dividend to that shareholder where the provisions of Division 7A have been breached. Direct loans, payments and debt forgiveness transactions The compliance risk associated with Division 7A may be mitigated by ensuring that any financial accommodation provided by a private company to a shareholder (or his or her associate) is subject to a section 109N compliant loan agreement (ie, a maximum seven year loan repayment period and interest charged at a commercial rate). Minimum loan repayments under section 109N compliant loans must be made prior to the end of the income year. Unpaid entitlements Where a trust makes a distribution to a company and that distribution then becomes an Unpaid Present Entitlement (UPE), any loan, payment or debt forgiveness made by the trust will be deemed to have been made directly by the company. Similarly to financial accommodation that is provided directly from a private company to a shareholder (or his or her associate), the effect of Division 7A may be negated by implementing a complying section 109N loan agreement. Before the end of the income year, we recommend a review of any UPEs to ensure appropriate measures have been put in place to mitigate the compliance risk associated with Division 7A, including by ensuring that section 109N compliant loan agreements are in place (where applicable) and any minimum loan repayments for the income year have been made. Page 6

9 Interposed entity transactions Division 7A will continue to apply regardless of any interposed entities. An interposed entity is an entity that is placed between a company and a target entity, and receives a payment from that company which it redistributes to the target entity. Division 7A will deem any payment, debt forgiveness or loan made from the company to the interposed entity as being made between the company and the target entity, effectively cutting out the interposed entity. 9.3 Company losses A company that satisfies the continuity of ownership test may apply carry forward losses (which have been incurred in previous income years) to offset the income that would otherwise be assessable for the current income year. The continuity of ownership test is generally satisfied when the majority shareholding of the company (assessed by reference to the shares that attract more than 50 per cent of the entitlements to dividends, voting rights, capital etc) continues to be owned by the same entity. Additional continuity of ownership requirements must be satisfied for the company to be entitled to apply carry forward losses in the event that the entity (or entities) owning the majority of the company s shareholding is a trust. 9.4 Tax consolidation choice to consolidate If taxpayers have formed a consolidated group in the current income year, then the decision to consolidate must be recorded in writing and notification must be given to the ATO otherwise the consolidated group will not be taken to have formed for tax purposes. Both the written decision to form a consolidated group and ATO notification should be created before tax returns for the consolidated group entities are lodged for the 2013/2014 financial year. Given the nature of the relationship between the entities that form a tax consolidated group (ie, joint and several liability of tax liabilities), it is important that newly formed consolidated groups consider whether it is appropriate to enter into tax funding agreements and tax sharing agreements (Tax Sharing Agreements). 9.5 Tax consolidation change in members When a new member joins a tax consolidated group in the current income year, the new member should become a party to any Tax Sharing Agreements in place between the current members of the tax consolidated group. In the event that a member of a tax consolidated group left the group in the current income year, the exiting member must make an exit payment in accordance with the terms of the applicable Tax Sharing Agreements. It is the responsibility of the head company of the tax consolidated group to notify the ATO of the changes regarding members entering or leaving the group within 28 days of the changes having been made. 9.6 Research and development (R&D) Entities that have operations which qualify as valid R&D activities may be granted an R&D tax incentive. The nature of the R&D incentive granted will be dependent on the entity s annual turnover: Page 7

10 entities that have an aggregated turnover up to a maximum of $20 million per year are eligible to receive a 45% refundable tax offset all other entities are eligible to receive a 40% non-refundable offset. Entities that intend to claim an R&D tax offset should ensure that their R&D activities are documented with appropriate specificity and detail. In particular, it is essential that the entity is capable of establishing a clear link between the expenses claimed for its R&D activities and the R&D activities themselves. Entities must also register annually with AusIndustry as a condition to claiming an R&D tax incentive. 10 PARTNERSHIPS 10.1 Taxation of partnerships A partnership is not a legal entity but rather (typically) a contractual relationship between partners. Partners will be entitled to a share of the partnership assets and profits in accordance with the proportions set out in the applicable partnership agreement. If no partnership agreement exists, the partners will be deemed to be entitled to, or be liable for, an equal share of the profits and losses of the partnership for the applicable income year. Any income derived by a partnership in the applicable income year will be assessable in the hands of the partners according to their proportional entitlements to the net partnership income. Accordingly, partners must ensure that a valid partnership agreement is in place (or validly amended) prior to the end of the income year. A partnership agreement cannot be deemed to operate retrospectively. Therefore, it is essential that any prospective partnership agreement is finalised (or varied) before the end of the income year to avoid the ATO deeming each partner to have received, for tax purposes, a share of the income derived from the partnership that does not accord with the share of profits that was intended to be distributed pursuant to the agreement between the partners. 11 CAPITAL GAINS TAX (CGT) 11.1 CGT in general In general, the CGT provisions will apply to the disposal of a CGT asset that was acquired on or after 19 September 1985 in the current income year. However, in addition to the disposal of a CGT asset, other CGT events may have occurred during the income year that will trigger the CGT provisions. Accordingly, it is essential that all receipts not treated on income account (ie, declared as assessable income) are reviewed with regard to whether they fall within the CGT provisions. In addition to the CGT provisions dealing with the amount of capital gains tax that may be payable on the net capital gain of the entity for the current income year, it is important to identify and analyse each CGT event that occurred during the year to ensure that any gain or loss arising from each individual CGT event is calculated correctly. For example, a CGT event may be deemed to have occurred in the year that a contract was entered into, notwithstanding that the proceeds payable under that contract will not be physically received until a later income year. Page 8

