Southern Accounting and Consulting Services Pty Ltd 2018 YEAR END TAX PLANNING

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1 Southern Accounting and Consulting Services Pty Ltd 2018 YEAR END TAX PLANNING This paper outlines some of the basic tax planning strategies that may reduce the amount of tax otherwise payable by taxpayers and thus contribute to the maximisation of their wealth. Generally, year end tax planning seeks to develop strategies to either defer assessable income to the next financial year and or to bring forward deductions to the current financial year. These techniques in effect shift profit between financial years. Other tax effective strategies, which are designed to give permanent tax relief, are also outlined for your consideration. When considering the relative merits of the following techniques, it is important to consider both the tax implications and commercial implications of each strategy. Commercial considerations often dictate that the recognition of revenue must be accelerated and the recognition of costs be deferred, this being in direct conflict with taxation considerations. Therefore, proper tax planning dictates that the tax benefits of a strategy must be tempered by due regard for commercial considerations Clearly, not all the tax planning techniques detailed below will be applicable to every taxpayer, however, they have been provided for your interest and information. Should you have any queries in relation to the above, please do not hesitate to contact this office before 30 June 2018 as we will be pleased to assist you in implementing any relevant tax planning techniques. Deferral of assessable income Advance receipts Income is not assessable until a product or service has been provided. Therefore, advance receipts, for goods or services to be provided at some later date, should be reflected as unearned income in the balance sheet at the end of the year and not included as income of the period. Business income For those taxpayers who have their accounts prepared on an accruals basis, business income is generally derived when the right to receive it as a debt which is due and owing arises i.e. a legally enforceable debt. Credit and instalment sales are therefore typically included in the year of sale, even though payment may not be received for some considerable time. Therefore, delay performing services or providing goods until after 30 June, do not accelerate the raising of accounts for services rendered and consider deferring raising accounts for interim fees for incomplete work. Given the time value of money a dollar paid in tax later costs less than a dollar paid now. For those taxpayers who have their accounts prepared on a cash basis, business income is generally derived when it is actually received. Therefore do not accelerate the actual receipt of income by delaying the issuing of accounts for product or services rendered. Capital gains If your 2017/18 income is abnormally low, it may be time to realise a capital gain rather than waiting until next year. Further, if you have realised capital gains for the year you may wish to accelerate the disposal of an asset at a loss into the current year (noting the ATO view on wash-sales). Seek to maximise your income in the form of capital gains on the disposal of assets (held for at least one year) as from 1 October From that date individuals and trusts will only be assessable on 50% of any calculated capital gain (no allowance for indexation). In effect the gain will be assessed at only half of the taxpayer s marginal tax rate e.g. a maximum of 23.50% (including Medicare levy) for an individual. Superannuation funds will only be assessable on 66.66% of any calculated capital gain. In effect the gain will be assessed at a 10% flat rate of tax. Companies are not eligible for CGT discounting. Taxpayers can however still elect to have the gain assessed under the indexation method (gain is adjusted for inflation) if that provides a better outcome. Assets acquired before 20 September 1985 are exempt from CGT as is the

2 disposal of the family home in most instances. It should be noted that it is expected to be ALP/Greens policy to make changes to the current CGT rules (if they are in a position to do so after the next Federal election due to be held anytime between 4/08/18 and 18/05/19) which may impact on CGT discounting (reduce or eliminating altogether) clients who have been considering selling assets or crystallising large unrealised gains may wish to do so sooner rather than later to take advantage of the current concessional rules. Further, capital gains are assessable in the financial year that a contract of sale is signed and exchanged, so consider deferring selling assets until after June 30 th to defer the incidence of the tax liability to the following year, especially if your other income will be lower in a later year and a lower marginal rate of tax will be applied to the assessable gain, or if the delay will qualify the gain for the discount method of calculating the gain. Dividends and interest income Interest income for tax purposes is usually only assessable when received (unless otherwise paid or credited on the taxpayers behalf). Therefore, consider investing spare cash in commercial bills or other interest bearing deposits that do not mature until after 30 June, to defer the tax liability on the interest income until the following financial year. Method of Accounting Pursuant to Taxation Ruling (TR98/1) a conclusion must be made by the taxpayer of which method of accounting is most appropriate to their particular situation being that method which gives a substantially correct reflex of income. That is taxpayers are free to appropriately self assess their situation. However, the ATO expect that most businesses are required to account for income on the accruals basis. Although, small professional businesses and taxpayers who have adopted the simplified tax system, can account for their income and expenses on the cash basis of accounting. Under the cash basis debtors are not included in income for the year and creditors not included in expenses. Reduction