30 June 2017 Year End Tax Planning
The current financial year ends on Friday, 30 June 2017. This article highlights items that may require your attention before then if you are an individual taxpayer, operate a private company or trust, or own a business or investment.
The focus this year is to be aware of the current superannuation contribution limits and to seek specific advice if you would like to maximise the associated contribution opportunities, either before or after tax, ahead of the significant changes which will take effect from 1 July 2017.
Please click on the links below for:
Key Superannuation Issues Including Current Contribution Opportunities
Australia’s superannuation rules have become increasingly complicated following the significant changes which became law in November 2016.
These changes, in particular the $1.6 million pension transfer balance cap, are discussed on our website. This article focuses on the current limits applying to contributions received by your superannuation fund before 1 July 2017.
Annual Concessional (ie Tax Deductible) Contribution Limits – This Year and Next Year
The contribution caps for tax-deductible superannuation contributions for all eligible individuals will decrease from 1 July 2017:
|Age at Previous 30 June||2016-17 Year||2017-18 Year|
|49 to 64||$35,000||$25,000|
|65 to 74 and satisfy work test||$35,000||$25,000|
|75 and over||Mandated Contributions||Mandated Contributions|
- The above comments are for your information. Please contact us if you require specific advice about the level of superannuation contributions, if any, that are appropriate for your circumstances
- Personal superannuation contributions on your own behalf are only tax deductible where both:
- For this year (and previous years), the 10% rule is satisfied (see below); and
- Notice of the claim is given to your superannuation fund on this form
- Excess concessional contributions above these caps are included in your assessable income – you may, but need not, withdraw the tax from your super fund
- The work test (ages 65 to 74) requires minimum employment of at least 40 hours in not more than 30 consecutive days
- Mandated employer contributions for those aged 75 and over comprise only Superannuation Guarantee Charge (“SGC”) and Industrial Award contributions
- Concessional contributions can only be made in relation to a person under 18 if they are an employee or carry on business
Example of Concessional Contributions Counted Against Current Concessional Cap
Sheila is aged 52. Her employer makes her SGC and salary sacrifice contributions (total $5,000 per quarter) 15 days after the end of each quarter. The following contributions will count against this year’s cap:
|$5,000||$5,000||$5,000||$5,000||Up to $15,000|
Under current superannuation laws Sheila’s employer can make up to a further $15,000 of concessional contributions on Sheila’s behalf in the June 2017 quarter, pursuant to a valid salary sacrifice agreement without causing Sheila to breach this year’s concessional contributions cap. These contributions must be received by Sheila’s superannuation fund on or before 30 June to avoid being counted against the reduced $25,000 cap that applies next financial year.
Division 293 Superannuation Tax Threshold Drops from $300,000 to $250,000 from 1 July 2017
Division 293 imposes an extra 15% on concessional superannuation contributions within the individual’s contribution cap (see above) to the extent that the individual’s concessional; contributions and adjusted income for surcharge purposes exceeds $300,000. Relevant income comprises the sum of:
- Taxable income
- Distributions to the individual subject to Family Trust Distribution Tax
- Reportable fringe benefits
- Net investment losses
Division 293 increases the tax rate on concessional contributions above the $300,000 threshold and within the concessional contributions cap from 15% to 30%. This higher rate is still 19% below the current maximum marginal rate (17% next year).
Personal Superannuation Contribution Deduction Rules Eased from 1 July 2017
Currently personal superannuation contributions are not tax deductible where more than 10% of the individual’s assessable income comprises income from employment sources as defined (ie salary, reportable fringe benefits and reportable superannuation contributions). From 1 July 2017 employees will be able to top up their employer contributions by making tax deductible personal contributions directly to their superannuation account – before doing so they should confirm the “space” available below the $25,000 contribution cap. This may remove the need for many “salary sacrifice” contributions. Employers may need to become more transparent about the time when SGC contributions are made.
Non-Concessional (ie After Tax) Contributions – This Year
The non-concessional contribution caps will also decrease or cease from 1 July 2017.
