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
Please note that none of the below matters will become law until the Budget is passed by the House of Representatives and the Senate and signed by the Executive Council.
From Budget Night – 12th May 2015
- Small businesses with aggregated turnover of less than $2 million are able to immediately deduct the cost of assets (cars, vans, office equipment, plant and equipment, etc) they start to use or are installed ready for use, provided the asset cost less than $20,000 excluding GST (previously $1,000).
Small businesses can apply this $20,000 rule to as many individual items as they like.
"Aggregated turnover" is calculated on a group basis and must be "business income" and the concession doe not apply to artificial or contrived arrangements including sales between related parties.
- Assets valued at $20,000 or more can continue to be placed in the small business simplified depreciation pool, depreciated at 15% in the first income year and 30% each income year thereafter.
- The government plans to suspend the current "lockout" laws for the simplified depreciation rule. Currently, these "lockout" rules prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt out.
From 1st July 2015
- The government proposes that the company tax rate will be reduced by 1.5% to 28.5%, for companies with aggregated annual turnovers of less than $2 million. "Aggregated turnover" is calculated on a group basis and must be "business income".
- The government also intends to introduce a legislation, whereby individual taxpayers with business income from an unincorporated business, sole trader and partnership that has aggregated annual turnover of less than $2 million, will be eligible for a small business tax discount.
The discount will be 5% of the income tax payable on the business income received by an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year and will be delivered as a tax offset.
- Start-up businesses will benefit by being able to immediately deduct professional costs associated with starting a new business.
Taxation Planning For 30th June 2015
- You could consider whether there are benefits in delaying the receipt of income until after 30th June 2015 or bringing forward expenses, to avail yourself of the reduction in the corporate tax rate for the 2015/16 fiscal year.
- You could delay the incurring of expenses, relative to the establishment of a new business, until after 1st July 2015 so that those expenses can be 100% written off in 2015/16 fiscal year.
Small Business Entities
(A Small Business entity is one whose aggregated turnover is less than $2 million – "aggregated turnover" is calculated on a group basis and must be "business income". Please ignore this section if not applicable to you.)
The small business entity rules apply to a sole trader, partnership, company or trust which has a group turnover of less than $2 million in the previous or current year.
Small businesses can have a small business asset pool.
The balance in the asset pool at 1st July 2014 can be written off at 30%.
Assets acquired in the period 1st July 2014 to 11th May 2015 are treated as:
- Acquisition price up to $1,000 – written off in 2014/15.
- Acquisition price $1,001 onwards – depreciation of 15% able to be claimed in 2014/15.
Assets acquired in the period 12th May 2015 to 30th June 2015 are treated as:
- Acquisition price of up to $20,000 – written off in 2014/15.
- Acquisition price $20,001 onwards – depreciation of 15% able to be claimed in 2014/15.
Depreciation – Motor Vehicle
You can choose to use the capital allowance provision to calculate the deduction for a motor vehicle costing $1,000 or more, if you've started to use or have installed the asset ready for use for business purposes.
From 12th May 2015 (subject to the 2015 Budget being passed), you can immediately write off the cost of a vehicle costing up to $20,000. If the vehicle costs more than $20,000, the vehicle can be placed into the small business simplified depreciation pool, depreciated at 15% in the first income year (2014/15) and 30% each income year thereafter.
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.
- Staff Bonuses – ensure a cheque has been written prior to 30th June 2015 and PAYG withholding tax deducted.
- Staff Holidays – where practical, encourage staff to take holidays prior to 30th June 2015.
- Superannuation – for the year ending 30th June 2015, superannuation contributions can be paid for any eligible person:
- aged under 50 years – $30,000
- aged 50 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).
- Superannuation Minimum Contributions – superannuation contributions have to be paid to all eligible employees who are paid at least $450 gross per month.
- 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 2015.
- Directors' Fees – ensure cheques are drawn prior to 30th June 2015 and that PAYG Withholding Tax is deducted.
