Year End Tax Planning 2016

FOR INDIVIDUALS: WHAT’S IMPORTANT IN 2015/16

Temporary Budget Deficit Levy

In addition to the current base Medicare Levy, Individuals earning over $180,000 remain subject to the additional 2%Temporary Budget Deficit Levy (which shall also be in place for the 2017 income year). Accordingly, the top marginal tax rate remains at effectively 49%.

Medical Expenses Tax Offset

To be eligible for a 20% tax offset, eligible net medical expenses must exceed the minimum threshold of $2,218 p.a. (the offset is calculated as 20% of the excess over $2,218). However, for singles earning more than $90,000 or couples earning more than $180,000 (plus $1,500 for each dependent child after the first child) the net medical expenses must
exceed $5,233 and the offset is at a rate of 10% on the out of pocket expenses in excess of this amount. For the 2016 income year, the net medial expense tax offset can be claimed in respect of medical expenses relating to:

  • Disability aids
  • Attendant care
  • Aged care

Zone Tax Offset

From 01 July 2015 the zone tax offset will be limited to those taxpayers whose usual place of residence is within the designated zones. The zone tax offset is a concessional tax offset available to individuals against their income tax liability in recognition of the isolation, extreme climate and high cost of living associated with living in designated zones.

The changes made to the zone tax offset will remove “fly-infly-out” and “drive-in-drive-out” employees, whose usual place of residence is located outside of the zone, from being eligible to claim the zone tax offset for the 2016 income year and later income years.

Claiming Travel Allowance Deductions

We are continuing to observe an audit focus by the ATO on travel allowance expenses being claimed by individual taxpayers. There are a number of key eligibility points to be aware of if you are intending on using the exception for retaining substantiation for these claims:

You must be receiving a bona fide
travel allowance from your employer

You must be working away from home
(on overnight stays) in the course of
performing employment duties

You must calculate the claim correctly
for your salary level and location of
work

You must be able to show that you are
incurring travel expenses

As audit risk is high with these claims, we recommend that you seek advice in relation to your eligibility. Note that the way that your employer provides and reports the allowance can impact on your risks in this regard.

Medicare Levy Surcharge (MLS) and Private Health Insurance Rebate (PHIR)

The thresholds for the imposition of the MLS (if not covered by private hospital insurance) are broadly as follows:

Singles (no dependents) – $90,000 pa

Families – $180,000 pa (plus $1,500 for each dependent child after the first)

Note that there are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions and investment losses counted in testing against these thresholds.

We further note that there is a “tiered” system for calculating MLS in the 2016 income year. The rate of MLS will be between 1% and 1.5% depending on the extent to which income exceeds the above thresholds.

In addition, the PHIR is also means tested in the 2016 income year under a “tiered” system. The rate of rebate will be between 0% and 30% depending on income levels. This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional liability of lodgement of their return.

ATO Recovery of Higher Education Loan Programme and Trade Support Loan Debt

The Higher Education Loan Programme (HELP) and Trade Support Loan (TSL) repayment rules to debtors who reside overseas have been extended by assessing their repayment obligations on their worldwide income. Repayment obligations will commence from 01 July 2017.

From 01 January 2016, HELP and TSL debtors who are going overseas for more than 6 months will be required to register with the ATO. Debtors already living overseas will have until 01 July 2017 to register.

Areas of ATO Focus in 2016

The ATO’s “Building Confidence” publication reminds individuals of its extensive data matching capabilities, based on information it receives from various sources including banks, share registries, employers, government agencies, and via its network of global information exchange agreements. In terms of focus areas for compliance activities, the ATO continues to closely monitor:

  • Claims for work-related expenses that are unusually high relative to others across
    comparable industries and occupations
  • Excessive rental property expenses
  • Non-commercial rental income received for holiday homes
  • Interest deductions claimed for the private proportion of loans
  • People who have registered for GST but are not actively carrying on a business

PLANNING CONSIDERATIONS

Capital Gains Tax

Realised capital losses are able to be offset against realised capital gains to reduce the net capital gain and therefore tax payable. Caution – the ATO has a Public Ruling relating to “wash sales”. The Ruling considers that the ATO can apply Part IVA anti-avoidance provisions to cancel offsets and apply penalties.