in tax rates & increases in tax free thresholds From 1 July 2012 the tax free threshold rose from $6000 to $18,200 for adults ($ after the impact of the low income tax offset), and marginal tax rates (MTR) rose from 15% to 19% for taxable income to $37000, from 30% to 32.5% for taxable incomes to $87000 (will increase to $90,000 for 2019), and 37% for incomes between $87,000 and $180,000 and 45% thereafter. The Government has legislated changes announced in the 2017 Federal Budget, which increase the $87K MTR threshold to $90K from 1/7/18; and introducing a non-refundable Middle Income Tax Offset of up to $530 from that date (increasing to $645 from 1/07/22). Also from 1/7/22 the $37K MTR threshold will increase to $41K and the $90K MTR threshold will increase to $120K; and from 1/7/24 the $120K MTR threshold will increase to $200K (thus removing the 32.5% MTR range), and the 45% MTR will commence on incomes above $200K. In addition the Government has legislated to lower the company tax rate by 1.5% to 28.5% from 1 July 2016 and again by 1% to 27.5% from 1 July 2017 for eligible companies (turnover of less than $10M for 2018) (ultimately reducing to 25% for companies with aggregate turnover of $50M from 1/07/26) and to provide a 8% (increasing progressively from 2024 to 2027 to 16%) tax discount to certain non-incorporated businesses. So if taxes are going to rise bring forward receipt of income, if taxes are falling defer receipt of income. Rental income Rental income is generally liable to tax on receipt. For such taxpayers, rent uncollected at 30 June will be subject to tax in the following financial year. Salary Sacrifice Consider the benefits of salary sacrificing cash income for fringe benefits paid for out of pre-tax dollars. This will enable you to avoid or defer taxation on current income (you save your marginal tax rate) and possibly avoid paying the 10% GST on any asset purchase. Salary sacrificing of superannuation contributions or personal use assets such as a lap top computer used primarily for work purposes (no limit on the number of similar items per year under concessions announced in the 2016 Federal Budget), give rise to no Fringe Benefits Tax (FBT), whereas other benefits such as a company car may still provide taxation savings despite being subject to FBT. Note that to be an effective the salary sacrifice agreement must be prospective and not retrospective i.e. determined before work is commenced not after it has been provided.

3 Sale of fixed assets It is worth considering deferring the realisation of fixed assets which will give rise to a depreciation recapture (profit) (Balancing charge). Acceleration of allowable deductions Accrued expenses Accrued expenses e.g. group tax, telephone, electricity, gas may be claimed in the year they are incurred even though the payment may be made in the following year. However provisions such as annual leave and sick leave are not deductible until they are actually paid. Bad debts Bad debts must generally have previously been brought into assessable income and to be deductible must be written off during this year of income. The debt must clearly be bad before a deduction will be allowed i.e. all reasonable steps to collect the debt must have been exhausted. Balancing adjustments When you dispose of an asset (or write it off for scrap value) and the amount received on disposal is less than the assets written down tax value (depreciation value), the difference between the two amounts can be claimed as a tax deduction (alternatively the profit must be included as income so be careful with agreed trade-in valuations). Black hole expenditure Review expenditure to ensure that any post 1 July 2005 deductible black hole expenditure (capital expenditure for which no deduction allowed under tax law) is identified e.g. expenditure to establish a marketing or business plan, research into likely markets of profitability of a business, the establishment of business premises, company incorporation costs or the capital investment in assets of the business. Also shareholders, beneficiaries and partners can claim liquidation and deregistration costs where the company, trust or partnership carried on a business. In addition from 1 July 2016 start-up small businesses (turnover of less than $2M) are able to claim an immediate deduction for establishment costs (e.g. company incorporation fees, legal and accounting fees), instead of claiming costs over a 5 year period under the black hole deduction provisions. Note that the non-commercial losses rules which apply to sole traders and partnerships may operate to ensure that the costs are capitalised and carried forward to soak up future income. Borrowing expenses Borrowings expenses (e.g. legal expenses, stamp duty, valuation and survey fees, mortgage insurance and guarantee fees) are deductible if the proceeds of the loan are used for income producing purposes. If expenses total more than $100, the deduction is spread over the lesser of the life of the loan or 5 years. Business Closure Costs When a business ceases and the owners continue to incur costs (e.g. office / factory rent, equipment leases, interest on business loans), those costs are generally tax deductible, even if incurred quite sometime after the business ceased. Capital Expenditure accelerated depreciation Small businesses (turnover of less than $10M) with an ABN can claim an instant deduction of up to $20000 per item for certain capital expenditure incurred between 12/5/15 and 30/06/18 (items costing more than $20K must be depreciated under normal rules i.e. 15% in the year of purchase and 30% thereafter). So seek to take advantage of the tax deductions that can be claimed to reduce profits and tax liabilities in the 2018 financial year, before the deduction limit reverts back to the previous $1000 write-off limit. The Government announced in the 2018 Budget, that it will legislate (subject to approval by the opposition in the Senate) to extend the end date for the $20K deduction until 30/06/19 so take advantage of the higher tax deductions that are definitely on offer for the 2018 financial year.

