The 2014 Financial Year Is Coming To An End
This special edition of our newsletter contains commentary on many of the items you may encounter, as part of your end of financial year deliberations.
End Of Year Tips
Tax planning is largely about seeking to average income levels over a series of years to ensure income in one year is not taxed at a higher rate when other years income could be earned and taxed at a much lower rate. It is therefore important to estimate your taxable income for 2014 and 2015 and consider whether it is worthwhile seeking to move expenses or income from 2014 to 2015 or vice versa. This is often possible via various strategies. If you need assistance or have any questions we would appreciate the opportunity to help.
"Cash is King!" - update your financial records to 30th June 2014, so you can discuss with us the possible variation of your PAYG instalment due by 28th July 2014.
The 2014 Federal government's budget introduced some items to which you may need to give consideration prior to 30th June 2014. These include:
• From 1 July 2014 to 30 June 2017 a Temporary Budget Repair Levy of 2% applies to the component of income over $180,000.
• Medicare levy increases to 2% from 1 July 2014.
• Changes to FBT rate to increase the rate to 49% from 1 April 2015 to 31 March 2017.
• Dependant Spouse Offset and Mature age Worker Tax Offset will be mostly abolished from 1 July 2014.
• The company tax rate will reduce from 30% to 28.5% from 1 July 2015. The rate change may bring forward some dividends from companies to use the higher franking rate.
• A Parental Leave Levy of 1.5% will apply to companies with taxable incomes over $5M.
End Of Year Tax Planning Checklist 2014
Small Business Entity Rules
The small business entity rules apply to a sole trader, partnership, company or trust which has a group turnover of less than $2M in the previous year, or likely to be less than $2M in the current year. If you are a small business, the following may help.
• Depreciation Rules - if the asset costs less than $6,500 it may be written off in full in the year in which it was acquired. Other assets go into a single pool to be written off at 30% (for any new assets acquired 15% in the first year).
• Depreciation – Motor Vehicle – you can choose to use the capital allowance provision to calculate the deduction for a motor vehicle costing $6,500 or more if you have started to use or installed ready for use for business purposes. The deduction in the first year is $5,000 + 15% of the residual.
• Trading Stock Rules - small business entities do not have to account for changes in trading stock or prepare a stocktake for tax purposes where the difference between the value of the opening stock and a reasonable estimate of the closing stock is $5,000 or less.
• Prepaid Expenses - a small business entity taxpayer can claim an immediate deduction for certain prepaid business expenses that satisfy the 12-month rule.
• Prepayments - Not Defined As Small Business - the prepayment rule for other businesses applies to business taxpayers with a group turnover of $2M or more.
• Prepayments "Excluded Expenditure" - there is an exemption for payments of "excluded expenditure". (Please contact us for further details.)
• Interest On Investment Loans - taxpayers who have borrowed money for a non-business investment (e.g. rental property) can check with their lenders to see if they can prepay interest prior to 30th June 2014.
• Staff Bonuses - ensure a cheque has been written prior to 30th June 2014 and PAYG withholding tax deducted. Otherwise contact our office to discuss how accrued bonuses can be claimed.
• Superannuation – for the year ending 30th June 2014, superannuation contributions can be paid for any person up to $25,000, or $35,000 if 59 years or over on 30 June 2013.
• Self-Employed Persons - self-employed persons can obtain a superannuation deduction on the same basis as that adopted for employees as long as you meet the 10% rule. (Please contact us for further details).
• Salary Sacrifice Arrangements - salary sacrifice arrangements can be utilised to maximise superannuation contributions subject to the overall deduction limits.
• Non-Concessional Superannuation Contributions - non-concessional contributions can be made up to $150,000 per annum or a total of $450,000 over a 3-year period. This will increase to $180,000 in 2015.
• Superannuation Co-contribution - the government will give lower income earners $0.50 for each $1 they contribute to superannuation from their after-tax salary up to a maximum of $1,000.
• Interest On Loan Funds - interest can be claimed on loans taken out for business purposes or to buy income producing properties and/or shares.
• Repairs & Maintenance - ensure that the work has been completed prior to 30th June 2014.
• Directors' Fees - ensure cheques are drawn prior to 30th June 2014 and that PAYG Withholding Tax is deducted.
• Travel Deductions - prepare a full itinerary and diary if travel is for travel of six nights or more and maintain records to support all expenses.
• Donations - any promised tax deductible donations should be made prior to 30th June 2014.
