End Of Year Tips
Prepayments – if your turnover is under $10 million, consider any prepayments prior to 30th June 2017.
"Cash is King!" – update your financial records to 30th June 2017 so you can discuss with us the possible variation of your PAYG instalment due by 28th July 2017.
Federal Budget Not Passed
The following is a summary of some of the key issues contained in the Federal Budget 2017/18 that has been submitted to the House of Representatives, but has not yet been passed:
- Limit on deductibility on equipment depreciation deductions to outlays actually incurred by investors.
- Disallow travel expenses for residential rental property.
- Extending the immediate small business deduction, for the purchase of assets costing under $20,000, to 30th June 2018.
- HELP (Higher Education Loan Program) repayment changes.
- Increase in Medicare levy.
Change in Definition of Small Business
In the 2016/17 Budget the government announced an increase to the small business entity (sole traders, partnerships, companies, trusts) turnover threshold from $2 million to $10 million from 1st July 2016.Small Business Entities
(Aggregated turnover of less than $10 million – "aggregated turnover" is calculated on a group basis and must be "business income". Please ignore this section if not applicable to you. Please refer to "Entities not defined as Small Businesses").
The small business entity rules apply to a sole trader, partnership, company or trust which has a group turnover of less than $10 million in the previous year, or likely to be less than $10 million in the current year.
Depreciation Rules
A small business taxpayer can immediately write-off the cost of new assets, including motor vehicles costing up to $20,000 until 30th June 2018 based on current proposed legislation. If the assets (including motor vehicles) cost more than $20,000, the asset can be placed into the Small Business Simplified Depreciation Pool, depreciated at 15% in the first income year and 30% each income year thereafter.
Prepayments
Small business entity taxpayers are entitled to a deduction where the relevant services will be wholly provided within 12 months of the date of expenditure, such as office supplies, stationery, rent, advertising etc.
General Deductions
- Staff Bonuses – ensure a cheque has been written or payments made prior to 30th June 2017 and PAYG withholding tax deducted.
- Staff Holidays – where practical, encourage staff to take holidays prior to 30th June 2017 or when cashing in holidays, these are paid before 30th June 2017.
- Superannuation – for the year ending 30th June 2017, superannuation contributions can be paid for any eligible person:
- aged under 49 years - $30,000
- aged 49 years and over - $35,000 (subject to the "work-test" from age 65)
- Self-Employed Persons – self-employed persons can obtain a superannuation deduction on the same basis as that adopted for employees.
- Salary Sacrifice Arrangements – salary sacrifice arrangements can be utilised to maximise superannuation contributions subject to the overall deduction limits.
- Non-Concessional Contributions – non-concessional contributions can be made up to $180,000 per annum or a total of $540,000 over a 3-year period (for those aged under 65). Please consult with us or your financial planner in regards to the recent changes announced in the Federal Budget before making contributions due to potential adverse consequences and the reduction in the non-concessional contribution amount to $100,000 in 2018.
- Travel Deductions:
- Overseas – prepare a full itinerary and diary.
- Local – more than 6 nights you are required to maintain a diary.
- Motor Vehicle Expenses – there are 2 methods available to calculate tax deductions for work-related motor vehicle expenses:
- cents per kilometre - 66 cents per kilometre
- logbook method - you can claim your actual business kilometres as a percentage of the total kilometres that the motor vehicle has travelled and to then utilise that percentage as the claimable percentage of the total motor vehicle expenses incurred.
- Donations – any promised tax deductible donations should be made prior to 30th June 2017.
- Research & Development for companies with turnovers under $20 million – a company will receive the benefit of a research and development refundable tax offset calculated at 43.5% of the eligible research and development expenditure. The rebate can be paid to the company by the Australian Taxation Office within 30 days of lodgement of the company's tax return if the company elects to receive this payment in the company's income tax return. It's important to note that for research and development claims in respect of the year ending 30th June 2017, the company must register with AusIndustry by 30th April 2018 or the date of lodgement of company's income tax return, whichever is the earlier.