11 11.2 Fifty per cent general CGT discount The capital gain derived from certain CGT events in respect of a CGT asset may be reduced by 50 per cent if the owner of the CGT asset is either an individual or a trust Small business CGT concessions There are four main small business CGT concessions that should be considered by small businesses to reduce the amount of CGT that may be payable for the current income year. A taxpayer may be eligible for the small business CGT concessions if: the taxpayer satisfies the $6 million net assets test (which includes assets held by the taxpayer s affiliates and entities connected to the taxpayer); or the $2 million turnover test (which includes assets held by the taxpayer s affiliates and entities connected to the taxpayer). The different types of small business CGT concessions available are: the 15 year exemption 50% active asset reduction retirement exemption replacement asset rollover. Each small business CGT concession is subject to a variety of criteria. Therefore, we recommend a thorough review of the taxpayer s affairs and an inquiry into the taxpayer s financial objectives to determine which small business CGT concession(s) is suitable in the circumstances. Importantly, the small business CGT concessions may apply to the sale of shares in a company or units in a trust. Therefore, it is imperative that small business owners who are considering selling their interest in the business consider the small business CGT concessions closely as a part of their broader sale strategy. In the event that a CGT event has already occurred for the current income year, taxpayers intending to rely on the small business CGT concessions must ensure that the required elections and associated documentation are completed and submitted to the relevant authorities (eg, the taxpayer s superannuation fund) Earn-out arrangements Earn-out arrangements may be entered into when a business or business asset is sold for the purpose of deferring the taxation of a portion of the proceeds payable on the sale of a business or business asset (such proceeds only being payable by the purchaser after certain earning-based requirements have been met), to a time that the taxpayer actually receives those proceeds. Page 9

12 11.5 CGT exemptions and rollovers Numerous exemptions can affect the quantum of capital gains and losses derived by the taxpayer during the income year. We recommend that a complete list of the available exemptions is reviewed with reference to a taxpayer s activities for the applicable income year. The exemptions must be claimed prior to lodgement for the income year. Some examples include: pre-cgt assets trading stock main residence exemption demerger relief splitting of assets and merging of assets CGT events on death rollover for the change of an unincorporated body to an incorporated company. 12 ANTI-AVOIDANCE 12.1 Loan rationalisation and debt forgiveness The end of financial year is an opportune time to review inter-company financing arrangements with a view to consolidating or reconciling loans and reducing the compliance burden for the forthcoming financial year. We recommend a review of any proposed restructuring of a corporate group s financing arrangements with specific regard to the various integrity provisions (eg, Division 7A, share tainting provisions, debt forgiveness provisions etc) Injection of income into a trust Taxpayers must be aware of the anti-avoidance rules that may apply to an injection of income into a trust which has carry forward losses (or an entitlement to other deductions) Share capital transactions The purpose of the share capital transaction rules or the tainting rules is to prevent companies from transferring taxable amounts (eg retained profits) into a share capital account and distributing these amounts as preferentially taxed share capital distributions. Any subsequent distribution of share capital, which has been made in contravention of the share capital transaction rules, will be treated as an unfranked dividend Part IVA Part IVA is a broad-reaching set of general anti-avoidance provisions that must be considered in respect of the taxpayer s material transactions in the current income year, as well as in the context of the taxpayer s broader corporate structure, financing and operational arrangements that have been implemented for (among other things) tax planning purposes. Page 10

