End of Financial Year Housekeeping

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The current financial year ends on Tuesday 30 June 2015. 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 draw a pension from a superannuation fund. We also discuss changes that may impact you from 1 July 2015.

Please click on the links below for:

Small Business Budget Developments

 
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The May 2015 Federal Budget included several tax changes affecting small businesses, in particular the $20,000 instant asset write off. Please note that none of these changes have been passed by Federal Parliament. The Senate, which can be difficult to predict, needs to approve these measures before they become law.

What is a Small Business Entity (SBE) – the $2 Million Turnover Test

An entity qualifies as a SBE if:

  • it currently carries on a business; and either or both:

         o its aggregated turnover for the previous income year was less than $2 million;
         o its aggregated turnover for the current year is likely to be less than $2 million.

However if aggregated turnover for both of the two previous years was over $2 million an entity cannot be a SBE if its turnover drops below $2 million this year.

Aggregated turnover refers to the SBE’s annual turnover (see below) plus 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 reasonably 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 entity derives in the ordinary course of carrying on a business. It does not include income that is not connected to a business.

The tax benefits of qualifying as an SBE include:

  • capital allowance (depreciation) concessions
  • trading stock valuation concessions
  • access to CGT small business concessions
  • deductions for certain prepayments
  • option to use GST adjusted notional tax method to work out PAYG instalments
  • FBT exemption for on site parking
  • ability to account for GST on a cash basis

Proposed $20,000 Instant Business Asset Write Off

Under the Budget proposal, eligible small business taxpayers will be able to immediately deduct the cost of business plant and equipment including motor vehicles where the cost of each item is less than $20,000 (GST exclusive for businesses entitled to GST input tax credits) and the relevant asset is first acquired between 7:30pm (AEST) 12 May 2015 and 30 June 2017. The Tax Office has confirmed these measures apply to both new and second hand assets. The measure will not apply to assets that have previously been owned by the relevant taxpayer.

If an asset costs more than $20,000 it 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 pool balance falls below $20,000 after 12 May 2015 that amount can also be written off before 30 June 2017.

The following exclusions will 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 developed 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 will be 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 the existing rules rather than as an immediate write off.

Cuts to Small Business Income Tax Rates from 1 July 2015

The recent Budget proposed that the tax rate for eligible small business operating through a company structure will be cut from 30% to 28.5% from 1 July 2015. This 1.5% cut provides an added incentive for eligible companies to defer assessable income until after this 30 June and to bring forward allowable deductions.

The tax rate for other companies will remain at 30% and this rate will continue to apply to all franked dividends paid by companies.

The Budget also proposed that unincorporated small business taxpayers will be eligible for a 5% small business tax discount. This will be delivered as an offset calculated as 5% of the income from the small business activity and capped at $1,000 per individual per year.

Legislation to reduce the small business company tax rate to 28.5% was introduced on 28 May but did not address the tax cut for other small business taxpayers.

Individual Tax Planning

 
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No Changes to Personal Tax Rates?

The current personal tax rates including the (temporary) 2% deficit levy for taxable incomes over $180,000 but not the 2% Medicare Levy (or possible small business personal tax cuts) are as follows:

EOFY Table 1

*The Government has introduced legislation to reverse the previously approved increase in the tax free threshold to $19,400 and the increase in the marginal tax rate on the second band. As of today, this measure has not become law. With low inflation rates “bracket creep” is less of a factor than in prior years.

The temporary budget repair levy will continue until at least 30 June 2017. It is probably too early to start planning for its removal.

Low Income Tax Offset

The low income tax offset, currently a maximum of $445 for incomes up to $37,000 is scheduled to be reduced to $300 from 1 July 2015. Amending legislation to reverse this change is still before Parliament.

Gifts and Deductions

Gifts or donations of at least $2 to tax deductible charities made by 30 June 2015 are deductible this year. You should ensure the charity is endorsed as a tax deductible gift recipient and that you keep receipts.

Work Related Car Expenses – Deduction Choices and Deductions Rates to be Reduced

Currently taxpayers can claim a deduction for car expenses using one of the following four methods:

  • cents per kilometre
  • log book method
  • 12% of original value
  • one third of actual expenses

The last two options will be removed effective from 1 July 2015. If you were claiming deductions using either of these methods you will need to switch to the log book method (valid log book required for a representative twelve week period) or switch to the generally lower deductions for the cents per km method.

Also from that date the existing cents per kilometre deduction rates, currently 65 cents for small cars, 76 cents for medium cars and 77 cents for large cars will be replaced with a single rate of 66 cents.

