End-of-year tax planning tips for business

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Gregory Warner
6 years ago
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further reduce your enterprise s tx burden for the yer.

1 Client Informtion Newsletter - Tx & Super June 2017 End-of-yer tx plnning tips for The generl rule is tht you cn clim deductions for expenses your incurs in its tsk of generting ssessble income. Mny of these deductions re obvious rent, mterils, supplies nd so on but there re lso some less obvious options left vilble just before the end of the income yer, should your circumstnces suit, to further reduce your enterprise s tx burden for the yer. About this newsletter Welcome to Ibbotson + Mosctelli s client informtion newsletter, your monthly tx nd super updte keeping you on top of the issues, news nd chnges you need to know. We invite you to red our monthly updte nd contct our office if you hve ny queries. T: E: office@imccountnts.com.u Content in prtnership with Txpyers AUSTRALIA Py tomorrow s expense tody If your hs tken out lon, ny interest ccrued but not physiclly pid by June 30 is potentilly deductible (the crucil fctor of course being tht the lon ws used to produce ssessble income, which most lons re) ssuming tht the ccounts for tx on n ccruls bsis. In similr vein, see if you cn negotite with your finnce provider to mke upfront interest repyments tht is, they my not be due until fter July 1, but the finnce provider will ccept them before then. Ibbotson + Mosctelli June

2 End-of-yer tx plnning tips for cont In relted tip, it is fct of life tht mny sole trders fund some ctivities through their personl credit crd or personl lon. Becuse the interest costs re not being incurred under the nme, but in the nme of the owner, mny opertors hve unfortuntely ssumed tht deduction cnnot be climed. But remember sole trder s nd non ctivities re ll delt with under the txpyer s personl income for tx purposes. So qulifying expenses will be deductible even if you used your personl credit crd insted of your one. Cpitl gin shuffle Cpitl losses cn be offset ginst, nd therefore reduce, txble cpitl gins tht you my mke on selling other ssets. So if your is due to sell some ssets tht will relise cpitl loss, try to crystllise these losses before June 30. If however the sle will produce cpitl gin, dely crystllising this gin until the income yer so tht you will hve full fiscl yer to get in plce options to offset tht gin with cpitl losses or revenue expenses. It my even be worthwhile for you to sell n underperforming sset, nd relise loss, if this suits your CGT circumstnces. And remember, s generl rule the CGT event for disposl occurs t contrct dte this could help in your plnning if you sell n sset where settlement nd/ or pyment tkes plce in but the contrct is executed in Apprecite deprecition Getting tx deduction for the wer nd ter nd loss of vlue on ssets tht re used to derive ssessble income is stlwrt of the tx regime, so review of your enterprise s deprecition schedule is lwys prudent. Any number of opportunities cn be discovered, including the bility to scrp nd write-off mounts of redundnt ssets, ressess remining effective lives, or llocte ssets to low vlue pool. This is importnt for this nd next tx yer s the $20,000 instnt sset write-off hs been extended until June 30, 2018 (subject to legisltion pssing). It will therefter revert to $1,000 (notwithstnding possible further chnges in next yer s Federl Budget). Trding stock isn t lwys stndrd Tking into ccount the chnged vlue of your trding stock over n income yer cn ffect the resulting txble income. But s you cn hve choice of how tht vlution is rrived t tht is, cost, mrket selling, or replcement vlue (or even lower vlue due to obsolescence) the end result my llow you to either bring forwrd deductions or lterntively increse txble income if you hve sufficient deductions to use up for the yer. And remember, ech item of trding stock cn be vlued differently for tx purposes. Ask for our help should you need guidnce. Silk purse from sow s er Another unfortuntely not uncommon fct of life is tht some mounts owed to you sitting on the blnce sheet re not likely to ever be pid. Now is the best time of yer to re-consider these mounts, nd decide if ny re legitimte bd debts, nd therefore ble to be written off nd be trnsformed into tx deduction. To this end, it could py to go bck through your outstnding invoices to find potentil bd debt cndidtes nd write them off before June 30. However the ATO hs rules regrding bd debt deductions cll our office for more detils. A bonus from stff bonuses Businesses tht ccount for tx on n ccruls bsis re entitled to clim tx deduction for n expense in the yer in which the hs committed to the libility. If you hve committed to py employees end-of-yer bonuses, the ccrued expense cn be climed s tx deduction even though it is physiclly pid next finncil yer. A compny cn lso clim director bonuses in the yer the expense is ccrued in the sme wy (directors re clssified s employees). For compny to clim deduction for director or employee bonus without physiclly pying the money, the compny must, before the end of the finncil yer, commit to the pyment of specific mount. The mount need not be quntified but the clcultion methodology must be fixed (for exmple, formul bsed on profits or revenue mounts yet to be finlised). The commitment should be documented (such s minutes of directors meeting). continued Ibbotson + Mosctelli June