The following material is provided for your information. Please seek appropriate professional advice before making non-concessional contributions. Significant penalties apply for exceeding the relevant contribution limits:
Year Ending 30 June 2017
Under Age 65
|* General limit (maximum – see below)||$180,000|
|* With three year bring forward rule (maximum)||$540,000|
Age 65 to 74 and Meet the Work Test (see above)
|* General limit (maximum – see below)||$180,000|
|* With three year bring forward rule||Not applicable|
The maximum non-concessional contributions will be reduced if non-concessional contributions exceeded $180,000 in the 2016 tax year and/or $360,000 in the 2015 tax year.
Non-Concessional Contributions – Next Year
In very general terms the non-concessional (ie after tax) contribution caps for an individual with accrued superannuation entitlements of less than $1.6 million at 30 June 2017 will be:
Under Age 65
|* General limit (maximum – see below)||$100,000|
|* With three year bring forward rule (maximum)||$300,000|
Contributions above $100,000 will only be available where total superannuation entitlements are less than $1.4 million at 30 June 2017 (or $1.3 million for contributions over $200,000).
Age 65 to 74 and meet the work test (see above)
|* General limit (maximum – see below)||$100,000|
|* With three year bring forward rule||Not applicable|
The maximum non-concessional contributions will also be reduced if non-concessional contributions exceeded $180,000 in the 2017 tax year and/or $360,000 in the 2016 tax year.
Access to Superannuation Benefits - Preservation Ages
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:
|Date of Birth||Preservation Age||Application Date|
|Before 1 July 1960||55||Until 30 June 2016|
|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 1962 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|
Superannuation Pension Drawdown Rates
Where you are receiving an account based superannuation pension you should ensure that you draw down the minimum annual pension by 30 June each year. These are calculated by applying the following percentages to your opening account balance
|Age of Recipient||Current Pension Factor|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 & over||14%|
There is no maximum pension drawdown except in relation to transition to retirement income streams where the maximum annual pension is 10% of the opening balance.
Income on Larger Superannuation Pension Account Balances to Become Taxable
From 1 July 2017 where both:
- Part or all of your superannuation entitlements are in pension mode; and
- Your “transfer balance cap” exceeds $1.6 million
part of the income from the assets supporting the pension will become taxable in the superannuation fund at 15% (or 10% for long term capital gains).
The rules are relatively complex – please contact us before 1 July if you require specific advice – a number of strategies exist to mitigate the adverse tax outcomes.
Transition to Retirement Income Streams to Become Less Tax Effective from 1 July 2017
A transition to retirement pension income stream (TRIS) can be a tax effective strategy to allow access to accumulated superannuation entitlements from preservation age (see above) without formally retiring. Under current rules pensions paid before age 60 are taxed at your marginal tax rate subject to a 15% tax offset. The superannuation fund does not pay tax on the associated earnings.
From 1 July 2017:
- Income from assets supporting a TRIS will become taxable in the superannuation fund
- TRIS cannot be taken as tax free lump sums
Please contact us if you require advice about your current TRIS.
Australian Financial Services Licence General Advice Disclaimer
Any financial product advice is provided by (AFSL No. 485258) (Haines Norton Sydney Advisers Pty Ltd). The advice provided is general in nature and is not personal financial product advice. The advice provided has been prepared without taking into account your objectives, financial situation or needs and because of this you should, before acting on it, consider the appropriateness of it having regard to your objectives, financial situation and needs. You should carefully read and consider any Product Disclosure Statement (PDS) that is relevant to any financial product that has been discussed before making any decision about whether to acquire the financial product.
You can contact us on (02) 9256 6600 or by visiting our website at www.uhyhnsydney.com.au/.
Individual Tax Planning Issues Outside Superannuation
Limited Federal Budget Changes to Personal Tax Rates
The recent Federal Budget brought only minor inflation adjustments to the Medicare Levy thresholds. The 2% temporary Budget Repair Levy will cease from 1 July 2017. This provides additional incentives for higher income earners to defer discretionary income such as private company dividends and bring forward tax deductions
Gifts and Deductions
Gifts or donations of at least $2 to eligible charities made by 30 June 2017 are tax deductible this year. Deductions for larger donations over can be spread over up to 5 income years. In all cases you should ensure the charity is endorsed as a tax deductible gift recipient and keep receipts.
