2009 Year End Tax Planning Guide
INDEX
Defer Income
Accelerate Deductions
Investment Allowances
Research & Development
Trading Stock Valuation Options
Bad Debts
Directors’ Fees
Prepayments
Blackhole Expenditure
Small Business Entities
Loans by Companies to their Shareholders and Associates
Trust Losses and Family Trust & Interposed Entity Elections
Trust Distributions
Capital Gains Tax
Income Tax Rates
Superannuation Contributions
Debt/Equity Rules
Thin Capitalisation
Foreign Exchange
Non-commercial losses
Personal Services Income
Tax Consolidation
International
Defer Income
Consider deferring receipt of income assessed on a cash receipts basis to after the end of the financial year.
If you use an accruals basis to return income, consider invoicing clients or customers after the end of the financial year.
Accelerate Deductions
Consider the acquisition or installation of plant before the end of the financial year – particularly low cost items that may qualify for immediate write off.
Realise losses by scrapping obsolete or unusable plant and equipment before year end.
Investment Allowances
Consider accelerating the installation of new plant and equipment before 1 July 2009 to benefit from the proposed 50% additional deduction for assets costing $1,000 or more acquired by Small Business Entities.
Small businesses who acquire assets with a cost of $1,000 or more will be eligible for a 50% tax bonus for depreciable assets acquired between 13 December 2008 and 31 December 2009, provided the asset is installed by 31 December 2010. However, the asset must be acquired and installed before 30 June 2009 in order to claim the tax bonus in this tax year.
Other businesses can claim a 30% tax bonus for depreciable assets costing $10,000 or more if the asset is acquired between 13 December 2008 and 30 June 2009 and installed before 30 June 2010.
Other businesses can claim a 10% tax bonus for depreciable assets costing $10,000 or more if the asset is acquired between 13 December 2008 and 31 December 2009 and is installed before 31 December 2010.
Research & Development
A deduction (or tax offset in some circumstances) is available up to 125%-175% for qualifying research and development expenditure incurred by registered organisations. Registration applications must be lodged annually within ten months after the end of the company’s year of income and before lodging their return of income.
A research and development tax credit scheme will be introduced in the 2010-11 tax year.
Trading Stock Valuation Options
Trading stock on hand can be valued at the lower of cost, replacement price, or market selling value.
Prior to year end any stock that is either of reduced value, obsolete or damaged should be identified and valued accordingly. Alternatively, stock of no value should be scrapped.
Bad Debts
Review all debts in existence prior to year end. Write off debts that have gone bad in the books of the company by 30 June. Remember to claim the GST adjustment.
Directors’ Fees
Deductions for directors’ fees, bonuses or similar payments are allowable only when the company makes a firm commitment to pay the fees, i.e. by passing an authorised resolution before 30 June. Therefore, in order to claim directors’ fees it is not sufficient for tax purposes to simply determine the fees and pay them in the following income year.
“Blackhole” Expenditure
Review expenditure to ensure that any “blackhole” expenditure is identified. This applies to business capital expenditure that is not otherwise taken into account as revenue or capital expenditure and which may qualify to be written off over five years.
Prepayments
An immediate deduction is normally not allowable for prepaid expenditure where a payment is made for services in advance and which will be provided in the future. The deduction will only be allowable proportionately in the year of income in which the service is provided.
Consideration should be given however to whether you can deduct the prepayment in full as a Small Business Entity or a non-business taxpayer or the prepayment falls into certain categories of expenditure for which a deduction is allowed in full. If this is the case, you should consider accelerating expenditure before the end of the financial year.
Small Business Entities
Consider whether the business entity, including a sole trader, can be classified as a Small Business Entity (“SBE”).
An entity is a SBE if it:
- carries on a business, and
- satisfies a $2m aggregated turnover test.
An SBE is entitled to a number of tax concessions including:
- more flexible rules regarding deduction of prepaid expenditure;
- immediate write-off of certain low-cost plant and equipment; and
- simplified valuation of trading stock.
Loans by Companies to their Shareholders and Associates
You should consider whether loans made to or amounts paid on your behalf from a private company or trust after 4 December 1997 could be characterised as “Division 7A” loans. Division 7A loans are potentially taxable to a shareholder or associate as fully taxable unfranked dividends.
You should consider:
- repayment of the loan which can be undertaken by the payment of a franked divided or salary or wages; or
- entering into a formal loan agreement for repayment of the loan (normally over 7 years).
Ensure that any required repayments for existing loan agreements have been made.
Trust Losses and Family Trust & Interposed Entity Elections
Where a trust has a current year tax loss, is claiming a bad debt deduction, is seeking to deduct a prior year tax loss, or is in receipt of franked dividend income, you must consider whether the trust should make a family trust election in order to effectively utilise these deductions/franking credits. The family trust election operates to identify a family group.