Donations

Donations or gifts of $2 or more to approved organisations and charities are tax deductible. Ensure you retain receipts for donations made.

Derivation of Income

It is worth considering whether assessable income can be deferred to the 2017 income year. This requires careful consideration and should be discussed with your accountant.

Maximising Allowable Deductions

Expenses that are incurred before year end can reduce taxable income. Consider up-and – coming liabilities and the value in incurring them before year end. If you have a rental property, consider whether you are maximising claims for capital allowance and capital works deduction on the property. A report from a quantity survey or suitably qualified specialist can maximise your entitlements. Also, remember to pay income protection insurance premiums before year end.

Prepayments
In limited circumstances, an immediate deduction is available for non-business prepaid expenditure (e.g. interest on a loan relating to a rental property or on other passive investments such as a share portfolio).

Motor Vehicle Expenses

For the 2015-16 income year and later income years there are now only two methods which can be used for motor vehicle expenses. These are:

  • The cents per km method (for up to 5,000) business kilometres travelled)
  • The log book method (log book kept over 12 weeks and updated every five years)
  • Further, from 01 July 2015 there is a single cents per kilometre rate of deduction determined
    by the Commissioner. For the 2015-2016 income year the single rate of deduction
    determined by the Commissioner is 66 cents per kilometre.
  • Detailed records assist in maximising deductions.

Salary Sacrifice

To be effective as a strategy for you, the benefits received must be taxed at a lower rate than your salary under the Fringe Benefits Tax (FBT) rules. From 01 April 2016, the following changes to FBT concessions on salary packaged entertainment benefits apply:

  • Introducing a grossed-up cap of $5,000 for salary sacrificed meal entertainment
    expenses and entertainment facility leasing expenses for certain employees of not
    for profit organisations
  • Removal of the reporting exclusion in relation to salary packaged entertainment
    benefits

Due to the varying calculations for different benefits under the FBT rules, a salary sacrifice may be beneficial for you.

Low Income Earners

The tax-free threshold of $18,200, together with the low income tax offset, means that some low income earners will not need to lodge income tax returns for the 2016 income year.

Salary Sacrifice Bonus into Superannuation

You may be able to optimise your tax position by salary sacrificing any end of year bonus into super. There are important considerations that need to be addressed in this regard to ensure it is tax effective and to ensure contribution caps are not breaches.

Superannuation – Income

Individuals aged over 60 are generally are generally not taxed on any payments from a superannuation fund. Individuals aged between 55 and 60 will generally be taxed concessionally.

Superannuation – Non-concessional Contributions

Non-concessional contributions can be made up to $180,000 p.a. or a total of $540,000 on a bring forward basis over a 3-year period (provided that the bring forward rule wasn’t triggered in either the 2014 or 2015 income year).

Superannuation – Rebate

A rebate of up to $540 is available for superannuation contributions made during the 2016 year for your spouse where your spouse’s income is less than $10,800 p.a. (this rebate reduces for income amounts up to $13,800 p.a.).

Superannuation – Personal Deductions

We recommend you check that the total of your personal contributions (in respect of which you intend to claim a tax deduction) and any employer contributions during the income year do not exceed $30,000 for individuals under 49 years of age on 30 June 2015 or $35,000 for all other individuals. Concessional contributions above these caps are assessed to the individual at their marginal tax rate, and also incur an interest charge from the ATO.

For a personal superannuation contribution to be deductible in 2016:

  • You must be under 75
  • The amount you earn as an employee must be less than 10% of your combined
    assessable income, reportable fringe benefits and reportable superannuation
    contributions
  • Contributions must be made by 30 June 2016
  • You must notify the trustee of your fund in writing of your intent to claim a deduction.

Superannuation – Government Co-contribution

The maximum co-contribution amount that you can receive is $500, based on an after-tax contribution of $1,000 (i.e. for every $1 contribution made, the government contributes $0.50). This is reduced by 3.33 cents for each $1 of income over $35,454 p.a. up to $50,454 p.a. As there are also other qualifying criteria, you should therefore contact us or your financial advisor if you wish to access this benefit in 2016.

Transition to Retirement Income Streams If you are 55 or older at 30 June 2016, you may be eligible to commence a “Transition to Retirement” pension. Benefits may include:

  • Receiving pension income while still working
  • Ability to salary sacrifice to superannuation to access lower tax rates
  • Concessional tax treatment within your super fund.

