RSM Australia

Tax planning 2016

Tax Insights

As it is coming close to the end of the financial year, it is again time to review your tax position and consider your end of year tax planning options.

This document outlines a few tax planning approaches which you may want to consider prior to the end of the 2016 financial year. We have noted the key changes to the taxation system, announced in the Liberal Party Federal Budget that may affect you for the 2016 year.

Below follows suggested tax planning activities to be undertaken broken down into the following sections:

  • Business entities
  • Primary producers
  • Individuals

Business entities

Review income recognition

For businesses operating on the accrual basis, it is necessary to clearly identify your year end cut off dates and criteria for the recognition of income, to ensure income is included in the correct period.  Income should be included when it is constructively received by the taxpayer, or in other words, when you have done everything required of you to earn the income and you have an indisputable right to the money.

You should only invoice in the month of June for jobs that are completed before 30 June. Any incomplete jobs should be invoiced on completion in the following financial year.

Employee superannuation guarantee payments

Superannuation contributions for employees are only tax deductible when they are actually paid, not when there is an obligation to pay, like other expenses. 
As such when preparing your final wage payments for the year we suggest that superannuation payments are calculated and made prior to 30 June 2016.

Bring forward deductions

Small business entities (annual turnover of less than $2 million) can access prepayment concessions that are not available to larger businesses.  Therefore, if you have the cash available, you may want to consider prepaying expenses such as rent, accounting fees, interest expense, bonuses and subscriptions. It is important to note that pre-paid expenses can be paid in advance for no longer than 12 months in order to be eligible for the prepayment concession.

We note that the Federal Government has proposed a reduction in the tax rate for small business entities from 1 July 2016, therefore by bringing forward deductions prior to 30 June 2016 a further tax benefit is received.

Prior to making any prepayments, we recommend that you contact us to confirm your eligibility for the deduction in the 2016 year.

Budget alert
It has been proposed that the small business entity annual turnover limit be increased from $2 million to 10 million on 1 July 2016.

Small business assets - instant asset write off

Small business entities will be eligible to claim an immediate write off for assets costing less than $20,000 (acquired and installed ready for use from 12 May 2015). The previous immediate write off limit was $1,000. Assets costing $20,000 or more will need to be depreciated in the general small business pool. The value of the pool can also be written off once it drops below $20,000. 

We note that the $20,000 limit is GST exclusive for businesses registered for GST but GST inclusive for those who are not registered.

Budget alert
Given it is proposed that the small business entity annual turnover limit is to increase from $2 million to 10 million on 1 July 2016. Business entities with an annual turnover of more than $2 million but less than $10 million may want to consider delaying capital expenditure until after 1 July 2016 to be able to access the instant asset write off available to small business entities.

Capital gains tax roll-over relief

Small businesses with an aggregated turnover of less than $2 million will be permitted to make changes to their legal structure, such as moving from a trust to a corporate structure, without running the risk of triggering a capital gains tax (CGT) event. This bill was announced in the 2015 Federal Budget and has now received royal assent and is law.

This change allows small businesses to operate in a structure that suits their operations at inception rather than potentially being burdened with unnecessary regulations caused by having to plan for potential future growth. The rollover relief will be first available for rollovers occurring in the 2016-17 year onwards, therefore if possible, businesses may consider delaying their restructuring activities until after 1 July 2016.

Review doubtful debts

Prior to 30 June, ensure any doubtful debts that are not recoverable are written off.  Bad debts may only be written off once there has been a genuine attempt to recover the debt. When writing off bad debts, also consider the GST adjustment required.

Company loan – Division 7A (Trust Loans Subdivision EA)

Div 7A loans result from a variety of circumstances, the most common being:

  • When money is ‘lent’ by a company to shareholder/s or a shareholder’s associate during the financial year; or
  • When taxable distributions are made by a trust to a company but the actual cash is retained by the trust.

These loans need to be either repaid or placed on commercial terms (written loan agreement outlining term of loan and the timing of principal and interest repayments) or under Division 7A of the Tax Act they can potentially be treated as deemed dividends and taxed in the borrower’s hands.