3 End-of-yer tx plnning tips for cont Remember the concessions Prliment hs finlly pssed most of the tx relief pckge nnounced in the lst Federl Budget, but with some mendments. The legisltion brings into effect the following chnges for SME es: Progressive cuts to the compny tx rte: The tx rte will be progressively reduced to 27.5% from to for compnies tht re crrying on nd hve n ggregted turnover of less thn $50 million. The 27.5% rte for those entities will be progressively cut to 25% by An increse to the smll entity threshold from : Sok up those losses There my be cse to offset prior yer losses ginst current yer income, however for compnies nd trusts the bility to do so cn be subject to certin conditions (the crry forwrd loss rules). These include the continuity of ownership test nd the sme test for compny. See the ccompnying rticle on the next pge of this newsletter Wht is tx loss, nd how cn it be turned to good use? And of course sk us to consult with you should this seem pplicble. The ggregted turnover threshold for ccess to most smll tx concessions will be $10 million, with the exception of the below concessions. - The threshold for the smll income tx offset will be $5 million. - The threshold for the smll CGT concessions will remin t $2 million. And reminder tht the smll income tx offset rte for unincorported enterprises for hs gone up to 8%, nd will sty t tht rte until It will then double to 16% by (the offset will remin cpped t $1,000 yer however). A summry of concessions vilble for smll nd eligible thresholds (from July 1, 2016) is lid out in the tble below. Summry of concessions vilble for smll nd eligible thresholds (from 1 July 2016) Aggregted nnul turnover $20,000 instnt sset write-off Smll CGT concessions Smll restructure roll-over Compny tx cuts Smll income tx offset Smll pool < $2m Yes Yes Yes Yes Yes Yes Yes < $5m Yes No Yes Yes Yes Yes Yes < $10m Yes No Yes Yes No Yes Yes Immedite deduction for certin strt-up costs This informtion hs been prepred without tking into ccount your objectives, finncil sitution or needs. Becuse of this, you should, before cting on this informtion, consider its ppropriteness, hving regrd to your objectives, finncil sitution or needs. Libility limited by scheme pproved under professionl stndrds legisltion (other thn for cts or omissions of finncil services licensees). Ibbotson + Mosctelli June

Wht is tx loss, nd how cn it be turned to good use? You generlly mke tx loss when the totl deductions tht cn be climed for finncil yer exceed the totl of ssessble nd net exempt income for the yer.

4 Wht is tx loss, nd how cn it be turned to good use? You generlly mke tx loss when the totl deductions tht cn be climed for finncil yer exceed the totl of ssessble nd net exempt income for the yer. If you operte tht mkes loss you cn generlly crry forwrd tht loss nd clim deduction for it in future yer. If you're sole trder or in prtnership, you my be ble to clim losses by offsetting them ginst your other personl income (such s investment income) in the sme income yer. Only sole trders or individul prtners in prtnership who meet one of the non-commercil losses requirements (see next pge) cn offset losses ginst other income (such s slry or investment income) in the sme income yer. If you do not meet ny of these requirements, or if you operte through compny or trust, you cn still crry it forwrd to future yers. If your mkes profit in following yer, you cn offset the deferred loss ginst tht profit. Note tht tx loss is different from cpitl loss. A cpitl loss occurs when you dispose of cpitl sset for less thn its tx cost bse. A cpitl loss cn only be offset ginst ny cpitl gins in the sme income yer or crried forwrd to offset ginst future cpitl gins it cnnot be offset ginst income of revenue nture. Your structure cn ffect how you cn clim tx losses. For exmple, compnies cn generlly choose the yer in which they clim deduction for crried forwrd tx loss. This cn be useful s it mens, for exmple, tht compny cn choose not to utilise prior yer losses in prticulr yer in order to py sufficient tx to be ble to distribute frnked dividends. However, if you operte s sole trder, prtnership or trust, you cnnot choose the yer or yers in which you clim deduction for your prior-yer tx losses. SOLE TRADERS Individuls cn generlly crry forwrd tx loss indefinitely, but must clim it t the first opportunity (tht is, the first yer tht there is txble income). You cnnot choose to hold on to losses to offset them ginst future income if they cn be offset ginst the current yer s income. Crried forwrd tx losses re offset first ginst ny net exempt income (such s pension income, government llownces nd so on) nd only then ginst ssessble income. Losses must be climed in the order in which they were incurred. continued Ibbotson + Mosctelli June