Have You Been Wondering Whether a SelfManaged Superannuation Fund (SMSF) is Suitable for You?

Now is a good time to seek specific advice in relation to this question, as it may be appropriate to establish a SMSF in conjunction with other tax planning opportunities, to maximise the benefit of the SMSF in your circumstances.

FOR BUSINESSES: WHAT’S IMPORTANT IN 2015/16?

Reduction to Company Tax Rate for Small Business Companies from 01 July 2015

From 01 July 2015, the income tax rate of a small business company (that is a company with an aggregated turnover of less than $2 million) is reduced by 1.5% to 28.5%. Companies with an aggregated annual turnover of $2 million or more will remain subject to an income tax rate of 30%.

The maximum franking credit that can be allocated to a frankable distribution is usually set by the applicable income tax rate. From 01 July 2015 small business companies can still frank to 30%, the same as larger businesses. From 01 July 2015 small business companies will have a higher franking credit cap then their income tax rate of 28.5%. Importantly, the normal franking credit distribution provisions will apply.

Tax Discount for Unincorporated Small Businesses

For the 2015/16 income year and later income years an individual who runs a small business (business an aggregated annual turnover of less than $2 million) or whose assessable income includes a share of a small business trust’s or small business partnership’s net income, providing the small business is not a corporate tax entity will be entitled to the “Small Business Tax Offset”.

The amount of the Small Business Tax Offset for an income year is calculated by first determining the percentage of the individual’s taxable income for the year that is total net small business income. This percentage is then applied to the individuals basic income tax liability for the income year, with the amount of the tax offset being equal to 5% of that calculation, capped at a maximum amount of $1,000.

Changes to Work Related Car Expense Deductions

For the 2016 income year and later income years there are currently two methods, the cents per kilometre method (for up to 5,000 business kilometres travelled) and the log-book method that tax payers may choose to claim work-related car expense deductions. Previously, there were four methods. The 12% of original value method and the one third of actual expenses method have been repealed effective 01 July 2015. Further, from 01 July 2015 there will be a single cents per kilometre rate of deduction determined by the Commissioner.

For the 2016 income year the single rate of deduction determined by the Commissioner of 66 cents per kilometre.
Detailed records assist in maximising deductions.

SUPERANNUATION CHANGES

Super Stream

The Super Stream deadline for employers with 19 or fewer employees is 30 June 2016 (larger employers should already be using Super Stream). It is recommended that employers with 19 or fewer employees ensure that their system is ready for Super Stream as soon as possible.

Super Stream is a standard for processing superannuation data and payments electronically, and must be used by:

  • Employers
  • Self-managed superannuation funds
  • APRA-regulated funds

Super Stream data is in a standard format so it can be transmitted consistently across the super system between employers, funds, service providers and the ATO. Super Stream allows employers to make all their contributions in a single transaction, even if they’re going to multiple super funds.

Superannuation Guarantee

The gradual increase in the Superannuation Guarantee rate to 12% has been re-phased, with the 2016 income year rate of 9.5% now frozen until 01 July 2021, from which date it will increase by 0.5% per year.

Reduction to the Research and Development (“R&D”) Tax Offset

The income tax law is being amended to reduce the rates of the tax offset available under the R&D tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points.

The higher (refundable) rate of tax offset, for eligible entities with annual turnover of less than $20 million and which are not controlled by an exempt entity or entities, for the first $100 million of eligible expenditure will be reduced from 40% to 38.5%.

The amendments are proposed to apply to assessments for income years on or after 01 July 2014. The passage of the Bill may require amendments to previously lodged 2015 company tax returns containing an R&D tax incentive claim.