Work Related Car Expenses – Limited Deduction Choices
Individual taxpayers can now only claim a deduction for car expenses using one of the following two methods:
- 66 cents per eligible kilometre travelled (up to a maximum of 5,000 kms)
- Log book method – the business usage percentage established by a log book kept during a representative 12 week period within the current year or the previous four years applied to actual costs of operating the car including lease rentals or depreciation and finance cost
Where a senior employee’s car has comparatively limited business use it may be tax effective for the employee to “salary package” the car if permitted by the employer. There is a range of service providers in this area offering novated lease salary packaging opportunities which reduce the employer’s administrative burden.
Net Medical Expense Offset – Now Very Limited Application
The medical expense offset is now only available for payments for medical expenses in relation to:
- Disability aids
- Attendant care services
- Aged care services and accommodation
Please contact us if your net expenditure on these items after Medicare and health fund reimbursements exceeds $2,299 (or $5,423 for certain higher income earners).
Medicare Levy Surcharge – Inadequate Private Health Insurance
A Medicare levy surcharge applies 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 individuals with income for surcharge purposes exceeding $90,000 (singles) and $180,000 (couples) plus $1,500 for the second and subsequent dependent children. The maximum surcharge 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
- Distributions to the above subject to the Family Trust Distribution Tax
- Reportable fringe benefits
- Reportable (eg salary sacrifice) superannuation contributions
- Total net investment losses
If you expect your income to rise above the relevant threshold next financial year and you do not currently have qualifying private health insurance you may need to consider taking it out. The cost of the premiums may be less than the surcharge involved.
Private Health Insurance Offset
Where individuals are covered by qualifying private health insurance they may qualify for the private health insurance offset on the associated premiums. This can be accessed as a reduction in the premium or a tax refund.
Singles qualify for a full or partial offset where their income for surcharge purposes (see definition above) is less than $140,000 plus $1,500 for each dependant child after the first. Couples qualify for a full or partial offset where their income for surcharge purposes is less than $280,000 plus $1,500 for each dependent child after the second. In both cases the offset varies between 8.93% and 35.722% depending on the contributor’s age and family income.
Lifetime Health Insurance Cover Loading – No Private Health Insurance After Age 30
If you do not have private hospital cover with an Australian registered health fund on your Lifetime Health Cover base day and then decide to take out hospital cover later in life, you will pay a 2% loading on top of your premium for every year you are aged over 30 and do not have cover.
Your Lifetime Health Cover base day is normally the later of 1 July 2000 or the 1st of July following your 31st birthday.
Last Year to Deduct Personal Travel Expenses to Inspect Your Residential Investment Property
From 1 July 2017 personal travel expenses associated with inspecting, maintaining or collecting rent for a residential rental property will be disallowed. Normal property management expenses will remain tax deductible.
Exotic “Tax Driven” Investments
We discourage investments in “tax driven” investments unless they can be expected to deliver sound commercial returns (assistance may be required from an Australian Financial Services Licence Holder to assess the viability of the project). We are not licensed to comment on the commercial merits of such investments.
Removal of CGT Main Resident Exemption for Certain Overseas Home Owners
Foreign residents and temporary tax residents will be denied access to the CGT main residence exemption for properties purchased after 9 May 2017.
Existing homes will be grandfathered until 30 June 2019. After that time it appears the full gain since the purchase date could be taxed at rates up to 47%.
TAX PLANNING FOR INVESTORS
Deducting Prepaid Expenses
Individual non-business investors and small business taxpayers (currently aggregate turnover recently increased to under $10 million and set to rise further – see below) 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 2018. 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 qualify.
Note that different rules apply to non-small business taxpayers and to “tax shelter” investments.
Capital Gains Tax (“CGT”) – Timing of Asset Sales
For CGT purposes, the date of acquisition or disposal of an asset is normally 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 due date for any resulting CGT liability.
The long term CGT discount (50% for resident individuals; 0% for non-residents and 33.33% for superannuation funds in accumulation phase) is generally available where assets have been owned for more than 12 months between the dates of the purchase and sales contracts. If you are close to the 12 month ownership period, you should weigh up the ability to access this discount when considering the timing of a sale, along with other commercial considerations such as the asset’s current price and its potential price volatility.