4 Capital Gains Tax and personal use assets Personal use assets costing less than $10,000 which are kept primarily for personal use or enjoyment are exempt from any CGT upon disposal. Conversely any capital loss cannot be claimed regardless of the initial cost of the asset. Capital Gains Tax Rollover Relief Individual small businesses (assets of less than $6M and turnover of less than $2M) will be able to claim a 50% active asset exemption (replaces 50% goodwill exemption), in addition to only including 50% of any realised capital gain as assessable income under the general 50% CGT discount. The net effect is that individual small businesses will only be taxable on a maximum 25% of any realised capital gain. The gain may become tax free if the gain is rolled into replacement assets or is applied towards the $500,000 capital gains tax retirement exemption (those aged under 55 must deposit the gain into a super fund). Further, any gain on business assets held continuously for 15 years, by an individual taxpayer aged at least 55 years of age and who intends to retire or is incapacitated, is exempt from tax. From 1 July 2016, small business are able to change the legal structure of their business without incurring any income tax liability when active assets (not passive assets) (such as CGT assets, trading stock, revenue assets and depreciating assets) are transferred by one entity to another as long as there is no change to ultimate economic ownership. Capital losses Capital losses can only be offset against capital gains, not income from other sources. If you feel that you may realise a capital loss in 2017/18 it may be worthwhile reviewing your portfolio and consider accelerating the disposal of assets/shares to offset any gains against such losses. Consider a wash sale to crystallize losses (take care as the ATO may seek to review such transactions) and whether non-tax deductible costs can be included in an assets cost base. Capital write-off on buildings A deduction of either 2.5% or 4% is available for the capital write-off on the cost of an income producing building, depending on the date the construction of the building commenced. Consider commissioning a quantity surveyor to prepare a Depreciation Report as the basis for claiming deductions (real estate agent or an accountants estimates are not sufficient to satisfy the ATO). Note that you can only claim a deduction for capital works on residential properties (as opposed to commercial residential properties such as boarding houses, motels, etc) built after 17 July In Government changes announced in the 2017 Budget, income tax deductions for the decline in value of previously used plant and equipment in rental premises used for residential accommodation are no longer allowed (i.e. for rental properties bought after 7.30pm 9 May 2018) i.e. only the original owner can claim depreciation with subsequent owners only being able to claim depreciation on capital assets they install. Ceasing a business Costs incurred in ceasing to carry on a business are deductible over a five year period. These costs include legal fees, site rectification costs, removal costs, and compensation costs (e.g. early contract termination payments). Computer software Software purchases of less than $20,000 can be claimed in full as a deduction by small business entity (SBE) taxpayers; non-business taxpayers can claim a full deduction for purchases of less than $300; for non-sbe taxpayers the tax deductible limit is $1000, with greater amounts depreciated at a prime cost rate of 25%pa. Note that in-house software (software purchased or developed for use in the business and not for resale) does not qualify for the accelerated $20K capital assets it must be depreciated under the uniform capital allowance or simplified depreciation rules for SBE s. Consumable goods Consumable goods (e.g. office stationery, spare parts, etc) should be purchased before the end of June to get a higher deduction claim. Deductions when no income is earned To claim a tax deduction there must generally be a nexus between an expense and current income. There are some exemptions to this rule e.g. members of professional industry organisations can continue to claim deductions for subscriptions paid when they in retirement or during non-working periods (limit of $42 per membership); where a business

5 ceases to operate certain unavoidable costs incurred when operating the business continue to be deductible e.g. loan interest, lease payments, and blackhole deductions; various rental property deductions as long as the property remains genuinely available for rent (onus of proof vests with the taxpayer to prove this by reference to real estate listings / advertising costs, etc) and if the property was not available for rent the cost must be apportioned between the amount deductible and not deductible; if a rental property is unavailable for rent because it is being built, renovated or repaired as long as it is your intention to rent it out (and not put the property on the market for sale again the onus of proof of intention remains with the taxpayer) you can still claim certain costs e.g. loan interest, council and water rates, and land tax (if the intention to rent changes to intention to sell or live in the property you cannot claim expenses incurred after the time of change of intention); the cost of borrowing money to invest in publically listed or private company shares is deductible as long as there is a real prospect of dividends being received from the investment (e.g. company has history of making profits and paying dividends). Depreciation - generally Consider whether current rates of depreciation (prime cost or diminishing value) on business assets adequately reflect their useful lives. If not then accelerate the cost write off of the asset by adjusting the applicable rate of depreciation. If you are considering purchasing new plant and equipment do so before 30 June. Non- business purchases of plant and equipment (i.e. salary and wage work related expenses) that does not exceed $300 may be fully written off in the income year it was acquired. Similarly, where equipment is purchased that exceeds $300; it may still be fully written off where its effective useful life is considered to be less than three years. Depreciation simplified tax system From 1 July 2016, small business taxpayers, businesses with a turnover of less than $10M (previously $2M), can self-elect to adopt simplified depreciation