Small Business Entities: Capital Allowances

Currently, the capital allowances concessions provided to small business include:

  • Immediate deduction for depreciating assets that cost less than $20,000, provided the asset is acquired at or after 7:30pm on 12 May 2015, and first used or installed ready to use on or before 30 June 2017
  • Immediate deduction for an amount included in the second element cost of a depreciating asset that is first used or installed ready for use in a previous income year, where the amount of the cost is less than $20,000 and incurred on or after 7:30pm on 12 May 2015 and on or before 30 June 2017
  • Immediate deduction for the balance of the Small Business Entity’s general small business pool where the balance is less than $20,000 at the end of the income year. The income year must end on or after 12 May 2015 and on or before 30 June 2017

Importantly, the 2017 income year is the last year the increased thresholds apply. From 01 July 2017 the capital allowances concessions provided to small businesses will be reduced to:

  • Immediate deduction for depreciating assets costing less than $1,000 if the asset is first used or installed ready for use on or after 01 July 2017
  • Immediate deduction for an amount included in the second element cost of a depreciating asset that is first used or installed ready for use in a previous income year, where the amount of the cost is less than $1,000 and incurred on or after 01 July 2017
  • Immediate deduction for the balance of the Small Business Entity’s general small business pool where the balance is less than $1,000 at the end of an income year that ends after 30 June 2017

Small Business Entities Restructure Roll-Over Bill

A Bill that may present opportunities for small business owners to restructure in a broader variety of ways than was previously permitted without income tax cost has  received Royal Assent on 08 March 2016. The Bill which provides optional roll-over relief will be available where a Small Business Entity transfers an active asset of the business to another Small Business Entity as part of a “genuine business restructure”, without changing the ultimate economic ownership of the asset.

The effect of the roll-over is to provide for tax neutral tax consequences for the transfer, but only for the income tax purposes of the transfer and not for the purposes of Goods and Services Tax (GST), Fringe Benefits Tax (FBT) or duty.

The Bill provides a safe harbour rule for determining a “genuine” restructure, and applies to transfer of assets occurring on or after 01 July 2016. We strongly suggest that small business owners considering applying for this rollover relief in connection with a business restructure seek our advice.

Monthly PAYG Tax Instalments

From 01 January 2015, companies which had base assessable instalment income over $100 million (as determined from their most recent tax return) moved to the monthly PAYG tax instalment program. From 01 January 2016, this shall apply more broadly to companies with assessable income over $20 million.

Trust Distributions

If your entity structure is a trust, then it is crucial that your trustee resolution to appoint or distribute income to beneficiaries is effective as at 30 June 2016. This means that tax planning for trusts should be done as soon as possible to ensure the resolution can be made with tax effective considerations in mind and also finalised/documented prior to 30 June.

Areas of ATO Focus in 2016

The ATO has developed small business benchmarks for over 100 industries, using data from income tax returns and business activity statements. Taxpayers can use these benchmarks to compare their performance with the rest of their industry. Moreover, they enable the ATO to identify taxpayers whose performance is outside of the benchmark range, who are more likely to be subject to compliance activities such as reviews and audits.

The ATO is concerned with small businesses who fail to report income and overclaim tax concessions, whether as a result of deliberate attempts to hide income and operate in the hidden or cash economy, or through inadvertent mistakes such as companies inappropriately seeking capital gains tax concessions available to small businesses.

For small businesses, the ATO’s concerns continue to include:

  • Employers not deducting and/or not sending to the ATO the PAYG Withholding
    from employee wages
  • Employers not paying the superannuation guarantee
  • Businesses registered for GST but not actively carrying on a business
  • Failure to lodge activity statements
  • Incorrect and under reporting of sales

OTHER PLANNING CONSIDERATIONS

Variation of PAYG tax instalments

Subject to a review of your year-to-date tax position, it may be possible to reduce the amount of your remaining tax instalments for the 2016 year (i.e. the quarterly tax payment for June 2016). This can provide a cash flow advantage when compared to the delay in waiting for your 2016 tax return refund to be paid by the ATO. Please contact us should you wish to discuss this issue.

Bad Debt

If you have any bad debt, ensure you write them off prior to 30 June 2016 and prepare minutes approving the write-off. This will also enable an adjustment for any GST charged on the original invoice.

Franking Credits

Shares must generally be held “at risk” for at least 45 days for entitlement to franking credits. Individuals and superannuation funds can receive a refund of excess imputation credits. Un-utilised excess franking credits in a company may be carried forward as a revenue loss.

Maximising Allowable Deductions

Expenses that are incurred before year end can reduce taxable income. Consider upcoming liabilities and the value in incurring them before year end. Allowable deductions may include:

Paying directors’ fees and bonuses

Repairs on property and machinery

Pooling depreciating assets

Scrapping of depreciating assets which are no longer being used

Non-Commercial Losses

Non-commercial loss provisions restrict the ability of an individual who carried on a “non -commercial” business activity to offset that loss against other income earned in that income year.