Net Medical Expense Offset

Individual taxpayers who incur net medical expenses (ie gross medical expenses less Medicare and health fund or other insurance reimbursements) in respect of themselves or a qualifying dependent may be entitled to a tax offset.

Medical expenses mean payments to a legally qualified medical practitioner, nurse or chemist, or a public or private hospital, in respect of an illness or operation. It extends to most dental and ophthalmic work, artificial limbs and medical or surgical appliances.

The medical expense offset is being phased out and no offset will be available in this year ending 30 June 2015 unless the taxpayer received a positive offset amount in both of the years ended 30 June 2013 and 2014. A limited offset will continue for persons with disabilities next year.

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 $2,218.
  • where the taxpayer’s ATI exceeds $90,000 (singles) or $180,000 (couples plus $1,500 for the second and subsequent dependent children) the offset is 10% of the excess over $5,233.

Adjusted taxable income for offset purposes comprises the sum of:

  • taxable income for the year
  • 53.5% of reportable fringe benefits (note that this ratio will change to 51% from 1 july 2015)
  • certain tax free pensions and benefits
  • exempt foreign income
  • total net investment losses
  • reportable and concessional personal superannuation contributions

If you still qualify for this offset it may be appropriate to bring forward routine medical and dental visits and to stock up on medicine at the chemist by the end of June.

From 1 July 2015 there will typically be no specific tax reason to keep track of medical expenses.

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 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 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 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.

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 reduction in tax payable or increase in potential tax refund.

The thresholds for the private health insurance offset have been capped at current levels for the next three financial years.

Singles qualify for a full or partial offset where their income for surcharge purposes (see above) is less than $140,000. The maximum offset is 38.72% for someone over age 70 with income under $90,000.

Families 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.

Lower rates apply to younger taxpayers and/or those with higher incomes.

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).

Superannuation Planning For Individuals

 
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Superannuation Contribution Opportunities

Normally superannuation contributions on behalf of an individual are made by an employer. In some circumstances contributions can be made by the individual.

The ability of a superannuation fund to accept contributions depends on the age of the member and, for those over 65, whether they are gainfully employed on at least a part time basis.

EOFY Table 2

* children under 18 must derive income from business or employment activities to make superannuation contributions

Concessional (ie Tax-Deductible) Contribution Limits – This Year

The current superannuation concessional contribution caps are as follows:

  • under age 49 at 30 june 2014                       $30,000
  • age 49 to 64 at 30 june 2014                        $35,000
  • age 65 to 75 and satisfy the “work” test        $35,000

These amounts are not expected to increase next year.

All employer superannuation contributions count towards the concessional contributions cap.

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 and, wages or directors fees, reportable fringe benefits and reportable (salary sacrifice) superannuation contributions). The tax deduction is only available to the extent the individual has net taxable income after subtracting all other deductions except tax losses. The contribution cannot produce or increase a tax loss. Individuals intending to claim a deduction for a personal contribution must give a notice to the superannuation trustee.

In order to claim a tax deduction this year, contributions must be actually received by the fund by 30 June 2015. It is not sufficient to post the cheque on that day.

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

Taxpayers making discretionary superannuation contributions should be very careful to avoid inadvertently breaching their contributions cap as the following taxes apply:

  • the fund pays the normal 15% tax on the excess contribution
  • the member also includes the excess contribution in their assessable income and pays tax at their marginal rate less a 15% non-refundable offset for the tax paid by the superannuation fund. an interest charge also applies
  • as an integrity measure excess concessional contributions also count towards the non-concessional contributions cap (see below). this can result in double taxation with effective tax rates up to 95%

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%.

Non-Concessional (ie Non-Tax Deductible) Contribution Caps

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

Picture4

* Persons aged 65 to 75 must also satisfy the work test
** You must be under 65 at any time in the first year and not have triggered the “bring forward” rule in the previous three years

The 2015 amounts will not increase until the concessional contribution cap increases (which is not expected for some time).

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 $180,000 in the current year and no more than $540,000 from 1 July 2015. These amount assume you have not previously triggered the bring forward rule.

Low Income Spouse Superannuation Contributions

There is an 18% tax offset for taxpayers who make superannuation contributions on behalf of their low income spouse (relevant income comprising assessable income plus reportable fringe benefits and reportable superannuation contributions, under $13,800).

EOFY Table 4

 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 from 1 July 2013 are as follows:

EOFY Table 5

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:

Picture5

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.

