EOFY Housekeeping

EOFY housekeeping

The current financial year ends on Monday 30 June 2014. This article highlights items that may require your attention by then if you operate a trust, own a business or investment, want to maximise your superannuation entitlements or have a self managed superannuation fund. We also discuss changes that may impact you from 1 July.

Please click on the links below for:

Trust Issues

 
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Discretionary Trust Distributions

Trustees must resolve and document their decision on how to distribute the current year’s trust income and, in some cases, capital gains by 30 June 2014 or such earlier date as is specified in the trust deed. The tax laws now authorise trustees to “stream” capital gains and/or franked dividend income to particular beneficiaries where permitted by the trust deed. In order for distribution resolutions to be as tax effective as possible, trustees must have a clear understanding of the likely income (including capital gains) and expenses of the trust and of potential beneficiaries for this current financial year.

Where we are aware that you control a discretionary trust we will be contacting you before 30 June to discuss the proposed distributions.

Beneficiary Tax File Numbers

Where current year trust distributions are contemplated to adult taxpayers who have not provided their Tax File Numbers (“TFNs”) to the Trustee, those TFN’s must be provided to the Trustees by 30 June 2014 and reported by Trustees to the ATO by 31 July 2014.  Where a Trustee does not have the TFN of an adult beneficiary, the trustee must withhold 46.5% of any trust distribution to that adult for the current year and remit that to the ATO by 30 September 2014.

Trust Losses / Family Trust Elections

Where a discretionary trust incurs an income tax loss it may need to make a Family Trust Election in order to preserve the benefit of those losses into future years. A Family Trust Election can restrict the class of potential beneficiaries under the trust.

Family trust elections may also be required where a discretionary trust has franked dividend income or where it owns shares in a private company that has a tax loss.  

Unpaid June 2013 Discretionary Trust Distributions to Private Companies

These will normally need to be documented by way of a loan agreement and repaid over 7 years for unsecured loans (or 25 years when secured over real estate) with interest commencing from 1 July 2014. Other strategies involving sub-trusts may also be possible. 

Private Company Tax Issues

 
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Shareholder Loans and Debt Forgiveness

Loans or payments made by private companies to their shareholders or associates can give rise to “deemed dividends” for income tax purposes. These are assessable to the recipient as an unfranked dividend.

No action is required before 30 June 2014 for new loans made since 1 July 2013.

No deemed dividends arise for outstanding loans made in the 2013 tax year or prior years where:

  • The loan was repaid in full by the earlier of the due for lodging the company’s tax return for the year was made or the actual date the return was lodged (“the lodgement date”); or
  •  The loan is covered by a written loan agreement for either 7 years (as an unsecured loan) or 25 years (where secured over real estate) made before the tax return lodgement date and the required minimum interest charges and principal repayments are made by 30 June each year commencing with the year after the year in which the loan was made; or 
  • The company had accumulated losses and did not have a “distributable surplus” as defined in the Tax Act in the year the loan was made (but note that a deemed dividend can arise when loans are forgiven in a subsequent year if there is a distributable surplus at that time).

Payments and Provision of Company Property

The private company loan rules extend to situations where company property (boats, holiday houses etc) is available for the private use of shareholders or their associates and less than a market rate of rent is charged. Where these rules apply, we recommend that a register is kept of the dates company property was either used for private purposes or was available for private use to the exclusion of the company.

Company Loss Carry Back Rules

The current Government proposed to repeal the recent amendments that allowed companies to carry back losses within limits as part of the removal of the Mining Tax. The amending legislation was defeated by the current Senate. The status of this item is unclear.

Superannuation for Employers

 
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Deductibility of Superannuation Contributions

 Employer superannuation contributions must be physically received by the fund by 30 June 2014 to be tax deductible in the current year.

In order to avoid a Superannuation Guarantee Charge (“SGC”) shortfall for the June 2014 quarter, the contributions must be received by the fund by 28 July 2014.