If a “family trust” is distributing income or capital to individuals, trusts, companies or partnerships, you must consider whether these entities must make an interposed entity election or are otherwise included in the family group.
If a distribution of income or capital is made to a person or entity outside the family group the distribution may be taxed at the highest marginal tax rate, currently 46.5%.
The decision to make a family trust election or an interposed entity election should only occur after receiving advice from your tax advisor.
Trust Distributions
The proper administration of a discretionary trust estate should see the trustee attending to a number of housekeeping and planning matters by 30 June 2009.
These housekeeping matters include the proper distribution of trust income and capital by way of resolution before the end of the financial year.
Capital Gains Tax
You should consider deferring the realisation of capital gains until after the end of the financial year. The realisation of a capital gain will normally be determined by the date of contract such as in the case of land or shares.
You should consider realising capital losses on assets before 30 June, if possible, in order to offset the capital loss against other capital gains.
Consider other CGT minimization strategies such as:
- Availability of small business and retirement concessions
- Defer a disposal to ensure the asset has been held for at least 12 months. This will potentially allow individuals and trusts to benefit from the 50% discount
- Review the cost base of an asset to ensure all expenditure available under the definition is included
- Consider whether it is most beneficial to utilize the 50% discount or frozen indexation
Income Tax Rates
1. Company Tax Rate
The company tax rate the year ended 30 June 2009 is 30%.
2. General Resident Individual Rates
|
Income bracket |
Tax Payable |
Marginal Tax Rate |
|
$ 0 - $ 6,000 |
Nil |
Nil |
|
$ 6,001 - $ 34,000 |
Nil plus |
15% of excess over $ 6,000 |
|
$ 34,001 - $ 80,000 |
$ 4,200 plus |
30% of excess over $ 34,000 |
|
$ 80,001 - $ 180,000 |
$ 18,000 plus |
40% of excess over $ 80,000 |
|
$ 180,001 + |
$ 58,000 plus |
45% of excess over $ 180,000 |
Additional concessions are available for low income earners and low income families.
3. Medicare Levy
The Medicare Levy is 1.5% - subject to low income phase-in.
Superannuation Contributions
Consider whether you should make a “concessional” deductible $50,000 contribution to superannuation as self employed person or whether the contribution should be made by a related entity with whom you are employed e.g. as a director, before 1 July 2009. From 1 July 2009, these contributions will be limited to $25,000 per annum.
Consider whether you are eligible to make a $100,000 contribution if you are 50 years or more before 1 July 2009. From 1 July 2009 to 30 June 2012, the contribution limit for persons aged 50 or more will be reduced to $50,000.
Debt/Equity Rules
The debt/equity rules determine whether an interest in a company is a debt interest or equity interest. This classification will determine whether a return may be frankable and non deductible such as a dividend or may be deductible and non frankable such as an interest payment.
Particular care should be exercised when issuing fixed return shares such as redeemable preference shares or advancing at call loans by shareholders to a company.
Thin Capitalisation
Deductions for interest paid on borrowing from foreign lenders (including related parties) may be denied where these borrowings are excessive.
You should consider whether borrowings are excessive and whether capital and debt restructuring should be undertaken before the end of the financial year to ensure interest deductions are not foregone.
Foreign Exchange
Consider whether foreign exchange losses should be realised before the end of the financial year.
You should consider whether you can use a simplified method of accounting for foreign assets and liabilities, particularly foreign currency bank accounts.
Non-commercial losses
For individuals and partnerships, losses from a business activity can only be offset against other income if certain tests are passed. “Non-commercial” losses are quarantined to be offset against income in future years.
You should consider whether these rules may adversely affect you.
Personal Services Income (PSI)
Under the PSI rules, personal services income derived by the company or trust is taken to be income of the individual.
PAYG withholding may apply in some circumstances and certain deductions may be restricted.
Some companies earning personal services income may be exempted from the rules if certain tests are passed regarding unrelated clients, employees and business premises.
You should consider whether the PSI rules may adversely affect you. You should consider whether a determination should be sought from the Australian Taxation Office to be exempted from these rules.
Tax Consolidation
The tax consolidation rules now allow a wholly owned group of companies (parent company and subsidiaries) to be able to lodge only one tax return for the whole group.
You should consider whether tax consolidation will allow effective use of tax losses in company groups.
International
Consider whether you have international transactions with related parties. Have arm’s length prices been charged and are there any transfer pricing issues to address.
Identify and address other international tax issues such as identifying permanent establishment/branches in foreign countries or whether there are foreign trusts or companies which could be affected by Australia’s accruals foreign taxation rules.
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