30 June 2018 Year End Tax Planning
The current financial and income tax year ends on Saturday 30 June 2018. This newsletter highlights items that may require your attention before then if you are an individual taxpayer, operate a private company or trust, or own a business or investment.
The focus this year is to be aware of the new superannuation opportunities and reduced contribution limits and to seek specific advice if you would like to maximise the associated contribution opportunities.
Please click on the links below for:
Superannuation – Current Contribution Rules and New Opportunities
Australia’s superannuation rules have become increasingly complicated following the significant changes which became law in 2016.
These changes, in particular the $1.6 million pension transfer balance cap, are discussed on our website. This article focuses on the current limits applying to contributions received by your superannuation fund on or before 30 June 2018.
Annual Concessional (ie Tax Deductible) Contribution Limits
The reduced contribution caps for tax-deductible superannuation contributions for all eligible individuals are now as follows:
|Age at Previous 30 June||2017-18 Year|
|49 to 64||$25,000|
|65 to 74 and satisfy work test||$25,000|
|75 and over||Mandated Contributions|
- The above comments are for your general information. Please contact us if you require specific advice about the level of voluntary superannuation contributions, if any, that are appropriate for your circumstances
- Personal superannuation contributions on your own behalf are only tax deductible where notice of the claim is given to your superannuation fund on this form
- Excess concessional contributions above these caps are included in your assessable income – you may, but need not, withdraw the tax thereon from your super fund
- The work test (ages 65 to 74) requires minimum gainful employment of at least 40 hours within 30 consecutive days
- Mandated employer contributions for those aged 75 and over comprise only Superannuation Guarantee Charge (“SGC”) and Industrial Award contributions
- Concessional contributions can only be made in relation to a person under 18 if they are an employee or carry on business
Example of Concessional Contributions Counted Against Current Concessional Cap
Sheila is aged 52. Her employer makes her SGC and salary sacrifice contributions (total $5,000 per quarter) 15 days after the end of each quarter. The following contributions will count against this year’s cap:
|$5,000||$5,000||$5,000||$5,000||Up to $5,000|
Under current superannuation laws, Sheila’s employer can make up to a further $5,000 of concessional contributions on Sheila’s behalf in the June 2018 quarter, pursuant to a valid salary sacrifice agreement without causing Sheila to breach this year’s concessional contributions cap. These contributions must be received by Sheila’s superannuation fund on or before the end of 30 June 2018 to avoid being counted against the $25,000 cap that applies to the 2019 financial year.
Personal Concessional Superannuation Contributions Generally Allowed from 1 July 2017
Under previous rules personal superannuation contributions were not tax deductible where more than 10% of the individual’s assessable income comprised income from employment sources as defined (ie salary, reportable fringe benefits and reportable superannuation contributions). From 1 July 2017 employees are able to top up their employer contributions by making tax deductible personal contributions directly to their superannuation account – before doing so they should confirm the “space” available below the reduced $25,000 contribution cap and understand the consequences should they exceed that cap.
This removes the need for the “salary sacrifice” contributions in the above example. Employers may need to become more proactive and transparent about the time when SGC and salary sacrifice contributions are made.
Individuals claiming a tax deduction for personal superannuation contributions must complete the form available here and give it to their superannuation fund before the earlier of the date of lodging their 2018 income tax return or 30 June 2019. You must also receive an acknowledgement from the fund before lodging your 2018 income tax return.
Division 293 Superannuation Tax Threshold Drops from $300,000 to $250,000 from 1 July 2017
Division 293 imposes an extra 15% tax on concessional superannuation contributions within the individual’s contribution cap (see above) to the extent that the individual’s concessional contributions and adjusted income for surcharge purposes exceeds $250,000. Adjusted income comprises the sum of:
- Taxable income
- Distributions to the individual subject to Family Trust Distribution Tax
- Reportable fringe benefits
- Net investment losses
Division 293 increases the tax rate on concessional contributions above the $250,000 threshold and within the concessional contributions cap from 15% to 30%. This higher rate is still 17% below the current maximum marginal rate including the Medicare Levy.