- Gifts – ensure payment is made to a tax-deductible charity on or before 30th June 2017.
- Legal Costs – review any legal costs that have been incurred. If the legal costs relate to regular business operations (eg debt collections), separate them from costs relating to capital items which are not deductible for income tax purposes.
Stock
- Trading Stock Rules – small business entities (turnover under $10 million) 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.
- Stock On Hand – review stocktake list in early June 2017. Determine whether to conduct "sales" prior to 30th June 2017. Conduct stocktake as at 30th June 2017. If you're conducting regular "rolling" stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2017. Stocktaking may not be necessary if you're a small business entity.
- Value Of Stock – stock can be valued at different individual methods for each item of stock:
- Cost
- Sale Value
- 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.
Assets
- Fixed Assets – determine if there are any benefits in scrapping any fixed assets to obtain the tax write off prior to 30th June 2017.
Employment Issues
- 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 ATO.
- 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.
Income Issues
- Personal Service Income – taxation laws include measures that are designed to limit the deductions available to certain contractors, whether operating as a sole trader or through a company, trust or partnership; these are known as the Personal Services Income (PSI) measures. A taxpayer, who meets certain specified tests, will be treated as carrying on a personal services business and will be able to claim a wider range of deductions. If you are operating a personal service business you need to be aware of the ATO's strict approach to income retention and income splitting.
- Non-Commercial Losses – for a business to be commercial, under the "non-commercial losses tests", the business needs to meet certain prescribed tests. If the tests are not met, any losses arising from the activities have to be carried forward and offset in a later year against future income from the same type of source. If you have non-commercial losses, please contact us for advice on the treatment of the losses in 2016/17.
- Trust Distributions – the ATO has indicated that it will be enforcing the full meaning of the law, whereby trustee distribution/resolutions have to be made by the 30th June each year.
Utilising Tax Free Threshold
Every adult taxpayer has a tax-free threshold of $18,200. If a taxpayer is verging on losses, consideration should be given to the decision being made in relation to the valuation of stock, bringing forward or delay of sales, etc, to utilise the tax-free threshold. Otherwise, it will be lost forever.
Entities Not Defined As Small Business
(Aggregated turnover of over $10 million. Please ignore this section if not applicable to you.)
Prepayments
The prepayment rule for "other small businesses" applies to business taxpayers with a group turnover of $10 million or more.
General Deductions
- Staff Bonuses – ensure a cheque has been written or payment made prior to 30th June 2017 and PAYG withholding tax deducted.
- Staff Holidays – where practical, encourage staff to take holidays prior to 30th June 2017 or if being cashed out, paid before 30th June 2017.
- Superannuation – for the year ending 30th June 2017, superannuation contributions can be paid for any eligible person:
- aged under 49 years - $30,000
- aged 49 years to under 59 years - $35,000
- aged 59 years and over - $35,000 (subject to the "work-test" from age 65)
- Self-Employed Persons – self-employed persons can obtain a superannuation deduction on the same basis as that adopted for employees.
- Salary Sacrifice Arrangements – salary sacrifice arrangements can be utilised to maximise superannuation contributions subject to the overall deduction limits.
- Non-Concessional Contributions – non-concessional contributions can be made up to $180,000 per annum or a total of $540,000 over a 3-year period (for those aged under 65). Please consult with us or your financial planner in regards to the recent changes announced in the Federal Budget before making contributions due to potential adverse consequences and the reduction in the non-concessional contribution amount to $100,000 in 2018.
- Repairs & Maintenance – ensure that the work has been completed prior to 30th June 2017.
- Travel Deductions:
- Overseas – prepare a full itinerary and diary.
- Local – more than 6 nights you are required to maintain a diary.
- Motor Vehicle Expenses – there are 2 methods available to calculate tax deductions for work-related motor vehicle expenses:
- cents per kilometre - 66 cents per kilometre
- logbook method - you can claim your actual business kilometres as a percentage of the total kilometres that the motor vehicle has travelled and to then utilise that percentage as the claimable percentage of the total motor vehicle expenses incurred.