Increase in the Superannuation Guarantee Charge Contribution Rate

The Government has confirmed that the SGC contribution rate will rise to 9.5% on 1 July 2014.

The maximum SGC contribution base will increase to $49,430 per quarter on this date. This equates to a maximum quarterly contribution of $4,695.85 per employee.

Superannuation Guarantee Contributions for Older Employees

From 1 July 2013 the previous SGC contribution age limit of 70 was removed. SGC contributions are now required for all employees unless another exemption applies.

Mandated industrial award contributions may also apply to these employees.

Company Directors Now Personally Liable for Unpaid SGC Contributions

In some circumstances company directors can now be held personally liable for unpaid SGC contributions and unremitted amounts withheld from employees’ salaries under the Pay As You Go withholding tax collections system.

Tax Planning for Investors

 
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Deducting Prepaid Expenses

Individual non-business investors and small business taxpayers (aggregate turnover under $2 million) are able to claim tax deductions for prepayments of tax deductible expenses this financial year where the period covered by the prepayment does not exceed 12 months and ends by 30 June 2015. These taxpayers may be able to reduce this year’s taxable income by pre-paying up to 12 months of tax deductible interest expense by the end of June – banks have special loan products in order to facilitate interest in advance payments.  Please check with your bank if you wish to prepay interest as not all loan products will qualify.  

Note that different rules apply to non-small business taxpayers and “tax shelter” investments.

Capital Gains Tax (“CGT”) - Timing

For CGT purposes, the date of acquisition or disposal of an asset is the date of exchange of the relevant contract (and not settlement). The difference between a 30 June and a 1 July sale contract date can be effectively a full year difference in the payment date of the resulting CGT liability.

The CGT discount (50% for resident individuals; 0% for non-residents and 33.33% for superannuation funds) is generally available where assets have been owned for more than 12 months before the date of the sales contract. If you are close to the 12 month ownership period, you should weigh up the ability to access the discount when considering the timing of a sale, along with other commercial considerations such as the asset’s current price and its potential volatility.

If you have realised taxable capital gains from selling investments during the year you may be able to reduce your CGT liability by selling other assets with unrealised capital losses by 30 June this year. For example, if you have unrealised losses on listed shares you could sell them to third parties in order to crystallise the loss. “Wash” sales to related parties, such as a family trust, can raise tax avoidance issues as can “parallel” trades in the same asset (eg one taxpayer sells listed shares and a related taxpayer buys shares in the same company).

Capital Loss Record Keeping

Where you have made a CGT loss you should keep records of the transactions giving rise to the loss for a further four years after you lodge your tax return for the year in which the loss is applied against a taxable capital gain.

Remember that you can choose the order in which capital losses are applied. In generally they should normally be applied first against “short term” capital gains on assets held for less than 12 months which do not qualify for the 50% discount.

Superannuation for Individuals

 
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Superannuation Contribution Opportunities


Concessional (Tax-Deductible) Contributions – This Year

The current superannuation concessional (tax deductible) contribution caps are as follows:

  • Under age 59 at 30 June 2013 $25,000
  • Age 59 to 64 at 30 June 2013 $35,000
  • Age 65 to 75 and satisfy the “work” test $35,000


These caps include all employer superannuation contributions. Taxpayers making discretionary superannuation contributions should be very careful to avoid breaching the contributions cap – excess contributions can be subject to effective tax rates of up to 93%. In limited circumstances, excess contributions of less than $10,000 can be refunded and taxed at your marginal tax rate.

These caps apply equally to self-employed individuals who can claim a 100% tax deduction for their personal superannuation contributions providing no more than 10% of their assessable income is employment related  (ie salary, wages, reportable fringe benefits and reportable (salary sacrifice) superannuation contributions).  Please note that a tax deduction is only available to the extent there is taxable income and a contribution cannot produce a tax loss.

In order to claim a tax deduction this year, contributions must be actually received by the fund by 30 June 2014. It is not sufficient to post the cheque on that day.