In respect to existing Division 7A loans, please ensure the minimum annual repayment is received by the company prior to 30 June 2016.

In the majority of instances we will have discussed this issue with you as it is an ongoing matter.  However if you do have any concerns please contact us.

Trust distributions

The tax-free distribution for minors from a discretionary trust is $416 for the 2015/16 financial year. We will be in contact leading up to 30 June 2016 to ensure trust distribution minutes are in place. 

Stocktake

An accurate physical stocktake should be performed at 30 June 2016 to ensure you are correctly reporting closing stock.  Identify any obsolete stock to be written off and old stock to write down to its correct market value.  Trading stock can be valued at the lower of cost, market value or replacement value for tax purposes. 

Small business entities (annual turnover of less than $2 million) have the option to not perform a physical stocktake if the difference between opening stock and closing stock is less than $5,000.

Time the sale of investments

If you are planning on selling investments that will result in a profit or a loss, consider the outcome of the sale in terms of your current position.  For example, do you have capital losses available to you in the current year?  Are you expecting less income in the 2017 financial year?

Personal services income

If you are receiving personal services income, you may wish to review the PSI rules in the lead up to 30 June 2016 to ensure that the income can be dealt with in the most tax effective manner. Please contact us if you have any questions or wish to discuss this issue further. 

Primary producers

Accelerated depreciation for primary producers

Accelerated depreciation for primary producers announced in the 2015 Federal Budget received royal assent and is now law. Under these rules an immediate deduction is provided in respect to the acquisition and installation of fencing and certain water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills. Further, the cost of fodder storage assets, such as silos and tanks used to store animal feed and grain is eligible for depreciation over a three year term, these assets were previously written off over 20 years. These accelerated depreciation rules took effect on 12 May 2015 and will run until 30 June 2017.

Individual tax payers

Superannuation contributions (self-employed) concessional contributions

You may be eligible to make a deductible superannuation contribution if your employment income is less than 10% of your assessable income.  

It is important to note that the annual concessional contributions cap is now $30,000 for most individuals. The only variation to this is if you were aged 49 years or over on 30 June 2015, in which case your concessional contribution cap will be increased to $35,000 for the 2015/16 year.

To claim a deduction for superannuation contributions in your income tax return you must provide a signed notice (Section 290-170 notice) to your superannuation fund notifying the fund of your intention to claim a deduction for these contributions in your individual income tax return. These signed forms must be provided to your superannuation fund and you must receive an acknowledgement notice from the fund confirming your contribution, prior to the lodgement of your individual income tax return.

Budget alert
It is proposed that the annual concessional contribution cap will be reduced to $25,000 regardless of age from 1 July 2017.

Non-concessional contributions

Currently for members under 65, non-concessional contributions are subject to a yearly cap of $180,000 or $540,000 over a three-year period. Members over 65 but under 75 are not eligible for the three year bring forward non-concessional contribution of $540,000. Members are not eligible to make non-concessional contributions once they are 75 or older. 

However due to changes to these rules in the 2016 Federal Budget we advise you to contact us prior to making any non-concessional contributions.

Budget alert
$1.6 million transfer balance cap - A new lifetime pension commencement cap has been proposed. From 1 July 2017, an individual may not commence a pension in superannuation with a balance of more than $1.6 million. In addition, for those with existing balances exceeding $1.6 million, the excess amount will need to be commuted back to the accumulation phase, where the earnings will attract 15% tax. 
Lifetime non-concessional cap - A lifetime non-concessional cap of $500,000 has been proposed from 3 May 2016 and counting contributions back to 1 July 2007.  

Division 293 tax on superannuation contributions

As in previous years, individuals with an adjusted taxable income over $300,000 will be subject to an additional 15% tax on their taxable superannuation contributions. 

Budget alert
It is proposed that the adjusted taxable income threshold be lowered from $300,000 to $250,000. 