rules. That is they can immediately write off most depreciating assets costing less than $1,000 each (low cost assets); pool most other depreciating assets such as cars and computers into a general pool and depreciate at 30% diminishing value method (in the 2012 and earlier financial years assets were entered into a general or long life pool depending on whether their useful lives were more / less than 25 years and depreciated at either 5% or 30%); and depreciate most newly acquired assets at 15% in the first year of purchase regardless of when the asset was purchased during the year. The Government announced in the 2015 Federal Budget that small businesses with an ABN can claim an accelerated immediate deductions for each asset purchased up to a maximum cost of $20,000 (concession applies to most assets but excludes those assets for which special rules already apply e.g. in-house software, horticultural plants, trading stock, etc.) for purchases made between 12/05/15 and 30/06/18 (assets costing more than $20,000 can be added to the small business asset pool and depreciated at 15% in the first year and 30% diminishing vale thereafter). But take care that the generosity of the tax break does not cloud your commercial instincts, as a company would need to spend $1.00 just to get back 30 cents (or 27.5 cents after the introduction of the lower company tax rate for small companies deriving active income in the 2018 financial year) so would still be out of pocket by 70 cents (72.5 cents). After 1 July 2018, the temporary $20,000 limit rules were intended to cease and deductions revert to the $1,000 limit and eligibility criteria noted immediately above however the Government announced in the 2018 Budget, that it will legislate (subject to approval by the opposition in the Senate) to extend the $20K deduction deadline until 1 July Donations to registered charities Donations are only deductible where there is taxable income. If there is insufficient taxable income to absorb the entire payment, consider deferring such expenses until a later year. Employee bonuses Employee bonuses should be paid before the end of the financial year and PAYGWH tax deducted. Although a deduction can be claimed as long as you have formally resolved to pay an employee bonus before the end of the financial year, even though it may not actually be paid until the following year. HELP debts repayment discount When you made a voluntary repayment of any HELP debts (formerly HECS) to the ATO before the 1 st of June each year you reduce the balance upon which indexation is applied (in 2018 indexation of 1.9% was applied to debts so voluntary payments effectively saves 1.9% of the amount paid). You have to start paying your HELP debt through the tax system upon

6 the lodgement of your tax return once your taxable income exceeds $55,874 for the 2018 financial year. Note that in changes due that took effect from 1 January 2017, the Government removed the HECS-HELP discount of 10% for eligible students and the voluntary HELP repayment bonus of 5%. Help debt repayments for expats Australian graduates living overseas must also make HECS payments based on their income in the 2016/17 and later financial years, if their income exceeds the repayment threshold (commencing at 4% of taxable income of $55,874 or more). The rules require those going overseas for more than 6 months from 1 January 2017 to register with the ATO, whilst those already abroad must register by 1 July Home office costs If the use of a home office is essential or incidental to earning income ensure that you claim HO running costs such as power, heating and associated costs either on a floor space basis (e.g. for electricity use), percentage of usage basis (e.g. for phone use), or set rate per hour that the home office is occupied and utilised (e.g. from 1 July 2014 a rate of 45 cents [previously 34 cents] per hour supported by diary notations of hours spent working in the home office for at least 4 weeks is generally accepted by the ATO). However, no deduction is available for HO occupancy costs such as mortgage interest, rent and insurance unless you conduct a business from your home office. Insurance premiums If you are considering taking out a new insurance policy for the business, you may wish to do it now and pay the premium before 30 June. Only superannuation funds are able to legitimately claim a deduction for life assurance policy premiums. Motor vehicle deductions Taxpayers are free to choose among the two methods of claiming motor vehicle expenses (log book actual cost method and set rate per kilometre method) (the 12% of cost method, 33.33% of actual cost method were only available for the 2016 and earlier financial years) and can change the method adopted in any given year to the method which maximises their tax deduction. Also remember that joint owners of a vehicle can both make clams for expenses e.g. under the set rate per kilometre method joint owners can each claim up to the maximum 5,000 kilometres per annum. To maximise your claim for business usage of the car ensure that you have a valid log book record which can be relied upon for up to 5 years as long as usage patterns or employment does not change significantly over that period. In changes announced in the 2015 Federal Budget, only a single rate of 66 cents per kilometre irrespective of engine capacity can be claimed under the set rate per kilometre method for the 2016 and later financial years. Non-commercial business losses Where individuals incur losses from business activities, the non-commercial loss rules that prevent such losses from offsetting other assessable income should be considered. These rules apply to hobby activities that because of the scale or nature of the activity do not satisfy the determinants of a business. Thus, only losses incurred in undertaking or carrying on a genuine business should be claimed as a tax deduction. Prepayments Costs are normally deductible when incurred, in the sense that a legally enforceable obligation to pay has arisen. Deductibility can be sped up by paying in advance. The type of expense that you can choose to repay includes rent, lease payments on cars and office equipment, interest and subscriptions. The number of taxpayers who can claim an immediate tax deduction under the 13 month prepayments rule is now limited to small business taxpayers (i.e. businesses with a 3 year average turnover of less than $2m) and individuals not carrying on a business (e.g. an individual can claim a deduction for pre-paying next years income protection insurance). In effect the immediate deduction has been replaced by deductibility over the period over which the services are provided. Reduction in tax rates & increases in tax free thresholds Tax reform is a topical subject at the moment, with mooted changes to marginal tax rates scales and reductions in company tax rates. So if taxes are going to rise delay the incidence of expenses to get greater benefit from the deduction in a later financial year, conversely, if taxes are falling you should bring forward expenses to keep profits subject the current higher tax as low as possible (e.g. SGC payments normally due after the end of the financial year in July, unpaid workers