13 In the event that a scheme yields a tax benefit and fails the dominant purpose test (ie, it was entered into for the sole or dominant purpose of producing a tax benefit), the ATO has the power to reconstruct the transaction to eliminate the tax benefit that would otherwise accrue to the taxpayer. We recommend that taxpayers seek advice if they are concerned about whether or not a particular transaction, arrangement or structure may contravene Part IVA Related party deductions A taxpayer who is involved in a related party transaction should pay careful consideration to whether or not antiavoidance provisions will deny any deductions that might otherwise be allowed Wash sales Part IVA may apply in instances of a wash sale. This is where assets are disposed of (at either a loss or gain) only for similar assets to be acquired again by the same entity at a later date Trust streaming to exempt entities Specific anti-avoidance rules have been introduced to stop tax-exempt beneficiaries of a trust (eg, charities) from being utilised to decrease the taxable income of a trust. 13 INTERNATIONAL TAX 13.1 Transfer pricing If a taxpayer is a multi-entity company, it should ensure that all transfer pricing transactions are recorded and that the methodologies used to determine price are thoroughly substantiated and documented. The ATO has the power to unwind what it would consider non arm s length transactions and substitute the terms of those transactions with terms that are in line with what would be considered commercially appropriate terms, with regard to the applicable market conditions. Due to the recent reforms and increased level of scrutiny and compliance activity, we recommend a pre-end of financial year review of any transfer pricing policies. Further, given the taxpayer holds the burden of proof for establishing that a transaction complies with the transfer pricing rules, we recommend a spot audit of transfer pricing transactions for the purpose of assessing the veracity of the taxpayer s transfer pricing documentation, to ensure that any allegations of a contravention with the transfer pricing rules can be rebutted successfully Thin capitalisation The thin capitalisation rules provide that payments of large sums of interest to overseas companies for financial accommodation provided to their Australian subsidiaries are not allowable deductions in the hands of the Australian subsidiary. The rules apply to Australian entities investing overseas, their associate entities, foreign controlled Australian entities and foreign entities investing directly into Australia. Taxpayers should examine their debt to equity ratios with reference to the safe harbour ratio (currently, 3:1) and Page 11

14 consider whether it is appropriate to implement strategies to alter their current ratio (eg, capital injection, asset revaluation) to fall within the safe harbour levels. Taxpayers must consider whether any strategy to alter their debt to equity ratios would contravene the relevant integrity provisions. 14 SUPERANNUATION 14.1 Superannuation guarantee Employers should make their compulsory super contributions within 28 days of the end of each quarter. If an employer fails to make the super contribution within the allotted time, they will be required to pay the superannuation guarantee charge (SGC). This charge is not deductible and the nominal interest component of the SGC can be significant (and the ATO does not have any discretion to remit any portion of this element of the SGC) Contribution limits Contributions to super are capped for individuals regardless of whether that contribution is made by them or someone else. The caps are as follows: the concessional contributions cap is $25,000 the non-concessional contributions cap is $150,000, but if an individual is under the age of 65 they can contribute a maximum of $450,000 at any time, across an ongoing 3 year period Excess contributions tax Taxpayers should ensure that any payments to a superannuation fund do not exceed the cap limits as noted above. If they do, the excess contributions will be taxed as follows: excess concessional contributions will be taxed at 31.5% plus 15% excess non-concessional contributions will be taxed at 46.5% excess concessional contributions will be counted towards the non-concessional contributions cap and can potentially be taxed again at 46.5%. 15 GOODS AND SERVICES TAX (GST) 15.1 GST adjustments for written off bad debt adjustments A taxpayer who has written off bad debts throughout the year or who has an overdue debt for a minimum of 12 months, or who has recouped a previously written off bad debt, may be required to make either an increasing or decreasing GST adjustment. Page 12

15 15.2 Accounting for GST on a cash or accruals basis A taxpayer that accounts for GST on a cash basis may need to commence accounting for GST on an accruals basis if they no longer meet the requirements for accounting on a cash basis. Any change to accounting methods may require a balancing adjustment. The criteria for GST accounting on a cash basis are as follows: the taxpayer is a small business with a maximum annual turnover of $2 million; or the taxpayer already accounts for income on a cash basis; or the taxpayer is carrying on an enterprise with a maximum GST turnover of $2 million; or the taxpayer s enterprise is one which the ATO has permitted to account for GST on a cash basis; or the taxpayer is a recognised charitable institution, trustee of a recognised fund, an entity that allows deductions for gifts or a government school Financial acquisitions threshold A financial acquisitions threshold (which in practice comprises two separate thresholds) applies to limit the ability of a taxpayer who makes financial supplies to claim full input tax credits for the expenses associated with making those financial supplies (Financial Acquisitions). A taxpayer who makes financial supplies must assess whether the Financial Acquisitions of the business breach the relevant thresholds ($50,000 in 12 months or 10% of the total GST paid on taxable acquisitions in 12 months). A taxpayer that exceeds either of the thresholds applying to Financial Acquisitions may still be entitled to claim reduced input tax credits for certain types of acquisitions, as prescribed by the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) GST adjustments for changes in use A taxpayer is likely to be required to make a GST adjustment where there is a change in the way that an item that comprised a creditable acquisition or importation is used for a purpose that is different to the intended use at the time of the acquisition or importation Reporting requirements for the building and construction industry Taxpayers (in the construction/building industry) are required to report details to the ATO of any payments made to contractors relating to the supply of construction/building work within 21 days following the end of the current income year. Page 13

16 16 CONTACTS For more information please contact any member of our Revenue Law team: Michael Kohn, Partner and Head of Revenue Law Phone (direct) m.kohn@cornwalls.com.au Julie Ngan, Senior Associate Phone (direct) j.ngan@cornwalls.com.au Meng Lee, Lawyer Phone (direct) m.lee@cornwalls.com.au Lesley Naik, Lawyer Phone (direct) l.naik@cornwalls.com.au Page 14