Archive for April, 2014

Tax planning

Tuesday, April 29th, 2014

There are many ways in which entities can defer income, maximise deductions and take advantage of other tax planning initiatives to manage their taxable incomes. Taxpayers should be aware that in order to maximise these opportunities, they need to start the year-end tax planning process early. Of course, those undertaking tax planning should be aware of the potential application of anti-avoidance provisions. However, if done correctly, tax planning can provide a number of tax savings for entities.

Deferring assessable income

  • Income received in advance of services being provided is, generally, not assessable until the services are provided.
  • Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
  • A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year.
  • Roll-over relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.

Maximising deductions

Business taxpayers

  • Taxpayers should review all outstanding debts prior to year-end to determine whether there are any debtors who may be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, the taxpayer could consider writing off the balance as bad debt.
  • The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting the prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the “same business” test.
  • A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
  • Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.

Non-business taxpayers

  • Non-business taxpayers are entitled to an immediate deduction for assets used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
  • The self-employed and other eligible persons are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the 10% rule.

Companies

  • Companies should ensure that all dividends paid to shareholders during the relevant franking period (generally the income year) are franked to the same extent to avoid breaching the benchmark rule.
  • Loans, payments and debts forgiven by private companies to their shareholders and associates may give rise to unfranked dividends that are assessable to the shareholders and their associates. Shareholders and entities should consider repaying loans and payments on time or have appropriate loan agreements in place.
  • Companies should consider whether they have undertaken eligible research and development (R&D) activities that may be eligible for the R&D tax incentive.
  • Companies may want to consider consolidating for tax purposes prior to year-end to reduce compliance costs and take advantage of tax opportunities available as a result of the consolidated group being treated as a single entity for tax purposes.
  • Companies should carefully consider whether any deductions are available for any carried-forward tax losses, including by analysing the continuity of ownership and same business tests.

Trusts

  • Taxpayers should review trust deeds to determine how trust income is defined. This may have an impact on the trustee’s tax planning.
  • Trustees should consider whether a family trust election (FTE) is required to ensure that any losses or bad debts incurred by the trust will be deductible and to ensure that franking credits will be available to beneficiaries.
  • Taxpayers should avoid retaining income in a trust because it may be taxed in the hands of the trustee at the top marginal tax rate of 46.5%.

Capital gains tax

  • A taxpayer may consider crystallising any unrealised capital gains and losses to improve their overall tax position for an income year.
  • Eligible small business entities can access a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.

Superannuation

  • For 2013–2014, a $35,000 concessional contributions cap applies for those who were aged 59 years or over on 30 June 2013. The $35,000 concessional cap will apply from 2014–2015 for those aged 49 years or over on 30 June of the previous income year.
  • From 1 July 2013, excess concessional contributions tax has been abolished. Instead, excess concessional contributions are included in an individual’s assessable income (and subject to an interest charge). Excess non-concessional contributions tax continues to apply where relevant.
  • Individuals who wish to take advantage of the concessionally taxed superannuation environment but wish to stay under the relevant contributions caps should consider keeping track of contributions and avoid making last minute contributions that would be allocated to the next financial year.
  • Individuals with salary-sacrifice superannuation arrangements may want to have early discussions with their employers to help ensure contributions are allocated to the correct financial year.
  • From 2012–2013, individuals earning above $300,000 are subject to an additional 15% tax on concessional contributions. However, despite the extra 15% tax, there is still an effective tax concession of 15% (ie the top marginal rate less 30%) on their contributions up to the relevant cap.

Fringe benefits tax

  • The four rates used in the statutory formula method for determining the taxable value of car fringe benefits are being replaced with a single statutory rate of 20% for fringe benefits.
  • The first $1,000 of the aggregate of the taxable values of “in-house” fringe benefits (ie in-house expense payment, in-house property and in-house residual fringe benefits) provided to an employee during a year is exempt from FBT. However, the $1,000 reduction does not apply to an in-house benefit provided on or after 22 October 2012 under a salary-packaging arrangement.

Individuals

  • The current government has proposed to cancel the carbon tax-related income tax cuts that are legislated to commence on 1 July 2015, and repeal the associated amendments to the low-income tax offset (LITO). Under these changes, the tax-free threshold would remain at $18,200 and the maximum value of the LITO would remain at $445.
  • The 30% private health insurance offset has been means tested since 1 July 2012. For 2013–2014, the singles’ income threshold for the 30% offset is $88,000 ($176,000 for families).
  • The medical expenses offset is being phased out and will not be available after 2018–2019. Transitional arrangements allow taxpayers to claim the offset from the 2012–2013 income year until the end of the 2018–2019 income year, subject to limitations.

ATO eye on dividend stripping

Monday, April 7th, 2014

The ATO has released details of “dividend access share” arrangements that it considers to be dividend stripping schemes under the tax law anti-avoidance provisions. These arrangements aim to allow ordinary shareholders of a private company and/or their associates to derive the economic benefit of significant profits accumulating in the private company in a substantially (if not entirely) tax-free form.