7 compensation payments, short term office consumables, investment property expenses such as insurance and rates, loan interest, income protection insurance, and pre-pay business travel expenses even if travel actually takes place in the following financial year). Rental property depreciation / capital allowances Consider commissioning a quantity surveyor to prepare a Depreciation Report on your rental property building and or chattels to ensure that you maximise your tax deduction for depreciation (over the useful life of the asset for plant and equipment) and or capital allowances (at either 2.5% or 4% p.a. for buildings and structural improvements). For example refer to In Government changes announced in the 2017 Budget, eligibility for claiming depreciation deductions, on properties purchased after 7.30pm 9 May 2018, are now limited to the original owner of the building, with subsequent owners only able to claim depreciation on work / items that they actually installed themselves therefore the total purchase cost will now form part of the cost base for CGT purposes (properties owned before that date remain unaffected by the new rules). Rental property deductions Landlords can claim tax deductions for a broad range of rental property deductions such as advertising for tenants, body corporate fees, cleaning, council rates, gardening, loan interest, land tax, pest control, property agent fees, repairs and maintenance, and water rates. So landlords should adopt appropriate record keeping techniques to obtain and retain documentary evidence of costs incurred to form the basis of tax deductions. The documentation should be retained for at least 5 years after the lodgement of a current year tax return. Further, landlords can commission the preparation of a Depreciation Report by a quantity surveyor to facilitate tax deductions for capital allowances on buildings and depreciation of fixtures and fittings and equipment. Landlords with rental properties in resort areas should take care that they only claim expenses that relate to the period that the property was actually rented or genuinely available for rent as if reviewed by the ATO they may reduce the claim for period when the landlord occupied the property. The Government announced in the 2017 Budget, that it will deny travel costs to visit rental properties for existing and new rental properties from 1 July 2017 and that it will limit depreciation deductions to the owners that installed depreciable assets in the property, with subsequent owners of properties purchased after 7.30pm 9 May 2017 ineligible to claim depreciation deductions. Repairs and maintenance Repairs and maintenance are fully deductible on income producing property and equipment (except where the expenses are initial repairs undertaken on rental properties before or soon after tenants take up residence) so it may be time to inspect your property and depreciable equipment and undertake any necessary repairs before the end of the year. Research and development tax incentive The R&D tax incentive encourages companies to engage in R&D. It has two components, those firms with an annual turnover of less than $20 million can claim a refundable tax offset of expenditure, all other firms can claim a (nonrefundable) tax offset for their expenditure. The offset replaced the former R&D tax concession from 2011, which was applied differently and had different entitlements. Sale of fixed assets It is worth considering accelerating the realisation of fixed assets which will produce a loss on sale. Self-education expenses Costs of self-education can be claimed as tax deductions provided the study is directly related to either maintaining or improving current occupational skills or is likely to increase your income from your current employment (but generally excludes cost of personal development courses). Eligible costs included course fees, books, stationary, and student union fees but exclude any HELP repayments. Generally, the first $250 of self-education costs is not claimable which can include non-tax deductible costs such as child minding costs. Superannuation contributions Co-contribution scheme Salary and wage and self-employed lower assessable income earning workers (earning less than $36,813 pa to get the full benefit reduced amounts on income up to $51,813 pa for 2018) (who are aged less than 71 and do not hold a temporary resident visa) should consider making personal superannuation contributions, as from 1 st July 2009 the Government will

8 match contributions paid by such workers on a $0.50 for $1.00 (was $1.00 for $1.00 for the 2013 financial year) contributed basis to a maximum of $500pa (was previously $ ). The amount of co-contribution payment reduces by 5 cents for every dollar of assessable income (salary sacrificed contributions and reportable fringe benefits) over $36,813. Contributions must be paid before 30 th June. For individuals to be eligible for this scheme they must earn at least 10% of total income from eligible employment, or carrying on a business, or a combination of both; if aged between 65 and 71 years of age (at the end of the financial year in which you make your after tax contribution) individuals must be gainfully employed for at least 40 hours in any 30 day period during the financial year in which the contribution is made. Superannuation contributions salary sacrifice Consider exchanging pre-tax salary directed into employee superannuation contributions for superannuation contributions paid by your employer (i.e. convert to an employee who receives no employer-sponsored superannuation support). This has the dual effect of limiting tax on the initial salary income and subsequent investment income to 15% rather than