30 June 2016 Australian Taxation Housekeeping
The current financial year ends on Thursday 30 June 2016. 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 May 2016 Federal Budget proposals saw a particular emphasis on superannuation tax concessions. Our complementary superannuation newsletter discusses the importance of maximising opportunities under the concessional (ie tax deductible) and non-concessional (ie after tax) contribution caps if want to maximise superannuation contribution entitlements for yourself, your family or your employees.
Please click on the links below for:
Individual Tax Issues Outside Superannuation
Limited Federal Budget Changes to Personal Tax Rates
The recent Federal Budget brought minor inflation adjustments to the Medicare Levy thresholds and a proposed $7,000 increase in the income level at which the 37% marginal tax rate first applies ($87,000 up from $80,000). The $315 annual tax saving from the second item does not provide any significant additional incentive to defer the derivation of assessable income or bring forward allowable deductions.
The 2% temporary Budget Repair Levy is still proposed to be removed from 1 July 2017. It is not clear whether this timetable could be impacted by the outcome of the forthcoming Federal election.
Gifts and Deductions
Gifts or donations of at least $2 to tax deductible charities made by 30 June 2016 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 – 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 car has comparatively limited business use it may be more tax effective for an 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 whilst reducing the administrative burden on employers.
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 $2,265 (or $5,343 for certain higher income earners).
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
- Distributions to the above subject to the Family Trust Distribution Tax
- Reportable fringe benefits
- Reportable (i.e. salary sacrifice) superannuation contributions
- Total net investment losses
If you expect your income to rise above the relevant threshold and you do not currently have 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 potential 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 dependent child after the second. 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 9.273% and 37.094% depending on the contributor’s age.
Lifetime Health Insurance Cover Loading – No Private Health Insurance After Age 30
If you do not have 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.
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 Licence Holder to assess the viability of the project).
Superannuation Planning for Individuals and Employers
Tax Planning for Investors
Deducting Prepaid Expenses
Individual non-business investors and small business taxpayers (currently aggregate turnover under $2 million but set to rise – 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 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 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 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 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 (e.g. 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 receive your income tax assessment 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.
Discretionary Trust Distributions
Trustees of discretionary (i.e. 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 2016 or such earlier 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 must 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 2016 and reported by Trustees to the ATO by 31 July 2016. 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 2016.
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 it may need to make a Family Trust Election or satisfy an alternative test in order to preserve the benefit of those losses into future years. A Family Trust Election can restrict the class of potential beneficiaries that can receive trust distributions without being subject to 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 50% or more interest in a private company that has tax loss or bad debt deductions.
Family trust elections raise a number of complex issues that are best discussed with your UHY Haines Norton adviser.
Unpaid 30 June 2015 Discretionary Trust Distributions to Private Companies
Any outstanding (i.e. unpaid) trust distributions made to corporate beneficiaries during the 30 June 2015 tax year will need to be addressed before the due date for lodging the company’s 30 June 2016 income tax return (or actual lodgement date if earlier).
Making a cash payment to the company is the most straightforward way to clear the unpaid distributions.
There are, however, options available to manage the amount over a period of time. The most common involves documenting the transaction by way of a Division 7A private company loan agreement and repaid over 7 years for unsecured loans (or 25 years when secured over real estate) with interest commencing from 1 July 2016. Other, more complex strategies involving sub-trusts are possible.
Business Taxpayers Especially Small Business Budget Developments
The May 2016 Federal Budget proposes to increase the turnover at which a taxpayer becomes eligible for Small Business tax concessions and cut the tax rate applying to qualifying companies.
What are the Small Business Entity (SBE) Tax Concessions – Current $2 Million Turnover Test
An entity currently 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 $2 million;
- 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 this year.
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 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 current tax benefits of qualifying as an SBE include:
- capital allowance (depreciation) concessions
- trading stock 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 onsite car parking
- ability to account for GST on a cash basis
Increase Most Small Business Turnover Thresholds from $2 Million to $10 Million from 1 July 2016
The SBE annual aggregated turnover threshold test will increase from $2 million to $10 million from 1 July 2016. This will enable access to the following small business concessions:
- Simplified depreciation rules
- Immediate write off of assets up to $20,000 (until 30 June 2017 and $1,000 thereafter)
- Simplified trading stock rules
- Simplified method of paying PAYG instalments
- Option to account for GST on a cash basis
- Immediate deductibility of certain start up costs
Small business FBT exemptions will apply from 1 April 2017.
The turnover threshold for the small business CGT concessions will remain at $2 million where the alternative $6 million net asset value test is failed.
Reduced Tax Rates for Small Businesses Generally
The small business company tax rate will fall to 27.5% (from 28.5%) from the 2016/17 income year. See below for more general changes to the company tax rate.
The tax discount for unincorporated small businesses (i.e. sole traders and partners in a partnership) will increase from 5% to 16% over 10 years. This is currently delivered as an offset calculated as 5% of the income from the small business activity and capped at $1,000 per individual per year.
The maximum discount remains capped at $1,000 per individual per year.
Where the small business entity is a trust, individual beneficiaries, but not corporate beneficiaries, qualify for the lower tax rate on distributions of small business trust income.
Cuts to Small Business and General Company Income Tax Rates from 1 July 2016
The recent Budget proposed that the tax rate for eligible small business operating through a company structure will be cut from 28.5% to 27.5% from 1 July 2016. 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 qualifying small business companies will remain at 27.5% until 30 June 2024 but the permitted turnover will rise gradually to $1 billion.
It appears the 30% general company tax rate will continue to apply to all companies paying franked dividends until 30 June 2024. By 30 June 2027 the general company tax rate is forecast to fall to 25%. If profitable small business companies take advantage of the $20,000 instant asset write off and have high dividend payout ratios they could face a shortage of franking credits and a potential liability to franking deficits tax.
Temporary $20,000 Instant Business Asset Write Off for Small Businesses to 30 June 2017
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 2017. The Tax Office has confirmed these measures apply to both new and second hand assets and will monitor the cut off dates to prevent abuses. The 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 pool balance falls below $20,000 after 12 May 2016 and before 1 July 2017 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.
Impact for Larger Small Businesses – Turnovers $2 Million to $10 Million
These companies will be newly eligible for the instant asset write off for assets ordered and installed ready for use between 1 July 2016 and 30 June 2017. 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 next year. The Tax Office has also ruled that income which is subject to a “contingency of repayment” can also be deferred.
Eligible small businesses that defer income beyond 30 June 2016 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 additional 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 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:
- Meal entertainment (for benefits provided before 1 April 2016)
- 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.
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 45% refundable tax offset – legislation before parliament which proposed to reduce this rate to 43.5% from 1 July 2014 lapsed when the Federal election was called
- Companies with higher turnover can claim a 40% non-refundable offset (proposed to fall to 38.5%) 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 2016 to be qualify for the current years offset.
Qualifying companies should be registered with AusIndustry on behalf of Innovation Australia within 10 months after year end (i.e. by 30 April 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 (i.e. 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 tests:
- 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 before 1 July 2014).
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 (i.e. $10 of gross assets supporting $6 of debt for every $4 of equity – previously a 3:1 (75%) ratio applied). 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. It may also be possible to revalue goodwill for the purposes of the tax calculations.
The 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
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 (“Division 7A”). These are assessable to the recipient as an unfranked dividend.
No action is required before 30 June 2016 for new loans made since 1 July 2015.
No deemed dividends arise for outstanding loans made in the 2015 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).
The Government has announced a longer term review of Division 7A. The results, which are expected to include more commercial loan terms, will take effect from the 2018 financial year.
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.