Considerable care is required with BPay transfers – these count towards the contribution caps for the year when the contribution is received by the fund and not the earlier time when it is debited to your bank account.

Very high income earners (adjusted taxable income over $300,000 – this comprises taxable income, tax free pensions, net investment losses, reportable fringe benefits and reportable and personal deductible superannuation contributions) may be subject to a 30% contribution tax rather than the standard 15%.

Concessional (Tax-Deductible) Contributions – Next Year

From 1 July 2014 the concessional contribution caps will be:

  •  Under age 49 at 30 June 2014 (note the $5,000 increase) $30,000
  • Age 49 to 64 at 30 June 2014 (note the age reduction) $35,000
  • Age 65 to 75 and satisfy the “work” test $35,000

Non-Concessional (Non-Tax Deductible) Contribution Caps

The non-concessional contributions caps (for under age 75 only) are as follows:

  FY 2014 and earlier FY 2015 and later
Annual cap* $150,000 $180,000
Three year bring forward rule ** $450,000 $540,000

 * Persons aged 65 to 75 must also satisfy the work test
** You must be under 65 at any time in the first year

Once again considerable care is required with voluntary superannuation contributions to avoid breaching the non-concessional caps penalty (up to 46.5% of the excessive contributions).   Taxpayers must also be very careful to avoid inadvertently triggering the non-concessional contributions caps, for example, where annual contributions of more than $150,000 have been made in any of the three preceding years.  Financial year 2015 contributions are not indexed if this cap was previously exceeded.

If you want to maximise your non-concessional contributions you could consider contributing no more than $150,000 in the current year and no more than $450,000 from 1 July 2014.

Superannuation Pension Drawdown Rates

Where you are receiving an account based superannuation pension you should ensure that you draw down the minimum pension for this year by 30 June each year. The required minimum pensions increased from 1 July 2013 as follows:

Age of Recipient

2011/12 & 2012/13

2013/14 and thereafter

Under 65 3.00% 4%
65 74 3.75% 5%
75 – 79 4.50% 6%
80 84 5.25% 7%
85 – 89 6.75% 9%
90 – 94 8.25% 11%
95 & over 10.50% 14%


There is no maximum pension drawdown except in relation to transition to retirement pensions where the maximum annual pension is 10%.

Superannuation Preservation Ages

Currently you cannot normally access your superannuation benefits until you reach your preservation age and satisfy a condition of release. Preservation ages are currently as follows (there has been some suggestion that these might be increased in the future to five years below your government age pension entitlement age):

Date of Birth

Preservation Age

Application Date

Before 1 July 1960

55

Until 30 June 2015

1 July 1960 to 30 June 1961

56

From 1 July 2016

1 July 1961 to 30 June 1962

57

From 1 July 2018

1 July 1963 to 30 June 1963

58

From 1 July 2020

1 July 1963 to 30 June 1964

59

From 1 July 2022

On or after 1 July 1964

60

From 1 July 2024

 

In Specie Superannuation Contributions (Asset Transfers)

In limited circumstances (various conditions apply) it can be possible to make a superannuation contribution by transferring the following asset classes to your self managed superannuation fund:

  •   Listed shares
  •   Business real property including commercial premises owned by the fund member or a related party (for example, the doctor’s surgery). In some cases the superannuation fund can borrow to purchase the asset rather that it being a contribution.

Individual Tax Planning

 
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Changes in Personal Tax Rates

The Medicare Levy commences to apply to individuals with taxable incomes from $20,542. From 1 July 2014 the rate will increase from 1.5% to 2% for affected taxpayers.