• Building Allowance - the construction costs of income producing buildings may be written off at 2½% or 4%, depending on date of construction.
• Salary Packages - ensure that salary packages for 2014/15 are negotiated and documented prior to 30th June 2014.
• Stock On Hand - review stocktake list as soon as possible. Determine whether to conduct "sales" prior to 30th June 2014. Conduct stocktake as at 30th June 2014. If you are conducting regular "rolling" stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2014. Stocktaking may not be necessary if you are a small business entity.
• Value Of Stock - stock can be valued at different individual methods for each item of stock:
- Sales Value; or
- Lower of Market Value or Replacement Cost.
• Obsolete Stock - identify any obsolete stock and decide whether to clear or dump that stock prior to stocktake.
• Fixed Assets - determine if there are any benefits in scrapping any fixed assets to obtain the tax write off prior to 30th June 2014.
• Payment Summaries - payment summaries have to be prepared and sent to all employees by 14th July each year.
• PAYG Withholding Tax - annual summary due 14th August to Australian Taxation Office.
• Payroll Tax (if you are liable) - you have to prepare a reconciliation of total payroll for the year showing the total amount of payroll tax payable and then reconcile this with the remittances that you have forwarded on a monthly basis.
• Work Cover - a Work Cover Declaration is due certifying wages paid for the year ending 30th June 2014.
• Bad Debts Recovered (on an accruals basis) - if a debtor, who had been written off as a bad debt and claimed as a tax deduction for the amount of the bad debt, subsequently pays any part of the amount owing, you have to bring the amount paid to account as assessable income in the year of recovery.
• Deferring Livestock & Produce Sales - farmers can defer livestock and produce sales until after 30th June 2014. However, if you are a farmer you need to assess whether you will suffer price reductions because of the decision to defer sales and the Temporary Budget Repair Levy of 2% for the component of taxable income over $180,000 which will be in operation in 2014/15.
• Income Splitting - income splitting can be highly tax effective, especially if investments have been placed in the name of a lower income earner. This can be applicable where a spouse is not working and the income in the spouse's hands would therefore be taxed at a lower rate.
• Franking Account - a company's dividend payments and franking profile should be reviewed before year-end to ensure sufficient franking credits are available.
• Company Loans - the law requires that the loan to the shareholder is properly documented. If there is no security offered, the term of the loan should not exceed 7 years. If security is offered, the loan should not exceed 25 years. The interest rate to be charged during 2013/14 is a minimum of 6.2%. If loans have been made to shareholders that have not been supported by properly documented loan agreements, then the Taxation Office can treat these payments as being dividends that are assessable to the shareholder.
• Tax Offsets - there are a number of tax offsets available within the income tax legislation for the year ended 30th June 2014.
• End of Year Tax Schemes - the ATO produces product rulings on various investment products that are marketed particularly around 30th June each year. To avoid confrontation with the ATO, it is best to consider investing in products that have obtained a product ruling. These product rulings are not a guarantee or government endorsement on the likely success, or profitability, of the investment.
• Salary Packaging - salary packaging can also assist in the minimisation of income tax, particularly in the areas of voluntary superannuation contributions and acquisition of assets that are not subject to fringe benefit tax, such as supply of a motor vehicle. Your employer is required to report the value of fringe benefits on your payment summary. That may have an effect on other government payments you receive.
• Superannuation Contributions - special concessions are available to low income or non-working spouses relative to superannuation contributions.
• Medical Expenses - if your medical expenses exceed $2,120, you can claim a tax rebate calculated at 20% of the excess of $2,162 if a claim was made in the 2013 income tax return. If a taxpayer's income is above $88,000 for singles and $176,000 for families, the claim is limited to 10% of the amount above $5,100.
• Trust Distributions – The Australian Taxation Office has indicated that it will be enforcing the full meaning of the law which is that trust distributions have to be made by the 30th June each year. The ATO has indicated it will be doing spot checks to ensure distribution minutes have been prepared and signed prior to 30th June 2014, setting out the distribution of the income of the trust.
Building and Construction
• Building and Construction Industry – if you're in the building and construction industry, you have to prepare a Reportable Payments Report to submit to the ATO, showing the payments you've made to each contractor for the year ended 30th June 2014. The return has to be lodged by 21st July 2014.
Changes from 1 July 2014
• The superannuation guarantee rate will increase to 9.5%
• The concessional superannuation contributions cap will increase to $30,000. That cap for individuals 49 years or over on 30 June 2014 will be $35,000.