- 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 4 methods available to calculate tax deductions for work-related motor vehicle expenses:
- cents per kilometre method:
- small car – 65 cents per kilometre
- medium car – 76 cents per kilometre
- large car – 77 cents per kilometre
- logbook method
- 12% of the original value method ) NB: neither of these methods will be available
- 1/3 of actual expense method ) from 1st July 2015
- Depreciation – review capital expenditure and ensure you claim depreciation at the highest legally allowable rate.
- Donations – any promised tax deductible donations should be made prior to 30th June 2015.
- Borrowing Costs – borrowing costs can be claimed over the shorter of 5 years or the term of the loan.
- Entertainment – entertainment is not deductible unless it is provided as a fringe benefit and Fringe Benefits Tax has been paid.
- Research & Development for companies with turnovers under $20 million – companies that incur research and development can claim additional taxation benefits. Companies must register their research and development projects with AusIndustry by 30th April 2016 or the date of lodgement of the company's income tax return, whichever is earlier. The company will receive the benefit of a research and development 43.5% refundable tax offset, calculated at 43.5% of the eligible research and development expenditure. The rebate can be paid to the company by the ATO within 30 days of the company lodging its income tax return. If you require further information on the treatment of research and development expenditure, please contact us.
- 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.
- Luxury Car Tax – the Luxury Car Tax is 33% and applies to the GST inclusive value in excess of $61,884 (including GST). The Luxury Car Tax for "fuel efficient vehicles" applies from a cost of $75,375.
Deductions On "Accruals" Basis
- Fringe Benefits Tax Payment – if a Fringe Benefit Tax instalment is due on 21st July 2015, it can be accrued and claimed as a tax deduction in the year ending 30th June 2015.
- Commissions Owing – where employees or another business are owed commission by your business for services rendered up to 30th June 2015, the accrued amount can be claimed as a tax deduction at 30th June 2015.
- Bad Debts – actually write-off any bad debts prior to 30th June 2015 and prepare minutes authorising the write-off.
- Interest – any accrued interest outstanding on a business loan, that has not been paid at 30th June 2015, can be claimed as a tax deduction at 30th June 2015.
- Salaries & Wages – the accrued expense for the days that employees have worked, but not paid at 30th June 2015, can be claimed as a tax deduction at 30th June 2015.
- Commercial Bills – where the term of a Commercial Bill expires beyond the 30th June 2015, the discount applicable to the period up to 30th June 2015 can be claimed as a tax deduction.
- Rent – if rent is in arrears, the part that is owed up to 30th June 2015 can be claimed as a tax deduction.
- Stock On Hand – review stocktake list as at 31st May 2015. Determine whether to conduct "sales" prior to 30th June 2015. Conduct stocktake as at 30th June 2015. If you're conducting regular "rolling" stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2015.
- Value Of Stock – each item of stock can be valued at 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.
Determine if there are any benefits in scrapping any fixed assets to obtain the tax write off prior to 30th June 2015.
- 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.
- Work Cover - a Work Cover Declaration is due by 31st August certifying wages paid for year ending 30th June 2015.
- 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.
- Government Grants – if your business has received a grant from a government department, it's most likely paid to you on the basis that it is taxable income and therefore you need to disclose in your tax return the receipt of the government grant. If you are lodging your income tax return on a cash basis, this highlights the desirability of ensuring that all of the government grant funds have been expended on tax-deductible items prior to 30th June 2015 (if possible).
- 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 2014/15.
- 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.
- 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%.
- Earnings made in a superannuation fund are taxed at 15% and paid by the superannuation fund.
- 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 55 years of age.
- Franking Account – a company's dividend payments and franking profile should be reviewed before year-end to ensure sufficient credits are available.
- 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 2014/15 is a minimum of 5.95%. 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 can only be offset against any capital gains generated during that and later financial years.
- 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, you might be entitled to further capital gains tax concessions.
- "Wash Sales" - the ATO has issued a ruling stating that "wash sales" should be ignored. 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
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 2015. The return has to be lodged by 28th August 2015.
End of Year Review
If you have any queries on any other items not discussed in this newsletter, or you have general matters that you'd like to discuss with us relative to your taxation affairs for the year ending 30th June 2015, please contact us in the next couple of weeks so that a convenient time for a meeting can be arranged.