being taxed at your marginal rate of up to 45% (plus MCL & MCLS if applicable). Contributions must be paid before 30 th June, and the amount is limited to $25,000 for members of all ages from 1 st July Superannuation contributions (SGC payments) Employer superannuation contributions made on behalf of employees (and some contractors employed under a contract that is wholly or principally for the provision of services) should be paid before 30 June to take advantage of their deductibility in 2017/18 (find out from your fund how early you need to makes payments to ensure your fund can process your payment before 30 th June). The payment of the Superannuation Guarantee Charge (9.50% based on ordinary times earnings) must be paid by 28 July to claim a deduction in the current financial year. The benefits of making superannuation contributions for high income earners increase from 1 July 2006, with the abolition of the superannuation surcharge, however the former age based tax deductible limits were replaced by flat tax deductible limits from 1 July In 2017/18 all Australians up to age 75, whether an employee or self-employed, will be able to claim a tax deduction for contributions to super regardless of the portion of their income that they derive from a salary and wage from 1 July From 1 July 2012 until 30 th June 2017 those members with adjusted incomes greater than $300K had the tax rate on their contributions increased from 15% to 30% (normal 15% plus a 15% surcharge); However, the threshold amount for liability to the 15% surcharge reduced to $250,000 from 1 July If the availability of cash is a problem, employers can consider borrowing to fund contributions for employees (loan would need to be structured properly to ensure deductibility of interest) or employees/the self employed could consider making non-cash contributions to self managed fund (e.g. shares). Obviously the capital gains tax and possible stamp duty implications of the deemed disposal of the assets so contributed must be considered. Self-employed persons can now claim a deduction for the all superannuation contributions made up to the maximum threshold amount (and they also qualify for the superannuation co-contribution payment). Self employed contributions must be paid before 30 th June. Persons aged under 65 are free to contribute to superannuation, however those aged between 65 and 74 are required to pass a work test (must establish that they have performed some sort of work activity for at least 40 hours in any given 30 day period during the year) to be eligible to make contributions to superannuation. The ATO in TR 2010/1 outline when they will accept that a contribution has been made and hence the year in which contributions are tax deductible e.g. cash when it is received by the fund; cheque or promissory note when it is received by the fund not when it is mailed; and in-specie property contributions when the fund acquires beneficial ownership and not when legal ownership changes (i.e. when contracts are signed and not when the title has been transferred). Superannuation Low income superannuation tax offset (was previously Low income super contribution) The Government introduced a low income superannuation tax offset (LISTO), which replaced the low income superannuation contribution (LISC) policy that was repealed from 1 July Effective 1 July 2017, eligible individuals with an adjusted taxable income up to $37,000 will receive a LISTO payment to their super fund. The LISTO payment will be equal to 15% of their total concessional (pre-tax) super contributions for an income year, capped at $500. Under the previous Low income super contribution system which operated from 1 July 2012, the Government provided a low income superannuation contribution of up to $500 annually for eligible individuals (excludes holders of temporary

9 resident visas) on adjusted incomes of up to $37,000 (10% or more of your income must come from business or employment activities). The amount paid was calculated by applying a 15% matching rate to concessional contributions made by, or for an individual on adjusted taxable incomes of less than $37K, with the maximum amount payable limited to a non-indexed $500. The payment will be made to the members fund in the following financial year. Legislation has been enacted that will abolish this scheme after the 2017/18 financial year and determinations of LISC will cease at 1 July 2019 (claims not processed after 30 th June 2019). Tax Debts Ideally, plan ahead for anticipated tax debts calculate your estimated year end profit and implement strategies to ensure that you have cash available to make payments (taxpayers with good tax return lodgement histories can usually defer lodgement of tax returns until 15 May of the next year after the end of the financial year which gives you extra time to find the cash). If you have cash available businesses with accumulated tax debts should make payments to prevent the ATO from charging you high rates on interest on the debt and from commencing winding up action. If cash is not available to pay the whole amount then you should seek a payment arrangement with the ATO. If you simply ignore the debt it will end up costing far more, dealing with any wind-up action instigated by the ATO (legal costs, disruption to business, etc) than simply dealing with the debt in a timely, planned and controlled manner. Tax Office reporting requirements There are certain things that businesses should do post 30 th June each year to ensure that meet their reporting obligations and avoid the imposition of penalties i.e. prepare payment summaries and provide to employees by 14 th July, prepare ATO payment summary report and submit to ATO by 14 August, pay the super guarantee amount for Q4 of the year by 28 July, prepare ATO taxable payments reports and submit to ATO by 28 August, and work on goals and visions for the next financial year remember that businesses do not plan to fail, they simply fail to plan. Trading stock Trading stock must be valued at 30 June at either cost price, market selling value or replacement value. A different basis may be adopted for each class of stock and even for each individual item of each class. Further the method of valuing trading stock may be changed at will each year. A taxpayer may be able to reduce or at least defer income by changing to a method which will produce a lower closing value than the method used in valuing opening stock. Remember, however, that