Transition to retirement income stream (TRIS)

Individuals who are currently between 55 and 60 years of age are eligible to commence a TRIS. This is a pension drawn from the member’s superannuation fund to supplement their employment income. 

Once a TRIS is started it is possible for the individual to then contribute (via salary sacrifice) an additional amount to their superannuation fund while supplementing this with their TRIS payments. In doing this a tax saving is generated within the superannuation fund.

The receipt of the TRIS by the member will be taxable to them, however the tax rate applicable is a discounted rate.

As everyone’s circumstances differ we recommend, should you wish to consider commencing a TRIS, that you contact us to discuss in more detail.

Budget alert
It is proposed that the tax exempt status of income supporting TRIS will be removed resulting in a tax of 15% being levied on income in these funds.

Bring forward deductions

Taxpayers who own an investment property or have an investment portfolio margin loan may also consider prepaying interest up to 12 months in advance on investment loans.

Prior to making any prepayments, we recommend that you contact us to confirm your eligibility for the deduction in the 2016 year.

Motor vehicle claims

The 1/3 of motor vehicle expenses and 12% of the purchase cost of a motor vehicle methods for claiming motor vehicle expenses were discontinued on 1 July 2015, meaning taxpayers can only use the cents per kilometre or log book method to claim a tax deduction for work related car expenses. 

Ensure you have a valid log book showing the business use of vehicles if you wish to claim more than the 66 cents per kilometre limited to 5,000km per year per motor vehicle.  A log book must be kept for 12 consecutive weeks and must be updated every five years or whenever your vehicle use materially changes.  Log books require detailed entries of the business travel, for example ‘travel from office to Noosa to prepare XYZ Pty Ltd June 2016 BAS’.  A log book may increase your motor vehicle deductions if you use your car regularly for business use.  

It is important to note, in most cases, home to work travel is not included as business related.

Donations

If you are intending on claiming donations against your taxable income, please ensure that the donations are made to deductible gift recipients. A list of DGRs are available on the ATO’s website.

Net medical expenses tax offset

The net medical expenses tax offset will continue to be phased out in the 2016 financial year. Only taxpayers who have out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses are eligible. 

Medical expenses must be for: 

  • yourself 
  • your spouse 
  • your children under 21 years old 
  • an invalid relative if you claim a Dependent Tax Offset for them 

Non-commercial loss rules

In the 2009 Budget, the government announced changes to the non-commercial losses rules which further restrict the deductibility of business losses incurred in relation to non-profitable business activities. 

An income test has been introduced where individuals with an adjusted taxable income of $250,000 or more will have the loss from their non-commercial business activity quarantined and carried forward to offset any further profits from the same business activity, irrespective of whether they satisfy any of the four objective tests.

An individual’s adjusted taxable income comprises the sum of their taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses.

Where a taxpayer’s adjusted taxable income is less than $250,000 (income test), the taxpayer must meet one of the following business tests to be able to include the business loss in their income tax return:

  • Assessable income test: assessable income for the year from that activity exceeds $20,000
  • Real property test: the cost bases of real property used on a continuing basis in carrying on the activity is at least $500,000
  • Other assets Test: value of other assets used in the business are $100,000 or more
  • Profits test: The business has had profits in three out of the last five years.

It is important to note that primary production and professional arts businesses are able to claim the losses from that business provided that the taxpayers’ assessable income from other sources is less than $40,000.

Medicare levy surcharge

Singles and families that do not have adequate private health insurance cover will be liable for the Medicare levy surcharge. This is now determined by new income thresholds, set out in the table below. 

 
No change
Threshold 1
Threshold 2
Threshold 3
Singles
$90,000 or less
$90,001-$105,000
$105,000-$140,000
$140,001 or more
Families
$180,000 or less
$180,001-$210,000
$210,001-$280,000
$280,001 or more
Rate
0.0%
1.0%
1.25%
1.5%

 

Note: The family income threshold is increased by $1,500 for each dependent child after the first child.

 

RSM in Sydney - providing accountanting, auditors and consultants for sydney Businesses