- Donations – any promised tax deductible donations should be made prior to 30th June 2017.
- Research & Development – companies that incur research and development can claim additional taxation benefits. There are two components:
- companies with turnovers under $20 million
- companies with turnovers over $20 million
- companies must register their research and development projects with AusIndustry by 30th April 2018 or the date of lodgement of the company's income tax return, whichever is the earlier.
- Research & Development for companies with turnovers under $20 million – a company will receive the benefit of a research and development refundable tax offset calculated at 43.5% of the eligible research and development expenditure. The rebate can be paid to the company by the Australian Taxation Office within 30 days of lodgement of the company's tax return if the company elects to receive this payment in the company's income tax return. It's important to note that for research and development claims in respect of the year ending 30th June 2017, the company must register with AusIndustry by 30th April 2018 or the date of lodgement of company's income tax return, whichever is the earlier.
- Companies with turnovers over $20 million – the company will receive a 38.5% non-refundable tax offset of the eligible research and development expenditure. If you require further information of the treatment of research and development expenditure, please contact us.
- Gifts – ensure payment is made to a tax-deductible charity on or before 30th June 2017.
- Legal Costs – review any legal costs that have been incurred. If the legal costs relate to regular business operations (eg debt collections), separate them from costs relating to capital items which are not claimable for income tax purposes.
Deductions On "Accruals" Basis
(subject to income tax return being lodged on an "accruals" basis)
- Fringe Benefits Tax Payment (Accruals Basis) – if a Fringe Benefit Tax instalment is due on 21st July 2017, it can be accrued and claimed as a tax deduction in the year ending 30th June 2017.
- Commissions Owing (Accruals Basis) – where employees or another business are owed commission by your business for services rendered up to 30th June 2017, the accrued amount can be claimed as a tax deduction at 30th June 2017.
- Bad Debts (Accruals Basis) – actually write-off any bad debts prior to 30th June 2017 and prepare minutes authorising the write-off.
- Interest (Accruals Basis) – any accrued interest outstanding on a business loan, that has not been paid at 30th June 2017, can be claimed as a tax deduction at 30th June 2017.
- Salaries & Wages (Accruals Basis) – the accrued expense for the days that employees have worked, but not paid at 30th June 2017, can be claimed as a tax deduction at 30th June 2017.
- Commercial Bills (Accruals Basis) – where the term of a Commercial Bill expires beyond the 30th June 2017, the discount applicable to the period up to 30th June 2017 can be claimed as a tax deduction.
- Rent (Accruals Basis) – if rent is in arrears, the part that is owed up to 30th June 2017 can be claimed as a tax deduction.
Stock
- Stock On Hand – review stocktake list in June 2017. Determine whether to conduct "sales" prior to 30th June 2017. Conduct stocktake as at 30th June 2017. If you're conducting regular "rolling" stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2017.
- Value Of Stock – stock can be valued at different individual methods for each item of stock:
- Cost
- Sale Value
- 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.
Assets
- Fixed Assets – determine if there are any benefits in scrapping any fixed assets to obtain the tax write off prior to 30th June 2017.
Employment Issues
- 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 ATO.
- 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.
Income Issues
- 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.
- Personal Service Income – taxation laws include measures that are designed to limit the deductions available to certain contractors, whether operating as a sole trader or through a company, trust or partnership; these are known as the Personal Services Income (PSI) measures. A taxpayer, who meets certain specified tests, will be treated as carrying on a personal services business and will be able to claim a wider range of deductions. If you are operating a personal service business you need to be aware of the ATO's strict approach to income retention and income splitting.
- Non-Commercial Losses – for a business to be commercial, under the "non-commercial losses tests", the business needs to meet certain prescribed tests. If the tests are not met, any losses arising from the activities have to be carried forward and offset in a later year against future income from the same type of source. If you have non-commercial losses, please contact us for advice on the treatment of the losses in 2016/17.
