Why this is important?
As the rates of tax for individuals and corporate entities are remaining the same for the 2015 income year, the planning opportunities will not give rise to any immediate tax windfall. The available strategies merely result in a timing difference for tax purposes (unless you are an individual and your marginal rate of tax will be less in the 2015 income year). That being said, having additional cash in your hand creates additional investment opportunities and the ability to grow your wealth faster.
What to do
First and foremost
Always engage the services of an expert. In the constantly evolving field of tax law and the increasingly sophisticated data matching conducted by the ATO (and resultant audit activity), the services offered by a tax agent are becoming more important.
The following checklist has been divided into three broad categories to assist entities with their end of year planning.
Generally, an individual's income is derived and deductions are incurred on a receipts basis. As such, the following opportunities are available for an individual to reduce their current year tax liability.
- Prepayment of deductible expenses
An individual can claim a deduction for prepaid expenditure for a period not exceeding 12 months. The most common types of prepayments include:
- Income protection insurance
- Interest on investment loans
- share portfolios
- rental properties
- Memberships and subscriptions
- Rental property expenses
- Repairs and maintenance
- Capital Gains Tax (CGT)
An individual should review the gains and losses on each asset within their investment portfolio before year end. The outcomes of the review could provide opportunities to:
- realise capital losses to offset any capital gains that were made earlier in the income year
- defer realisation of capital gains until July
- ensure assets have been held greater than 12 months before sale so the 50% discount can be applied to the gross capital gain
- Salary packaging arrangements
An effective salary sacrifice arrangement will reduce an individual's marginal rate of tax. The contractual arrangements should be put in place (or reviewed and updated) before year end as an individual cannot make a salary sacrifice arrangement for income already earned. A typical salary sacrifice arrangement may include the following components:
- Additional superannuation contributions (noting SGC will increase to 9.5% in 2015)
- Motor vehicle expenses
- School fees
The top marginal tax rate applies where your income exceeds $180,000. Fringe benefits tax applies the top marginal rate regardless of your income. For taxpayers who are not on the top marginal rate it is possible to take advantage of FBT concessions while being taxed on the benefits as income at lower rates.
Small and medium sized entities (SMEs)
A range of tax concessions are provided to small business entities (annual turnover less than $2 million). The following opportunities to reduce the current year tax liability should be given consideration by all SMEs before year end.
- Defer income
- Cash or accruals reporting – recognition of income on a receipts basis will generally defer the point of derivation
- Review service contracts – do the terms of the contract mean income can be recognised periodically when the services are performed?
- Bad debts
- Write off debt debts
- Ensure all bonuses are quantified and documented before year end
- Scrap obsolete items
- Utilise depreciation pools
- Review immediate write off limits - the government announced its intention to reduce the instant asset write off threshold for small businesses to $1,000 effective 1 January 2014. However, the amending legislation has not received royal assent.
- Trading Stock
- Closing stock can be valued at year end at the lesser of cost, market value or replacement value
Generally, an entity must perform a stocktake to determine the physical quantity and value of each item at year end.
Large corporate entities
- Foreign exchange gains and losses
- Realisation events
- Prior year tax losses
- Continuity of ownership
- Same business test
- R&D Tax incentive
The R&D tax incentive provides an incentive of up to 45% on eligible R&D expenditure undertaken by companies. Companies with income of less than $20m can have this incentive paid to them as a refund if they are in tax losses – they do not have to pay tax to obtain the benefit.
Expenditure for goods and services provided by an associate is only eligible R&D expenditure when paid. It is not sufficient for it to merely be owing. If you are conducting R&D activities and are using an associate for some of those activities make sure they are paid before 30 June.
- Thin capitalisation
Multi-national companies have limits on the level of debt they can have in Australia on which they can claim a tax deduction for interest and other borrowing expenses. The limits are based on the level of equity in the company. If the limits are exceeded it can only be fixed during the financial year, by issuing more equity. Multinational companies, particularly those with losses that may have reduced the level of equity during the year should consider this before the end of the year.
Tax advice should be obtained before any conversion of debt to equity as this can lead to the reduction of prior year tax losses and other adverse tax outcomes.
- Tax consolidation
Tax consolidation enables wholly owned group companies to lodge a single tax return, rather than a separate return for each company. This enables companies with tax losses to offset those losses against group companies with taxable income. While the decision to consolidate can be made after the end of the financial year, the consolidation process is complex and needs to be planned before the event, as it can give rise to a range of tax outcomes.
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