If you have realised taxable capital gains from selling profitable 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 capital loss you should keep records of the transactions giving rise to the loss for a further four years after you receive your income tax assessment for the year in which the loss is applied against taxable capital gains.
You can choose the order in which capital losses are applied. In general they should normally be applied first against “short term” capital gains realised on assets held for less than 12 months which do not qualify for the 50% discount.
Small Business Issues Including New Tax Rates and Thresholds
What are the Small Business Entity (SBE) Tax Concessions – Increased $10 Million Turnover Test
An entity now qualifies as a SBE if:
- it currently carries on a business; and either or both
- its aggregated turnover for the previous income year was less than $10 million;
- its aggregated turnover for the current year is likely to be less than $10 million
However if aggregated turnover for both of the two previous years was over $10 million an entity cannot be a SBE unless its drops this year (reduced concessions apply).
Aggregated turnover refers to the SBE’s annual turnover (see below) and the turnover of the SBE’s:
- connected entities – these are entities controlled by the SBE or which control the SBE
- affiliated entities – these are entities that act or could reasonable be expected to act in accordance with the SBE’s directions or wishes or in concert with the SBE
Annual turnover means the total income that the relevant entity derives in the ordinary course of carrying on a business. It does not include income that is not connected to a business.
The current tax benefits of qualifying as an SBE include:
- capital allowance (depreciation) concessions
- trading stock concessions
- potential access to CGT small business concessions (various further restrictions apply)
- deductions for certain prepayments
- option to use GST adjusted notional tax method to work out PAYG instalments
- FBT exemption for certain on site car parking
- Ability to account for GST on a cash basis
The turnover threshold for the small business CGT concessions remains at $2 million where the alternative $6 million net asset value test is failed.
Cuts to Small Business Company Income Tax and Franking Rates from 1 July 2016
Following a recent political agreement the income tax rate for eligible small businesses operating through a company structure was cut to 27.5% from 1 July 2016.
The permitted turnover for “small business” companies will rise as follows:
|1 July 2016 to 30 June 2017||$10 million|
|1 July 2017 to 30 June 2018||$25 million|
|1 July 2018 going forward||$50 million|
Dividend Imputation Issues for “Smaller” Companies
The cut in the smaller company tax rate to 27.5% is not all good news for shareholders in these companies, particularly where there are retained profits on which company tax was paid at the “old” 30% rate.
From 1 July 2016 these companies can only frank dividends at the 27.5% tax rate and not the higher 30% tax rate. Companies that innocently issued dividend statements earlier this year at the 30% rate will need to reissue those statements.
This will result in higher “top up” tax where fully franked dividends are paid to individuals on higher marginal tax rates.
As the ceiling for what is a small company rises there is some incentive to pay out franked dividends at the 30% rate whilst these companies are still “large”.
Companies that will become small have aggregated turnovers up to the following limits:
|Year ending 30 June 2018||$25 million|
|Year ending 30 June 2019||$50 million|
However, for individuals with ongoing taxable incomes above $180,000, the top up tax rate will fall on 1 July 2017 from 27.14% of the cash component of small company dividends to 26.9% due to the removal of the 2% temporary budget repair levy.
A reminder that dividend statements for private company franked dividends paid during the current tax year must be issued by 31 October 2017.
Distributions to Corporate Beneficiaries
Where dividends are distributed to a corporate beneficiary that is not considered to carry on business the overall tax rate will be topped up to 30%.
$20,000 Instant Asset Write Off – Larger Companies Becoming Small
Companies with turnovers between $10 million and $25 million will become eligible for the $20,000 instant asset write off for plant and equipment acquired between 1 July 2017 and 30 June 2018 (conditions apply).
$20,000 Instant Business Asset Write Off for Small Businesses Extended to 30 June 2018
Eligible small business taxpayers (see above) can immediately deduct the cost of business plant and equipment, including motor vehicles, where that cost is less than $20,000 (GST exclusive for businesses entitled to GST input tax credits) and the relevant asset was first acquired between 7:30pm (AEST) 12 May 2016 and installed ready for use by 30 June 2018. These measures apply to both new and second hand assets. The Tax Office will monitor the cut off dates to prevent abuses. This measure does not apply to assets that have previously been owned by the relevant taxpayer.