- Trust Distributions – the ATO has indicated that it will be enforcing the full meaning of the law, whereby trustee distribution/resolutions have to be made by the 30th June each year.
Property Investments
Deductions
- Interest On Investment Loans – taxpayers who have borrowed money for a non-business investment (eg rental property) can check with their lenders to see if they can prepay interest prior to 30th June 2017.
- Building Allowance – the construction costs of income producing buildings may be written off at 2.5% or 4%, depending on the date of construction. Please contact us if you require additional details.
- General expenses can include real estate agents fees; building allowance (can be written off at 2.5% or 4% depending on date of construction); depreciation of fixtures, fittings, plant and equipment; share of depreciation of common property in a strata titled property; repairs and maintenance; pest control; interest on monies borrowed for investment in the property; bank charges on the property bank account; cleaning; electricity; rates; land tax; insurance and travel for inspection trips by the owner apportioned for partly private travel (The Federal Budget will disallow this claim in 2017/18).
Income Issues
- 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.
Individuals
Deductions
- Superannuation Co-Contribution – the government will give lower income earners (up to $51,021) $0.50 for each $1 they contribute to superannuation from their after-tax salary up to a maximum of $500. Your maximum entitlement will reduce progressively if your income is greater than $36,021.
- Expense Substantiation – ensure that you can justify all employment-related expense amounts incurred.
- Working From Home Expenses – expenses can be claimed for working from home (as distinct from having a home office).
- Personal Insurance Payments – premiums for Sickness and Accident Cover are tax deductible. Payments can be made by the employer without incurring Fringe Benefits Tax.
- 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.
Income Issues
- Employee Share Schemes – if you're a member of an employee share scheme, you should ensure that any income earned is included in your income tax return.
- Qualifying Employee Share Schemes – scheme formed before 1st July 2009 – any discount on the shares is subject to taxation. If the scheme qualifies under the Employee Share Scheme Rules, the employee can choose when they include the discount in their assessable income. If the employee elects to include the discount benefit in their tax return for the year of receipt of the benefit, they are eligible for an exemption of the first $1,000 of the discount.
- Scheme Formed After 1st July 2009 – the discount on Employee Share Schemes are taxed either upfront or on a deferred basis. For 'qualifying' schemes, if the employee is earning less than $180,000 taxable income plus reportable fringe benefits, reportable superannuation contributions and total investment losses, then the employee can claim a $1,000 exemption from the inclusion of the assessable discount.
Superannuation Funds
- Contributions to superannuation funds for taxpayers with Adjusted Taxable Income (ATI) less than $300,000 are taxed at 15% of the contribution. For taxpayers with ATI over $300,000, contributions are taxed at 30%.
- For people 60 years or over who have started drawing a pension, payments from the superannuation fund are, in the majority of cases, tax-free.
- Generally, monies invested in superannuation funds cannot be accessed until 56 years of age.
Companies
- Company Loans – the law requires that a loan to a 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 2016/17 is a minimum of 5.40%. If loans have been made to shareholders that haven't been supported by properly-documented loan agreements, then the ATO can treat these payments as being dividends that are assessable to the shareholder.
Capital Gains Tax
- Matching Capital Losses and Capital Gains – capital losses are not directly deductible. Capital losses have to be offset against any capital gains generated during that financial year.
- 50% Capital Gains Tax Discount – you should check your eligibility for the general 50% capital gains tax discount for individuals. If you are a small business operator and are able to meet the $6 million net value asset test or have turnover of less than $2 million (yes, this amount is still $2 million!), you might be entitled to further capital gains tax concessions.
- "Wash Sales" - the ATO has issued a ruling that relates to "wash sales". This is a situation where shares, in companies listed on the Stock Exchange, are sold to crystallise the capital loss and then shortly thereafter the taxpayer, or an associate of the taxpayer, purchases shares in that same corporation on the Australian Stock Exchange.
Building And Construction Industries
- Building and Construction Industry – if you're in the building and construction industries, 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 ending 30th June 2017. The return has to be lodged by 20th July 2017.