These arrangements involve a number of features, but principally include the company issuing a new class of shares to another entity (eg another company controlled by the original shareholders) for nominal consideration, and the company declaring and paying fully franked dividends on the new class of shares of an amount approximately equal to the accumulated profits in the company. The ATO says these arrangements generally result in a reduction or elimination of the taxation liabilities that would normally arise with the payment of dividends (that is, if those dividends were paid to the company’s ordinary shareholders).

The Commissioner is of the view that under such circumstances, he can exercise his power to cancel all or part of the tax benefit obtained from these schemes.

Penalty for late superannuation contribution

Monday, April 7th, 2014

The Federal Court has affirmed an excess superannuation contributions tax assessment issued to an individual after finding there were no “special circumstances” to warrant reallocating excess concessional contributions that had been received late via BPAY.

The Court heard that the bookkeeper of the individual’s employer had made two payments on 30 June 2009 via BPAY to the individual’s superannuation fund, and that those payment were received by the fund on 1 July 2009. The Court also heard that the bookkeeper had mistakenly made an early payment to the individual’s superannuation fund on 27 May 2010, which was meant for the following financial year.

As a result of these payments, the total amount of funds received by the superannuation fund in the 2009–2010 financial year exceeded the individual’s $50,000 concessional contributions cap for the year.

The individual argued that there were “special circumstances” and that the Commissioner should reallocate the two late payments to the 2008–2009 financial year, and the 27 May 2010 payment to the 2010–2011 financial year.

However, the Court said late BPAY payments did not amount to “special circumstances”. Further, simple errors such as making a contribution too early also did not amount to “special circumstances”. The Court was also of the view that the individual had been in a position to ensure that the contributions were made in the correct year.

TIP: A taxpayer who has contributed above his or her concessional or non-concessional contributions caps can apply to the Commissioner to exercise his discretion to disregard or reallocate excess contributions for a financial year. However, it should be noted that the discretion is not easy to obtain.

Individuals should consider keeping track of contributions and avoid making last-minute contributions that could be allocated to the next financial year. Individuals with salary-sacrifice arrangements should carefully identify the timing of superannuation payments relating to wages accrued for the June quarter (or June month). Please contact us for further information.

No deduction for preparatory activities

Monday, April 7th, 2014

Successful entrepreneurs are a creative and motivated bunch, but it generally takes several attempts to develop a successful business venture. Costs are quickly incurred in determining the viability of, and in pursuing, a business idea. However, careful consideration of the deductibility of such costs needs to be taken. If the idea is a winner and a new business venture is born, a deduction may be available. However, in other cases, the deduction may not be available.

In one recent case, an individual was unsuccessful before the Federal Court in relation to his claims for deductions incurred in pursuing 14 business ventures on a 500-acre property. The Administrative Appeals Tribunal (AAT) had earlier found that although the man’s operations met a number of criteria relevant in determining whether a business was being carried on, none of the activities had advanced much beyond the planning stage.

The AAT held that the individual was not “carrying on a business” and that the claimed deductions were therefore not available. The Federal Court affirmed the AAT’s decision.

TIP: Given the breadth of examples covered in this decision, the decision is a useful reference point for taxpayers dealing with the issue of deductibility of costs incurred in preparatory activities associated with a business idea that is later abandoned or a business venture not yet generating income. Please contact our office for further details.

ATO compliance approach can be improved

Monday, April 7th, 2014

The government has released several reports prepared by the Inspector-General of Taxation, Mr Ali Noroozi, into the ATO’s compliance approach to individual taxpayers.

The Tax Inspector found that data-matching was generally positively received where the ATO uses it to assist individuals. However, he found that stakeholders were concerned that the data used by the ATO could be inaccurate and not sufficiently vetted before comparisons were made with taxpayer-reported information.

In relation to the ATO delaying tax returns to check refund claims, the Tax Inspector recommended that the ATO improve its processes as well as communication with taxpayers. Among other things, Mr Noroozi thought the ATO could better differentiate potentially fraudulent claims from mere mistakes. The ATO could also improve the time taken to review cases, and provide clearer reasons for any adjustments made.

Tax data net to be widened

Monday, April 7th, 2014

The government has proposed to improve taxpayer compliance through new third-party reporting regimes and has undertaken public consultation to seek feedback on possible policy issues. The proposal aims to improve taxpayer compliance by enhancing the information reported to the ATO by a range of third parties. The proposal is currently scheduled to commence from 1 July 2014 (although first reports would not be due to the ATO until after 1 July 2015).

The government notes that some of the elements of the proposal can be implemented by the ATO, whereas other elements will require tax law changes. This would involve the creation of new third-party reporting regimes in relation to:

•    sales of real property;
•    sales of shares and units in unit trusts;
•    sales through merchant debit and credit services; and
•    taxable government grants and other payments.

In respect of these transactions, the government suggests that the ATO would initially seek to receive annual reports and then seek to move to quarterly, monthly or real-time reporting.