The provisions will not apply if certain tests are satisfied. There are also special exceptions for primary producers and artists. Individuals with an adjusted taxable income of $250,000 or more will generally not be eligible to offset losses from non-commercial activities against other income. However, there may be an opportunity to request the Commissioner’s discretion to allow you to claim your losses.

PAYG Payment Summaries

PAYG payment summaries must be provided to employees by 14 July 2016 and lodged with the ATO by 14 August 2016, unless the ATO have granted your business an extension.

Personal Services Income

There are special rules about the tax treatment of Personal Services Income (PSI). The rules can apply to individuals, contractors and contracting entities by:

  • Limiting the deductions available
  • Attributing personal service income derived by an entity to the individual

An individual or personal services entity is subject to the PSI rules, unless it can show that the “results test” is satisfied, or it does not derive 80% or more of its income from one client and passes one of three additional tests.

Personal Use Assets

Where assets owned by a company are used outside of a business by a shareholder or “associate” this may result in a breach of Division 7A. This can give rise to an unfranked dividend to you for tax purposes.

If your company owns any assets that are available to be used for non-business purposes, please contact us to discuss this issue.

Prepayments (Other Than for Small Business Entities – Refer Below)

Unless you are a Small Business Entity only certain prepayments are required to be made by law (e.g. worker’s compensation insurance) and amounts of less than $1,000 are deductible as incurred.

Shareholder Loans

If you or your “associates” borrowed money, received a benefit, or had a debt forgiven from a private company during the year, the Division 7A rules may apply to you.

Small Business Entities

In general terms, you are a Small Business Entity if you carry on business and your aggregated turnover is less than $2 million, or is likely to be less than $2 million as at the commencement of the financial year. Small Business Entities can choose to access certain concessions including:

  • Immediate deductions for prepayments of up to 12 months
  • Simplified depreciation and trading stock rules

If you are transitioning beyond being able to be considered a Small Business Entity based on your turnover, it is important we consider the implications for you in this transition and consider whether there are any opportunities to minimise this impact on you and your associated entities.

Small Business Capital Gains Tax (CGT) Concessions

In addition to the above Small Business Entity concessions, four specific small business concessions may apply to reduce capital gains from the sale of your business assets or your business entity where you meet the $6 million “maximum net asset value test” or the business entity is a Small Business Entity. These CGT concessions are:

  • A 15 year exemption
  • A 50% reduction for active assets
  • A $500,000 retirement concession
  • Replacement asset roll-over relief

If the 15 year exemption does not apply, you may apply for one, two or all three of the remaining concessions.
If you sell your business or the entity that carries on the business, or are considering selling your business in the future, please contact us prior to entering into any agreement to discuss eligibility and planning to access these concessions. Note that we are observing this is an area of high risk for ATO audits at the moment.

Timing of Income

Consider issues associated with the timing of income close to 30 June, such as:

  • The time of billing work in progress
  • Timing of sales income
  • The date of entering into a contract for the sale of CGT assets

Superannuation

Contributions in respect to the quarter ending 30 June 2016 must be made before 30 June for a deduction to be available in the 2016 year. For family businesses, consider maximising concessional contributions for key individuals.
The concessional contributions cap for the 2016 income year is $30,000 for all individuals, unless you were 49 years of age or older on 30 June 2015. If you satisfy this age requirement, your concessional contribution limit for the 2016 income year is $35,000.

Concessional contributions above these caps are assessed to the individual at their marginal tax rate and also incur an interest charge from the ATO. The non-concessional contribution cap for the 2016 income year is $180,000 p.a. or a
total of $540,000 on a bring forward basis over a 3-year period (provided that the bring forward rule was not triggered in either 2014 or 2015).

Trading Stock

Stock can be valued under different methods for each item of stock:

  • Cost
  • Sales value
  • Lower market value or replacement cost

Conduct a stocktake before year end and identify obsolete items. Determine whether to conduct “sales” prior to 30 June.

PLEASE CONTACT US TO DISCUSS ANY OF THESE PLANNING ISSUES OR TO ARRANGE COMPLETION OF YOUR TAX RETURN

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