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End of Year Tax Planning

This article contains commentary on many of the items you may encounter as part of your end of financial year deliberations.

Entities Not Defined As Small Business

Aggregated turnover of over $10 million.

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 2018 and PAYG withholding tax deducted.
• Staff Holidays – where practical, encourage staff to take holidays prior to 30th June 2018 or if being cashed out, paid before 30th June 2018.
• Superannuation – for the year ending 30th June 2017, superannuation contributions can be paid for any eligible person:
• Up to –  $25,000
• People aged 65 years or over must satisfy a “work-test”
• 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 – the non-concessional contributions cap is $100,000 for 2017/18. The maximum bring forward cap is $300,000 over a 3-year period.  The Total Superannuation Balance is a new restriction on super contributions.  For 2017/18 if you have more than $1.6M in super you cannot make non-concessional (after tax) contributions, receive spouse contributions or receive the government co-contributions.
• 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 2018.
• Directors’ Fees – ensure cheques are drawn or payments made prior to 30th June 2018 and that PAYG Withholding Tax is deducted.
• Travel Deductions:
• Overseas – prepare a full itinerary and diary.
• Local – more than six nights you are required to maintain a diary.

A ban on travel related tax deductions for most real estate investors now applies.

• Motor Vehicle Expenses – there are two 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 2018.
• Borrowing Costs – borrowing costs can be claimed over the shorter of the five 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 – 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 thirty 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 2018, the company must register with AusIndustry by 30th April 2019 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.  For claim in 2017/18 financial year companies have to register with AusIndustry by 30 April 2019 or the date of lodgement of the income tax return whichever is the earlier

If the company wishes to claim Research and Development expenditure incurred overseas and “Advance/Overseas Finding” application must be lodged with the Australian Taxation Office prior to the end of the financial year.

• Gifts – ensure payment is made to a tax-deductible charity on or before 30th June 2018.
• Audit Fees – deductible if there’s a contract that creates a presently existing liability before 30th June 2018.
• Salary Packages – ensure salary packages for 2017/18 are negotiated and documented prior to 30th June 2018.
• Legal Costs – review any legal costs that have been incurred. If the legal costs relate to regular business operations (e.g. 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 $65,094 (including GST). The Luxury Car Tax for “fuel efficient vehicles” applies from a cost of $75,526.

 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 2018, it can be accrued and claimed as a tax deduction in the year ending 30th June 2018.
• Commissions Owing (Accruals Basis) – where employees or another business are owed commission by your business for services rendered up to 30th June 2018, the accrued amount can be claimed as a tax deduction at 30th June 2018.
• Bad Debts (Accruals Basis) – actually write-off any bad debts prior to 30th June 2018 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 2018, can be claimed as a tax deduction at 30th June 2018.
• Salaries & Wages (Accruals Basis) – the accrued expense for the days that employees have worked, but not paid at 30th June 2018, can be claimed as a tax deduction at 30th June 2018.
• Commercial Bills (Accruals Basis) – where the term of a Commercial Bill expires beyond the 30th June 2018, the discount applicable to the period up to 30th June 2018 can be claimed as a tax deduction.
• Rent (Accruals Basis) – if rent is in arrears, the part that is owed up to 30th June 2018 can be claimed as a tax deduction.

 Stock

• Stock On Hand – review stocktake list in June 2018. Determine whether to conduct “sales” prior to 30th June 2018.  Conduct stocktake as at 30th June 2018.  If you are conducting regular “rolling” stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2018.
• 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 2018.

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.
• Work Cover – a Work Cover Declaration is due by 31st August certifying wages paid for year ending 30th June 2018.

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.
• Government Grants – if your business has received a grant from a government department, it is 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 2018 (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 2017/18.
• 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.

This article does not include any of the items contained in the Australian government’s Budget for 2018/19 as the Budget has not yet been approved by Parliament.

Please do not hesitate to contact us if you would like to discuss any items with us.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.