5 Wht is tx loss, nd how cn it be turned to good use? cont NON-COMMERCIAL LOSSES If you're in s n individul, either lone or in prtnership, nd your mkes loss, you must check the non-commercil loss rules to see if you cn offset the loss ginst your income from other sources, such s wges. You cn sk us bout the non-commercil loss rules, but briefly these rules dictte tht you cn't clim loss for tht is little more thn hobby or lifestyle choice (bsed on the legl tests, not on your intentions). Even if it hs -like chrcteristics, if it is unlikely to ever mke profit nd doesn't hve significnt commercil purpose or chrcter, you generlly cn't offset the loss ginst your other income. In these cses, if you re thinking of rmping up your efforts nd re sure you will mke profit in the future, you might decide to defer the loss until you relise tht profit from the. The non-commercil loss requirements re: your is primry production or professionl rts nd you mke less thn $40,000 (excluding ny net cpitl gins) in n income yer from other sources your income for non-commercil loss purposes is less thn $250,000, nd either your ssessble income is t lest $20,000 in the income yer your hs produced profit in three out of the pst five yers (including the current yer) your uses, or hs n interest in, rel property worth t lest $500,000, nd tht property is used on continuing bsis in ctivity (this test excludes your privte residence nd djcent lnd) your uses certin other ssets (excluding motor vehicles) worth t lest $100,000 on continuing bsis. If you fil ll of the tests but you believe tht you should be llowed to clim the loss due to specil circumstnces, you cn pply to the ATO for the Commissioner's discretion to pply, which would llow you to utilise the loss (we cn help you with this ppliction). COMPANIES Compnies cn crry forwrd tx loss indefinitely, nd use it when they choose, provided tht since the loss ws incurred they hve either: mintined the sme mjority ownership nd control, or crried on the sme once the ownership test is filed. If there is chnge of ownership or control of compny during n income yer nd the compny does not mintin the sme, it must work out its txble income nd tx loss. In brod terms, compny in this sitution hs both txble income nd tx loss for the sme yer. In some circumstnces, the loss my be crried forwrd nd used in lter yers, subject to the usul restrictions. Also note tht with tx losses, you must keep proper records relting to your tx ffirs for t lest five yers. If you use informtion from those records in lter tx return, you my hve to keep records for longer. So, if you crry forwrd tx loss, you must keep the records until the end of ny period of review for the income tx return in which the loss is fully deducted. Certin deductions tht would otherwise be llowble cnnot be climed s deductions where doing so would give rise to tx loss. They re: pyments of pensions, grtuities or retirement llownces to employees, former employees, or their dependents gifts or contributions mde to deductible gift recipients pyments mde under conservtion covennts, nd personl supernnution contributions. Ibbotson + Mosctelli June

The trnsitionl CGT relief mesure nd your SMSF Trnsitionl cpitl gins tx (CGT) relief is temporry relief vilble to ll complying supernnution funds, not just SMSFs, for certin CGT ssets tht would