this technique merely shifts profit between financial years as the closing stock for the year automatically becomes its opening value at the beginning of the next year. Valuing unwanted or obsolete stock increases your taxable income, so 'physically' scrap it. Work related expenses If you are gainfully employed (i.e. gain at least 10% of your income from employment e.g. directors fees) then you should seek to maximise claims for tax deductible work related expenses (e.g. expenses that are related to your employment income such private motor vehicle usage, mobile phone use, self education costs) which can be substantiated with appropriate documentary evidence. So get into the habit of obtaining and retaining appropriate documentary evidence of such expenses to enable you to substantiate any claims if reviewed by the ATO. Generally, claims for WRE s that exceed $300 must be substantiated (although claims for laundry costs of uniforms or protective clothing not exceeding $150 do not have to be substantiated even when total WRE claims exceed $300); for small or undocumentable expenses a diary notation will suffice as documentary evidence i.e. for items costing less than $10 and less than $200 in total for the financial year; in addition for deemed undocumentable expense situations where it would be unreasonable to obtain a receipt (e.g. parking meters, road tolls, etc) a diary notation would also be accepted as documentary evidence that the expense has been incurred (no cost limit per item and no total amount limit for the financial year). Clients should refer to an article entitled Substantiation of work related expenses located at Information Sheets on our website for further coverage. Other techniques Allocated pensions Once superannuation benefits are converted to a pension, all of the earnings of the superannuation fund relevant to the pension capital become tax free to the superannuation fund. Therefore, consider commencing an allocated pension on the

10 minimum withdrawal amount to save paying the 15% earnings tax and take advantage of the 15% pensioners rebate to create wealth tax effectively. Payments of pensions (and lump sum payments) to those aged 60 or older are generally tax free in the recipients hands. Allocated pensions commenced after July 2007 enable the pensioner to withdraw any amount at or above the minimum amount which is based on a pensioners age and their member balance in the fund e.g. 4% of the members opening superannuation fund balance if aged between 55-64, 5% if aged between 65-74, 6% if aged between 75-84, 10% if aged between 85-94, and 14% if aged 95 or older). Allocated pensions that are commenced under the transition to retirement conditions of release will have a minimum payment requirement as detailed above and a maximum annual payment limit of 10% of the account balance at the start of each year. Fund trustees should ensure that the funds concessional tax treatment is not adversely affected by ensuring that the minimum pension payment percentages are satisfied before 30 June each year. The Government announced in the 2017 Budget, that it will remove the tax free status of fund income used to pay a TTRIP from 1 July Australian Business Register If a new supplier has charged GST on a tax invoice check on the ABR to confirm that the supplier is registered for GST if it is not just pay the GST exclusive amount on the invoice. BAS /IAS Remember to always lodge your BAS/IAS by the lodgement deadline, even when there is nil activity / liability, to avoid late lodgement penalties being imposed, and having to deal with recovery action for ATO estimated GST/ PAYG instalment liabilities. Beneficiary and shareholder loans Unless complying with strict requirements concerning documentation, interest rates and repayments, loans by companies to its shareholders after 4 December 1977 could be deemed to be unfranked dividends and taxable in the hands of the shareholder. Therefore, take care that any loan is properly documented in a loan agreement which includes the following provisions re: written loan agreement; a term of no more than 7 years or 25 years if secured by real estate; a commercial rate of interest must be stipulated (5.3% for 2018 per the Div. 7A benchmark interest rates tables published on the ATO website) interest rates and principal repayment must be made every year to ensure that the loan is fully paid back within the maximum term of the loan. The Government announced in the 2016 Budget, that it will legislate (subject to approval by the opposition in the Senate) to change the term of a Div. 7A loan agreement to ten years. Bonuses An employer may make a balance day resolution to pay a reasonable bonus to an employee and claim the bonus as a tax deduction in that year, whereas the actual payment of the bonus may take place sometime in the following year (with appropriate PAYGWH deductions made and the amount included on the employees Payment Summary of the year of payment). The same arrangements can be applied to directors fees and appropriately authorised by a shareholders resolution if not paid in the same year as the obligation to pay arose (although PAYGWH obligations should be accounted for in the year in which the obligation to pay the fee arose not in the year when the payment was made. Business Structures Examine your business structure to ensure that you have an appropriate business structure in place and that the structure is employed correctly to maximise the benefits of same. a) Consideration should be given to conducting your business through or in conjunction with a unit or discretionary trust. Current trust law enables considerable tax savings to accrue via the use of trusts, whereby profits are distributed to beneficiaries subject to lower marginal tax rates than the business principles. Other taxation benefits of utilising trusts include: professional taxpayers can utilise trusts, in an administrative service trust arrangement, to alienate (split) personal exertion income to lower tax paying beneficiaries; the running costs of family motor vehicles, especially the second vehicle, are fully tax deductible if owned by the trustee company (noting FBT implications); and converting family home mortgage interest into a taxable deduction, by renting the property from the trust. Other benefits of trusts include assisting eligibility for social security payments/benefits, as an estate planning tool, and protecting assets such as the family home from litigation.