When combined with the proposed 2% deficit levy for high income earners the marginal tax rates for next year will be higher than for this year, particularly for incomes over $180,000:

Taxable Income $

FY 2013/2014

FY 2014/2015

Under 18,200

Nil

Nil

18,201 – 37,000

20.5%*

21.0%*

37,001 – 80,000

34.0%

34.5%

80,001 – 180,000

38.5%

39.0%

Over 180,000

46.5%

49.0%

* Subject to phase in of Medicare Levy

The increase in the Medicare Levy is not sufficient to outweigh the normal timing advantages of deferring the recognition of income and bringing forward the time when deductions are incurred. However, where your tax bracket is likely to rise (“bracket creep”) it may be appropriate to engage these traditional tax planning techniques.

For a top marginal rate taxpayer receiving a fully franked dividend the margin above the 30% company tax rate increases from 16.5% to 19% - this means that shareholders will need to pay more “top up” tax if they receive a franked dividend from 1 July 2014. The increase is 3.6% of the cash dividend and may be sufficient to justify bringing forward the payment of fully franked dividends in some cases (especially where you are not subject to a PAYG instalment rate).

Gifts and Deductions

Gifts or donations of at least $2 to tax deductible charities made by 30 June 2014 are deductible this year. You should ensure the charity is endorsed as a tax deductible gift recipient and that you keep receipts.

Net Medical Expense Offset

A resident taxpayer who incurs net medical expenses (gross expenses less Medicare and health fund reimbursements) in respect of themselves or a resident dependent may be entitled to an offset.

The medical expense offset is being phased out and no offset will be available in the year ending 30 June 2014 unless the offset was previously claimed in the year ended 30 June 2013 (there are limited exceptions for persons with disabilities). Similarly, no offset can be claimed in the year ending 30 June 2015 unless the offset was claimed in both the 2013 and 2014 years.

Where these conditions are met the offset rate and threshold varies depending on the taxpayer’s adjusted taxable income (“ATI” - see below)

  • The general offset is 20% of the excess of unreimbursed medical expenses over $2,162 (indexed annually).
  • Where the taxpayer’s ATI exceeds $88,000 (singles) or $176,000 (couples) plus $1,500 for the second and subsequent dependent children the offset is 10% of the excess over $5,100.


Adjusted taxable income for offset purposes comprises the sum of:

  • Taxable income for the year
  • 53.5% of reportable fringe benefits
  • Certain tax free pensions and benefits
  • Exempt foreign income
  • Total net investment losses
  • Reportable (eg salary sacrifice) and deductible personal contributions

Medicare Levy Surcharge – Inadequate Private Health Insurance

A Medicare levy surcharge may apply where your income for surcharge purposes exceeds prescribed thresholds and you do not have adequate private health insurance.

The 1% surcharge commences to apply for incomes above $88,000 (singles) and $176,000 (couples) plus $1,500 for the second and subsequent dependent children. The maximum offset of 1.5% applies for incomes above $136,000 and $272,000 respectively.

Income for surcharge purposes comprises:

  •  Taxable income of the taxpayer and their spouse
  •  Reportable fringe benefits
  • Reportable (ie salary sacrifice) superannuation contributions
  • Total net investment losses


If you expect your income to rise and you do not currently have private health insurance you may need to consider taking it out.

Exotic “Tax Driven” Investments

We discourage investments in tax driven schemes unless they can be expected to deliver sound commercial returns (assistance may be required from an Australian Financial Services Licensee to assess the viability of the project).

Business Taxpayers

 
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Deferring Income

Income received in advance of the provision of services may be able to deferred until next year. The Tax Office has also ruled that income which is subject to a “contingency of repayment” can also be deferred.

Deductions for Employee Bonuses

Deductions can be claimed this year for bonuses to be paid after year end to unrelated employees where the business has definitely committed to the bonus by 30 June. This requires that the amount of the bonus (or its method of calculation) has been finally determined and, preferably, notified to the relevant employees by this date.

Small Business Immediate Asset Write Off

Under current tax laws qualifying “small business” taxpayers (aggregated turnover of less than $2 million) should consider bringing forward the purchase of:

  • Depreciating assets with a cost of less than $6,500 to before 1 July 2014 as this cost will be an outright tax deduction in the current tax year; and
  • Motor vehicles costing more than $6,500 as the first $5,000 qualifies for an outright tax deduction.