Considerable care will be required when transferring valuable assets to ensure the relevant contribution cap is not breached.

Tax Planning for Investors

 
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Deducting Prepaid Expenses

Individual non-business investors and small business taxpayers (aggregate annual 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 2016. 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 more restrictive rules apply to non-small business taxpayers and “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 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 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 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.

Superannuation For Employers

 
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Deductibility of Superannuation Contributions – Timing Issues

The Tax Office has ruled that a superannuation contribution is made when the capital of the fund is increased. This requires that the contribution is received by the fund by the end of 30 June 2015 to be tax deductible in the current year.

In order to avoid a Superannuation Guarantee Charge (“SGC”) shortfall for the June 2015 quarter, the contributions must be physically received by the fund by Tuesday 28 July 2015. This refers to the date on which the cheque or electronic transfer is received and not the earlier date on which it was sent.

Superannuation Guarantee Charge Contribution Rate Unchanged Until July 2021

The SGC contribution rate rose to 9.5% on 1 July 2014. No further increases are scheduled until 1 July 2021 when it will rise to 10%.

The maximum SGC contribution base will increase to $50,810 per quarter from 1 July 2015. This equates to a maximum quarterly contribution of $4,826.95 per employee. Where employees have multiple employers this could lead to a breach of their concessional contributions cap.

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 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.

SuperStream Requirements for Employer Superannuation Contributions

SuperStream is a government reform aimed at improving the efficiency of the superannuation contribution system. Under SuperStream, employers must report super contributions on behalf of their employees by submitting data and payment details electronically. All superannuation funds, including Self Managed Superannuation Funds (SMSFs), must receive contribution details electronically in accordance with the SuperStream standard.

A common standard is intended to ensure employer contributions can be streamlined and monies paid in a consistent, timely and efficient manner to members’ accounts.

Unrelated employers will be required to follow the below steps when paying employee superannuation contributions:

  • send all data electronically (such as the employee’s details and the amount of super being paid) in a standard message format
  • make contribution payments electronically
  • link data and money with a unique payment reference number
  • ensure data and payments are sent on the same day
  • respond to fund requests for complete information within 10 business days

Key SuperStream Dates – 30 June 2015 and 30 June 2016

Large employers with 20 or more employees could have started making contributions using SuperStream from 1 July 2014 and must complete the change by 30 June 2015.

Smaller employers with 19 or fewer employees can start making contributions using the SuperStream procedures from 1 July 2015 and must complete the transition by 30 June 2016.

From 1 July 2016 the proposed Single Touch Payroll reporting system will be introduced. We will issue a future newsletter when the details are finalised.

Implementation Issues

To comply with the SuperStream standard, it is important to consider the solution that best aligns with the needs of your business. Some of the solutions available are:

  • Upgrading payroll software – many software providers have updated their software to enable compliance with SuperStream. To check whether your accounting software is compatible with your SuperStream obligations you can check the Australian Taxation Office’s Certified Product Register here.
  • Engaging an external service provider to manage the SuperStream obligations for you.
  • Using a clearing house - Smaller employers (19 or fewer employees) are able to utilise the free services offered by the Medicare Small Business Superannuation Clearing House.
  • Working with your super fund that may have an online solution available to you.

Self Managed Superannuation Funds and SuperStream

Under SuperStream all super funds, including SMSFs, must receive employer contribution data and payments electronically in accordance with the SuperStream Standard.

If an unrelated employer contributes to your SMSF you will need to provide your employer with the following information about your fund:

  • the fund’s name
  • the fund’s ABN
  • the fund’s electronic service address (ESA)
  • the fund’s bank account number and BSB

The ESA is the address that your employer will use to send electronic contribution messages to your SMSF. This address is different to an email address.

If you are unsure of your SMSF’s ESA, please contact us to discuss.

SuperStream will not affect your SMSF if it:

  • does not receive any employer contributions; or
  • only receives personal contributions made by members; or
  • only receives contributions from related-party employers who choose not to use the SuperStream processes.

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 including any capital gains by 30 June 2015 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 2015 and reported by Trustees to the ATO by 31 July 2015.  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 to the ATO by 30 September 2015.     

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 writes off a bad debt it may need to make a Family Trust Election in order to preserve the benefit of the associated deductions into future tax years. A Family Trust Election can restrict the class of potential beneficiaries that can receive trust that are not subject to family trust distribution tax.