6 The trnsitionl CGT relief mesure nd your SMSF Trnsitionl cpitl gins tx (CGT) relief is temporry relief vilble to ll complying supernnution funds, not just SMSFs, for certin CGT ssets tht would otherwise give rise to txble cpitl gin through the necessry efforts to comply with the new trnsfer blnce cp nd new conditions to be pplied to trnsition to retirement income strems (TRIS). Upon the introduction of the trnsfer blnce cp, effective July 1, 2017, it is expected tht some SMSF trustees will need to scle bck existing pensions so tht the super fund s members do not exceed their trnsfer blnce cp, which is $1.6 million for the finncil yer. If CGT ssets re sold to enble the commuttion nd withdrwl from existing pensions, then the current lw will pply to these disposls nd the trnsitionl CGT relief is of no relevnce. Conversely, if fund member decides to commute portion of their supernnution interest tht currently is in the pension phse bck into the ccumultion phse, then the trnsitionl CGT relief will be relevnt. This is becuse investment ernings, including cpitl gins, re txble in the ccumultion phse. Additionlly, from July 1, 2017, income from ssets supporting TRIS will not be eligible for n exemption from income tx on ernings, so the CGT relief provisions will be relevnt for supernnution fund members receiving TRIS. Essentilly, the trnsitionl CGT relief ensures ny cpitl gins tht might rise s result of supernnution fund members complying with the trnsfer blnce cp or becuse of TRIS losing the tx exemption will continue to receive concessionl tretment. The ppliction of CGT relief Trustees cn choose to pply temporry CGT relief if they hold the sset throughout the period November 9, 2016 to June 30, 2017 (the pre-commencement period ), nd must do so before they re required to lodge the fund s tx return. Assets purchsed or sold during the pre-commencement period re not eligible for relief. Applying CGT relief will: reset the cost bse of n sset to its mrket vlue (this is where trustees rellocte or re-proportion ssets from retirement phse to ccumultion phse). The mrket vlue would be determined under the ATO s vlution guidelines for SMSFs on the dte of the sset trnsfer, or June 30, 2017 where ssets re re-pportioned defer cpitl gin tht rises when resetting the cost bse for re-proportioning ssets where you use the proportionte method. If trustee hs been using the segregted method, nd either continues to use it or switches to the proportionte method, n sset must cese being segregted current pension sset t time during the pre-commencement period to be eligible for relief. The cpitl gin or loss for tht sset will then be entirely disregrded. An sset ceses to be segregted current pension sset when: it is trnsferred out of the pool of segregted current pension ssets; or the trustee mkes nd records n election to switch to the proportionte method. The ATO hs published Lw Compnion Guideline on the relief mesures, nd we re hppy to provide you with link to this nd discuss your options. Ibbotson + Mosctelli June

Q: WHO IS ASSESSABLE ON INTEREST INCOME? A: THOSE WHO BENEFIT It is firly well-estblished nd welcome ct for n unt or uncle or of course prent to strt svings ccount for new ddition to the fmily.

7 Q: WHO IS ASSESSABLE ON INTEREST INCOME? A: THOSE WHO BENEFIT It is firly well-estblished nd welcome ct for n unt or uncle or of course prent to strt svings ccount for new ddition to the fmily. It is not so common however, to fctor in the txtion obligtions tht my rise from this generosity. A young child my not be ble to rech the buttons t the ATM, but they cn certinly hve bnk ccounts in their own nme. Nturlly it is child s gurdin who will mnge their finncil mtters, nd therefore prent my operte svings ccount on behlf of their child. For txtion however, while the ccount my be in the child s nme, the underlying tx principle tht previls is tht investment income (in this cse, the bnk ccount s interest) is ssessble to the person who beneficilly owns the money (not necessrily who leglly owns it). The tx rules in opertion here re not limited to children s sving ccounts, but it is scenrio tht is useful in describing the principles t work. In fct, the Txtion Commissioner hs recently issued guidnce tht consolidtes previous rulings nd determintions in reltion to not just children s svings ccounts but lso monetry gifts to child, joint bnk ccounts, nd joint signtories to bnk ccount. In ech sitution, it hs been determined tht interest income on bnk ccount is ssessble to the person or persons who beneficilly own the money in the ccount. TAX RATES FOR MINORS The ATO nd other government gencies determine minor to be those under the ge of 18, however some people re surprised to find out tht the tx rtes tht cn be pplied to the unerned (tht is, pssive) income of such young txpyers cn seem so punitive. For minors, the tx free threshold is mere $416. Between $417 nd $1,307 the rte is set t 68% (66% fter June 30, 2017, when the Temporry Budget Repir levy expires). From $1,308, the top (dult) mrginl rte pplies. But the reson for the seemingly hrsh rtes hs little to do with punishing the kids nd more to do with the behviour of the older genertion. These rtes (nd other mesures, such s the exceptions delt with below) were introduced to stop or discourge dults from chnnelling portion of their income through their child s bnk ccount, thus tking dvntge of lower mrginl nd effective tx rtes for themselves. EXCEPTED INCOME, EXCEPTED PERSONS There re, of course, exceptions. Brodly, the income derived by minors is txed t punitive rte unless the minor is n excepted person or the income is excepted income (so clled s these re n exception from the minors tx regime). An excepted person is minor who is ny of the following (with specil conditions to be met): full time worker person with disbility, or person with double orphn pension. Excepted income includes: employment income txble pensions or pyments from Centrelink or the Deprtment of Veterns Affirs Ibbotson + Mosctelli June