Please note that there is some uncertainty over this measure – the current Government proposed to reduce the instant asset write off threshold to $1,000 from 1 January 2014 as part of the repeal of the Mining Tax. The Mining Tax repeal bills were rejected by the current Senate. If they were to be passed by the incoming Senate it is not clear whether the start date would revert to 1 January 2014.

Should this happen:

  • 15% of the cost of the items would be deductible in the year of purchase; and
  • The remaining cost would be “pooled” and deducted at 30% per annum of the opening written down value of the pool.

Bad Debt Deductions

In order to claim a bad debt tax deduction this financial year the debt must have been n included in the taxpayer’s assessable income and be physically written off in the business accounting records on or before 30 June. Businesses may then also be able to recover any GST remitted on these debts.

Moneylenders may be able to claim additional bad debt deductions.

If there has been a change in ownership or control of a company, bad debt deductions may not be available unless the company satisfies the “same business test”. A discretionary trust may need to make a family trust election.

Trading Stock Valuation Rules

Trading stock on hand at year end can be valued at (full absorption) cost, market selling value or replacement cost. Normally the lowest value is chosen to minimise taxable income. However, if your business has incurred losses or you expect your marginal tax rate to rise, a higher value may be appropriate.

Obsolete Stock or Plant and Equipment

Obsolete stock and obsolete plant and equipment should be physically scrapped by 30 June in order to claim a full tax deduction this year. However, where obsolete stock is not scrapped it may still be possible to justify a lower value for tax purposes.

Reportable Fringe Benefits on PAYG Payment Summaries

Where the grossed up value of fringe benefits provided to an employee during an FBT year exceeds $2,000 this must be reported on the employee’s annual payment summary. Certain benefits are excluded principally:

  • Car parking
  • Meal entertainment
  • Certain pooled cars

Research and Development Registration

Companies spending $20,000 or more annually on research & development activities may be eligible for a tax offset of up to 45% (this is a refundable offset for companies with turnover up to $20 million). Eligible companies need to register with AusIndustry by 30 April 2015.

R&D related payments to associates should be made before 1 July 2014.

Individuals with “Non-Commercial” Business Losses

Individuals with annual adjusted taxable incomes (the sum of taxable income, reportable fringe benefits, reportable (eg salary sacrifice) superannuation contributions and net investment losses) exceeding $250,000 are not able to deduct any business losses against their other taxable income.

Other individuals incurring business losses may not be able to deduct those losses against their other taxable income unless that business satisfies one or more of the following:

  •  A farmer whose non-primary production is less than $40,000
  • The assessable income from the activity is at least $20,000
  • The activity has been profitable in at least three of the last five years
  •   The value of business real estate is more than $500,000
  • The value of other business assets is at least $100,000

Thin Capitalisation – Deductibility of Interest Expense and Finance Costs

The thin capitalisation rules can reduce debt deductions for taxpayers which:

  • Have significant foreign investments; or  
  • Are foreign owned; or
  •  Are foreign investors

The measures currently apply where annual debt deductions exceed $250,000. The previous Government proposed to increase this to $2 million from 1 July 2014 – the current Government has released draft legislation to achieve this. Debt deductions are not denied where the taxpayer satisfies certain debt to equity ratios (proposed to decrease from the current 3:1 debt:equity ratio to 1.5:1 also from 1 July 2014). In some cases, higher gearing ratios may be permitted

Where the measures apply it may be possible to reduce the amount of disallowed debt deductions by revaluing assets and/or a share capital raising by this 30 June.

The new transfer pricing rules may also reduce interest deductions where a taxpayer borrows from offshore related parties on uncommercial terms.

If you are feeling a little under prepared before the end of the financial year, or have any questions about this information please contact us today – we’re here to help.