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

Unpaid June 2014 Discretionary Trust Distributions to Private Companies

Any outstanding trust distributions made to corporate beneficiaries during the 2014 tax year will need to be addressed prior to 30 June 2015.

Making a cash payment to the company is the most straightforward way to clear the unpaid distributions.

However, there are options available to manage the amount over a period of time. The most common involves documenting the transaction by way of an interest bearing loan agreement and repaid over 7 years for unsecured loans (or 25 years when secured over real estate). Other strategies involving sub-trusts may also be possible.

Business Taxpayers

 
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Deferring Income

Income received in advance of the provision of services may be able to be 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.

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 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 to claim a bad debt deduction.

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 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.

Employee PAYG Payment Summary Issues

Employers are required to issue Pay As You Go (PAYG) payment summaries to employees. These are primarily to allow employees to complete their personal income tax returns. PAYG payment summaries require the following additional reporting requirements to ensure that their liability for various surcharges and obligations (eg Medicare levy surcharge and HELP repayments) or entitlement to certain tax offsets or other concessions is accurately determined.

We note the following PAYG Payment Summary issues

1. Reportable Employee Superannuation Contributions

These are all of the contributions that the employees request their employers to make in excess of the compulsory 9.5% superannuation guarantee amount. These usually arise from salary sacrificed arrangements.

Reportable Employer Superannuation Contributions are required to be included on your employees’ PAYG payment summaries.

2. Reportable Fringe Benefits

Where the “taxable” 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:

  • meal entertainment
  • car parking
  • certain pooled cars

Employees of Not For Profit organisations will be subject to a $5,000 annual cap on salary sacrifice meal entertainment from 1 April 2016.

3. Reconciliation of PAYG Withholding

It is important to cross check and reconcile the amounts of PAYG Withholding on the Annual Payment Summary Statement and PAYG Withholding Reconciliation Statement with the total amounts shown on each BAS lodged during the year.

The ATO cross match these records so it is essential that you get this correct. Please contact our office if you require assistance in reconciling these statements.

4. Finalising 2015 Salary Levels for Business Owners

Before business owners finalise their personal PAYG Payment Summaries for the 2015 financial year, please contact our office to discuss the salary levels which best take advantage of personal tax rates. We can also discuss whether or not a dividend should be declared before year end and if additional superannuation contributions are appropriate.

Research & Development Registration and Rate Change

Companies spending more that $20,000 annually on research & development (R&D) activities may be eligible for the following R&D tax offsets:

  • companies with group turnover under $20 million can claim a 45% refundable tax offset – legislation before parliament may reduce this rate to 43.5% from 1 July 2014
  • companies with higher turnover can claim a 40% non-refundable offset (to fall to 38.5% from 1 July 2014) on the first $100 million of R&D expenses

R&D related expenses incurred to an associate should be physically paid before 1 July 2015 to qualify for the current year’s offset.

Individuals with “Non-Commercial” Business Losses

Individuals with annual adjusted taxable incomes (the sum of taxable income, reportable fringe benefits, reportable 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 (10% or more of total assets); or
  • • are foreign owned; or
  • • are foreign investors

The measures now apply where annual debt deductions exceed $2 million (up from $250,000 in the 30 June 2014 and prior tax years).

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 $1.50 of debt for every $1.00 of equity) – this ratio has been reduced from the 80% of assets (or 3:1 ratio) that applied before 1 July 2014. 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 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 in relation to the interest rate, the amount of the loan or both.

Proposed Employee Share Scheme Changes from 1 July 2015

The current taxation problem with employee share and share options schemes in Australia is that the employee is generally taxed when the shares or options vest – this is when there ceases to be a real risk of forfeiting the shares or options.

There is amending legislation before Federal Parliament which seeks to improve the tax outcomes for employees. Under the proposed changes the taxing point for share options will occur at the earliest of one of the following times:

  • when the employee ceases the employment in respect of which they acquired the right;
  • fifteen years after the employee acquired the right;
  • when there are no longer any genuine restrictions on the disposal of the right (for example, being sold), and there is no real risk of the employee forfeiting the right; or
  • when the right is exercised and there is no real risk of the employee forfeiting the resulting share and there is no genuine restriction on the disposal of the resulting share (if such risks or restrictions exist, the taxing point is delayed until they lift).

Additional concessions may apply from 1 July 2015 may apply to small start up companies as announced in the last Federal budget.

 

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 2015 for new loans made since 1 July 2014.

No deemed dividends arise for outstanding loans made in the 2014 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 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 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 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.

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.