8 Who is ssessble on interest income? cont compenstion, supernnution or pension fund benefits income from decesed person s estte income from property trnsferred to the minor s result of the deth of nother person or fmily brekdown, or income in the form of dmges for n injury the minor suffered income from the minor s own income from prtnership in which the minor ws n ctive prtner net cpitl gins from the disposl of ny property or investments listed bove, nd income from the investment of ny of the mounts listed bove. Excepted net income (tht is, excepted income less relted deductions) is txed t dult rtes nd the tx libility on tht income cn be reduced by ny low income tx offset entitlement. Any other income derived by the minor is txed t the higher minor s rtes. The low income tx offset cnnot be used to offset the tx libility. JOINT ACCOUNTS Interest income on joint bnk ccount is ssessble to the ccount holders in proportion to their beneficil ownership of the money. Unless there is evidence to the contrry, the ATO will presume tht ech joint ccount holder beneficilly owns the money in equl shres. Relevnt evidence tht the joint ccount holders do not beneficilly own the money in equl shres cn include informtion regrding: who contributed to the ccount in wht proportions contributions were mde the nture of the contributions who drew on the ccount, nd who used the money (nd ccrued interest) s their own property. Txpyers my lso provide evidence tht n ccount holder holds money in the ccount on trust for others (for which there my of course rise the requirement for the ccount holder to lodge trust tx return). LEADING BY EXAMPLE The ATO lso issued four cse studies to help illustrte how the rules operte. Child sving ccount (child hs no beneficil ownership) Dvid, ged 10, hs n ccount in his nme. The ccount ws opened by his mother, who initilly deposited $7,000 of her own money into it. Dvid s mother is signtory to the ccount, nd mkes regulr deposits nd withdrwls to py for his school nd other expenses. Dvid s mother spends the money in the ccount s if it belongs to her. She is considered to be the beneficil owner. Dvid s mother is ssessble on the interest income erned from the ccount. Child svings ccount (prent opertes s trustee) Mtthew, ged 14, hs ccumulted $7,000 over the yers from birthdys nd other specil occsions. His mother hs plced the money into bnk ccount in his nme, which she opertes on his behlf. Mtthew s mother does not use the money in the ccount for herself or others. He erns $490 in interest during n income yer. Mtthew hs beneficil ownership of the money in the ccount nd is therefore ssessble on ll of the interest income (the birthdy gifts re not ssessble income). However, s he is under 18 yers of ge, Mtthew will be subject to higher rtes of tx under the minor s txtion rules. If Mtthew shows the interest in his tx return for tht income yer, his mother will not need to lodge trust tx return. (Note tht he is not n excepted person becuse he is minor nd not within one of the exceptions noted bove.) The interest is eligible ssessble income becuse it is not within ny of the ctegories of excepted income. Joint signtory (no beneficil ownership) Juli s elderly unt hs bnk ccount in the unt s nme, nd Juli is joint signtory to tht ccount. Juli will only operte the ccount if her unt is unble to do so due to ill helth. All the funds in the ccount re the unt s, nd Juli is not entitled to personlly receive ny money from the ccount. Juli does not hve ny beneficil ownership of the money in the ccount nd is therefore not ssessble on the interest income. Joint bnk ccount (rebutting presumption of equl ownership) Jne nd Stephnie re ech ssessed to income tx on hlf of the interest not returned on their joint bnk ccount. Jne lter estblishes tht Stephnie contributed ll of the money to the ccount nd usully treted ll of the interest s her money. Jne hs only once drwn funds from the ccount. Stephnie hs beneficil ownership of the money in the ccount nd is therefore ssessble on ll of the interest income. The ATO mends Stephnie s nd Jne s income tx ssessments ccordingly. Ibbotson + Mosctelli June

checks are tax current income.

checks are tax current income. Humn Short Term Disbility Pln Wht is Disbility Insurnce? An esy explntion is; Disbility Insurnce is protection for your pycheck. Imgine if you were suddenly disbled, unble to work, due to n ccident or