If an asset costs more than $20,000 the full cost can be placed in a small business simplified depreciation pool and depreciated at 15% in the first year and 30% in subsequent years. If the total pool balance falls below $20,000 after 12 May 2016 and before 1 July 2018 that balance can be written off in the relevant tax year.
The following exclusions apply:
- Horticultural plants
- Capital works
- Assets allocated to a low value pool or software development pool
- Primary production assets where an election is made to apply standard depreciation rates
- Assets leased out under a depreciating asset lease
Off the shelf computer software is eligible for the write off. In house software is also eligible except where the cost is allocated to a software development pool.
Where an asset costs less than $20,000 and is only partially used for business purposes the estimated taxable purpose proportion of the cost is an outright tax deduction. Where an asset costs more than $20,000 but the taxable proportion is less than $20,000 that cost must be depreciated under existing rules rather than as an immediate write off.
Larger small businesses with turnovers between $10 Million and $25 Million
These companies will become eligible for the instant asset write off for assets under $20,000 ordered and installed ready for use between 1 July 2017 and 30 June 2018. As noted above the Tax Office will be monitoring these cut off dates.
Deferring Business Income Generally
Income received in advance of the provision of the relevant goods or services may be able to deferred until the next tax year. The Tax Office has ruled that income which is subject to a “contingency of repayment” can also be deferred.
Larger small business companies that defer income beyond 30 June 2017 will also benefit from the reduction in the small business tax rates.
Deductions for Employee Bonuses
Deductions can be claimed this year by business taxpayers for bonuses to be paid after year end to unrelated employees where the business has definitely committed to pay 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.
Bad Debt Deductions
In order to claim a bad debt tax deduction this financial year the debt must have been 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 can also claim bad debt deductions for normal business loans.
If there has been a significant change in ownership or control of a creditor 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 or satisfy an alternative test.
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 in future, a higher year end value may be preferred.
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 and Employee Share Scheme Income on PAYG Payment Summaries
Where the grossed up value of fringe benefits provided to an employee during an FBT year exceeds $2,000 this total must be reported on the employee’s annual payment summary. Certain benefits are excluded principally:
- Meal entertainment unless salary packaged
- Car parking
- Certain “pooled” cars
Employees of Not for Profit organisations are now subject to a $5,000 annual cap on salary sacrifice meal entertainment.
Where corporate employers provide company shares or share options to employees or their associates the relevant taxable income, if any, must also be reported to the Tax Office.
Research & Development Registration and Proposed Change to Offset Rates
Companies spending more than $20,000 annually on eligible research & development (“R&D”) activities may be eligible for the following offsets
- Companies with group turnover under $20 million can claim a 43.5% refundable tax offset
- Companies with higher turnover can claim a 38.5% non-refundable offset on the first $100 million of qualifying R&D expenses
R&D related expenses incurred to an associate should be physically paid before 1 July 2017 to qualify for the current year’s offset.
Qualifying companies should be registered with AusIndustry on behalf of Innovation Australia within 10 months after year end (ie by 30 April 2018 for a company with a 30 June year end).
Individuals with “Non-Commercial” Business Losses
Individuals with annual adjusted taxable incomes (the sum of taxable income, reportable fringe benefits, reportable (ie 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 cannot deduct those losses against their other taxable income unless that business satisfies one or more of the following tests:
- A farmer whose non-primary production income is less than $40,000
- The assessable income from the activity is at least $20,000 (full year equivalent)
- The activity has been profitable in at least three of the last five income years
- The value of real estate used in the business is at least $500,000
- The value of other business assets is at least $100,000
Thin Capitalisation – Deductibility of Interest Expense and Other Finance Costs
The thin capitalisation rules can reduce debt (ie interest) deductions for taxpayers which:
- Have significant foreign investments (10% or more of total assets); or
- Are foreign owned; or
- Are foreign investors
The measures apply where annual debt deductions exceed $2 million.
