Blog

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.

Small Business Entities

Aggregated turnover of less than $10 million – “aggregated turnover” is calculated on a group basis and must be “business income”.

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 2019.  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 twelve 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 2018 and PAYG withholding tax deducted.
• Staff Holidays – where practical, encourage staff to take holidays prior to 30th June 2018 or when cashing in holidays, these are paid before 30th June 2018.
• Superannuation – for the year ending 30th June 2018, 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 6 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 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 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.

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 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.

 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 2018. Determine whether to conduct “sales” prior to 30th June 2018.  Conduct stocktake as at 30th June 2018.  If you’re conducting regular “rolling” stocktakes throughout the year, it may not be necessary to conduct a stocktake as at 30th June 2018.  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:
  • 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.
• WorkCover – a WorkCover Declaration is due by 31st August certifying wages paid for year ending 30th June 2018.

Income Issues

• 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.

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.

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.