11 b) Self managed (SMSF) superannuation funds offer the possibility for members, to retain control over their investment monies and to maximise the after tax rate of return (and thus maximise the amount available for reinvestment) on a given investment by minimising the tax rate applicable to fund income to 10-15% less any tax credits such as imputation credits. Further those nearing retirement age should consider the benefits of structuring a tax effective allocated pension through a self managed fund. Self managed funds can seek to minimise their tax liability by claiming a deduction for life insurance premiums of members and by adjusting their investment mix to maximise the amount of imputation credits available to offset their tax liability. Assets expected to appreciate greatly in value should be transferred as in specie contributions to your SMSF to ensure that the ultimate tax liability on the capital gain is limited to 10%-15% rate of tax before the impact of tax credits. The introduction of employee choice on 1 July 2005 for people in receipt of employer sponsored superannuation offers the opportunity for employees to establish a SMSF and direct their employer and their own contributions together with the rollover of other superannuation investments held in managed funds into their SMSF. The introduction of instalment warrant borrowings for superannuation funds now enables funds to introduce leverage into their operations to maximise investments and minimise taxation. This form of borrowing means that super funds can be used to accumulate lifestyle assets (e.g. rental homes in a resort area) during the accumulation phase of the fund at current day prices to be fully utilised by the fund member when the fund enters pension phase. We advise clients needing advice on the wisdom of making decisions on the above strategies should seek the advice of a licensed financial planner as we are not able to advise on same as from 1 July 2016, after the removal of the accountants exemption. Business versus hobby activities Taxpayers who run a hobby as a business (e.g. small farm, boutique shop such as a coin shop) (either as a sole trader or in a partnership) as well as working in employment can claim business losses as a deduction to offset PAYGWH tax paid as long as the business operations satisfy certain tests (i.e. the operation has assets of more than $500K, or uses equipment valued at more than $100K, or has assessable income of at least $20K, or where the activity has produced a taxable profit in 3 of the previous 5 years) as long as their adjusted income does not exceed $250K pa (in which case losses are carried forward to offset any future business profits). Therefore, care should be taken in structuring operations to ensure that the eligibility criteria are satisfied. Capital Gains Tax and change of residency If you cease being a Australian resident for tax purposes, you are deemed to have disposed of each asset that is not taxable Australian property for its market value at the time you ceased being a resident; and in the case of any indirect property interest you are taken to have immediately re-acquired theses assets for their market value. So if you are planning an extended trip overseas and you retain Australian assets which you anticipate will appreciate in value, then you could choose to pay CGT on a deemed disposal at the time of your departure and when you return you will be deemed to have acquired the assets at their them market value, hence you will have avoided CGT on the increase in value whilst you were a nonresident for tax purposes. Capital Gains Tax and principal residence exemption for rental use A general exemption from the operating of capital gains tax on the family home is available to individual owners (not eligible if held in a company or trust). If the property becomes a rental property an exemption can be claimed for up to 6 years, as long as the owner has not purchased a replacement property. However, to claim the exemption you must first be able to demonstrate that you actually lived in the residence before it became a rental property (e.g. drivers license address, electoral roll address, utility accounts in your name, documentary evidence that your furniture was moved into the address, motor vehicle registration address, etc) or the ATO may not allow you to claim the exemption. Children s bank accounts If investing money for a child in a bank account ensure that the account is opened in the name of the child and that the childs TFN is provided to the institution and that the child is at least a co-signatory on the account otherwise the ATO may assess the parent on any interest income if the parent acts as trustee for the child in relation to the account. Further, if the child earns interest of $420 or more and does not quote a TFN then the institution is obligated to withhold PAYG tax of

12 47% on the entire amount of interest earned and must then lodge a tax return to obtain a refund of the PAYG tax. Interest earned on an account in the name of a parent as trustee for the child, and the parent controls income and expenditure of the account, must be included in the parents tax return as assessable income. Child maintenance trusts By settling income producing property into a trust established to provide child maintenance payments, income can be split to minor beneficiaries who are taxed at ordinary adult and not minor rates of tax. Therefore, minor beneficiaries can receive $18,200 tax free compared to $416 before the higher minors tax rate applies to non-excepted income. Child wages from related parties The payment of casual wages to children is tax deductible to the payer and the income is assessed according to ordinary concepts in the hands of the child (remember that wages paid to family members must be reasonable for the work performed). So the child pays tax at the ordinary marginal tax rate and can benefit from the tax free threshold and low income tax offset such payments are not subject to the Div 6AA penalty tax rates which apply to unearned income paid to children (e.g. trust distributions). So children under the age of 18 can be paid as much as $20,542 in tax free wages. So employing your children through a family business to provide support or administration services enables you to reduce taxable profit by making tax free payments to your children (they in turn can use the money to pay their school fees so in effect school fees become tax deductible!). Companies and tax losses In order for a company to claim a tax deduction for a loss from a previous income year, it must pass either of the following tests re: a majority of the shareholders at the time the company incurred the losses must remain shareholders when the losses are recouped; or the company carries on the same business in the year of the deduction as it did in the year it incurred the losses and it did not enter into transactions that were designed to build up its income or losses. Contractor versus employees When looking to resource your business operations if you can employ contractors who supply you with their ABN and not PAYGWH employees, employers can avoid additional bookwork, insurance, payroll tax, superannuation guarantee payments, sick leave obligations, holiday pay obligations, and long service leave obligations. This may well result in total labour savings. Debt Levy The temporary debt levy of 2% on individual tax liabilities of over $180K ended on 30th June Debt Management Different rates of interest are applicable to different types of debt; and some debt interest is tax deductible and some is not. As a general rule you should seek to pay off those debts that are not tax deductible first (e.g. home loan interest) and then seek to pay off tax deductible debts (e.g. rental property loan). Further, when reducing debts seek to pay off those debts that have a higher rate of interest first such as credit card debt and then the debts with a lower rate of interest such as a home loan. Delay retirement Given that most superannuation law changes apply to retirees aged 60 or older, this provides a strong incentive to keep working for as long as possible. Those incentives include re: private superannuation fund pension or lump sum payments to members aged 60 or older are tax free; public sector funds payments to members are taxed at a lower rate; retirees can delay drawing down on their pension until age 65; retirees can make pre-tax contributions to super until they reach age 75; and workers and the self employed of all ages can make concessional contributions of up to $25K per annum for Employee share benefit schemes A tax exemption is available on the first $1,000 of benefits received under an ESBS and any resulting tax liability can be deferred in certain circumstances. From 1 st July 2009 tax on ESBS will be paid upfront on the discount (difference between price paid and market value of the shares), except where there is a real risk of forfeiture of the shares in which case the