Debt deductions are not denied to the extent that the taxpayer satisfies certain debt to equity ratios. For most taxpayers the “safe harbour” tax deductible debt cannot exceed 60% of total assets (ie $10 of gross assets supporting $6 of debt for every $4 of equity). Higher gearing ratios may be permitted under the alternative “arm’s length” debt test. This looks to the hypothetical amount the relevant taxpayer could have borrowed from an unrelated financier without related party guarantees.
Where the measures apply it may be possible to reduce the amount of disallowed debt deductions by revaluing assets (potentially including goodwill) and/or a share capital raising by 30 June 2017.
The anti-transfer pricing rules may also reduce interest deductions where a taxpayer borrows from offshore related parties on uncommercial terms in relation to the interest rate, the gearing ratio or both.
Private Company Tax Issues
Loans to Shareholders 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 (“Division 7A”). These are assessable to the recipient as an unfranked dividend.
No action is required before 30 June 2017 for new loans made since 1 July 2016.
No deemed dividends arise for outstanding loans made in the 2016 and 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 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 accounting 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 the end of that year).
Deemed Dividends and Provision of Company Property
The private company loan rules extend to situations where a private company’s property (boats, holiday houses etc) is available for the private use of shareholders or their associates and less than a market rental 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 by the shareholders.
Interest Free Credit Loans to Private Companies
Loans to companies that are the economic equivalent of shares can be treated as equity for tax purposes. This can have unintended tax consequences.
Interest free loans to private companies will continue to be treated as debt for tax purposes where:
- The loan is from a connected entity; and
- The loan does not have a fixed term; and
- The loan is repayable on demand or at the end of a reasonable period or on the death of the individual who made the loan; and
- The company’s GST turnover is under $20 million
Ideally there would be some paper or electronic document confirming the terms of the loan.
Discretionary Trust Distributions
Trustees of discretionary (ie non-fixed) trusts must resolve and document their decision on how to distribute the current year’s trust income including any realised capital gains by 30 June 2017 or such earlier default distribution date as is specified in the trust deed. The tax laws authorise trustees to “stream” capital gains and/or franked dividend income to particular beneficiaries where permitted by the terms of the trust deed. Other classes of income such as interest are blended and cannot be streamed.
In order for distribution resolutions to be as tax effective as possible, trustees should have a clear understanding of the trust’s likely accounting and taxable 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 previously provided their Tax File Numbers (“TFNs”) to the trustee, those TFN’s must be provided to the trustees by 30 June 2017 and reported by Trustees to the Australian Taxation Office (“ATO”) by 31 July 2017. Where a trustee does not have the TFN of an adult beneficiary, the trustee must withhold 49% of any trust distribution to that adult for the current year and remit that amount to the ATO by 30 September 2017.
Trust Losses/Family Trust Elections
Where a discretionary trust or other trust that does not qualify as a “fixed” trust incurs an income tax loss or bad debt it may need to make a Family Trust Election or satisfy an alternative test in order to preserve the benefit of those deductions into future years. A Family Trust Election restricts the class of potential beneficiaries that can receive trust distributions without the trust being subject to the 49% Family Trust Distribution Tax.
Family trust elections may also be required where a discretionary trust has substantial franked dividend income or where it has a significant interest in a private company that has tax loss and/or bad debt deductions.
Family trust elections raise a number of complex issues that are best discussed with your UHY advisor.
Unpaid 30 June 2016 Trust Distributions to Private CompaniesAny outstanding (ie unpaid) trust distributions made to corporate beneficiaries during the 30 June 2016 tax year will need to be addressed before the due date for lodging the company’s 30 June 2017 income tax return (normally 15 May 2018 or actual lodgement date if earlier).
Making a cash payment to the company is the most straightforward way to clear the unpaid distributions.
Other options are available to manage the unpaid amount over a period of time. The most common involves documenting the transaction by way of a written Division 7A private company loan agreement repaid over 7 years on a principal and interest basis for unsecured loans (or 25 years when secured over real estate) with interest commencing from 1 July 2017. More complex strategies involving sub-trusts are possible.
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.