Non-Concessional Contributions – From 1 July 2017
The non-concessional contribution caps have decreased from 1 July 2017.
The following material is provided for your information. Please seek appropriate professional advice before making non-concessional contributions. Significant penalties apply for exceeding the relevant contribution limits.
In very general terms the non-concessional (ie after tax) contribution caps for an individual with accrued superannuation entitlements of less than $1.6 million at 30 June 2017 are:
Under Age 65
|* General limit (maximum – see below)||$100,000|
|* With three year bring forward rule (maximum)||$300,000|
Contributions above $100,000 will only be available where total superannuation entitlements were less than $1.4 million at 30 June 2017 (or $1.3 million for contributions over $200,000).
Age 65 to 74 and meet the work test (see above)
|* General limit (maximum – see below)||$100,000|
|* With three year bring forward rule||Not applicable|
The maximum non-concessional contributions will also be reduced if non-concessional contributions exceeded $180,000 in the 2017 tax year and/or $360,000 in the 2016 tax year.
Where your total income for the 2018 year is less than $51,813, you are under age 71 and are essentially self employed, you may be entitled to a Government co-contribution if you make personal superannuation contributions. If your total income is less than $36,183 and you make personal contributions of $1,000 you will receive the maximum co-contribution of $500 which phase out on a progressive basis.
Please contact us if you require further information.
General Reminder on Timing of Superannuation Contributions
In order for superannuation contributions to count against this year’s contribution caps they must normally be received by the relevant superannuation fund before the end of 30 June. You should be cautious of possible delays through clearing houses and other electronic payment processing systems.
Contributions to your self managed superannuation fund should actually be received into the fund’s bank account before the end of 30 June.
Compulsory Superannuation Guarantee Charge contributions for the June 2018 quarter must be received by the relevant fund by 28 July 2018 to avoid penalties. SGC Contributions will not be tax deductible until next year if paid in July.
Access to Superannuation Benefits - Preservation Ages
You cannot normally access your superannuation benefits until you reach your preservation age and satisfy a condition of release. Preservation ages are currently as follows:
|Date of Birth||Preservation Age||Earliest Release Date|
|Before 1 July 1961||56||N/A – date already past|
|1 July 1961 to 30 June 1962||57||From 1 July 2018|
|1 July 1962 to 30 June 1963||58||From 1 July 2020|
|1 July 1963 to 30 June 1964||59||From 1 July 2022|
|On or after 1 July 1964||60||From 1 July 2024|
Superannuation Pension Drawdown Rates
Where you are receiving an account based superannuation pension you should ensure that you draw down the minimum annual pension by 30 June each year. These amounts are calculated by applying the following percentages to your pension account opening balance at 1 July 2017.
|Age of Recipient||Current Pension Factor|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 & over||14%|
There is no maximum pension drawdown except in relation to transition to retirement income streams where the maximum annual pension is 10% of the opening balance.
Income on Larger Superannuation Pension Account Balances Over $1.6 Million Now Taxable
From 1 July 2017 where both:
- Part or all of your superannuation entitlements are in pension mode; and
- Your “transfer balance cap” exceeds $1.6 million
part of the income from the assets supporting the pension will become taxable in the superannuation fund at the 15% “accumulation” tax rate (or 10% for long term capital gains).
The rules are relatively complex – please contact us if you require specific advice.
New Superannuation Guarantee Charge Opt Out for High Income Employees
Individuals with more than one employer can exceed the $25,000 concessional contribution cap merely as a result of combined SGC contributions.
From 1 July 2018 these individuals will be able to apply for a partial SGC exemption when their taxable income exceeds $263,157. The Australian Taxation Office will post the relevant form on its website – applications will need to be lodged 60 days before the start of the relevant quarter.
Limited Superannuation Guarantee Charge Amnesty for Delinquent Employers
On 24 May 2018 the Government announced a 12 month amnesty for employers that bring their outstanding Superannuation Guarantee Charge contributions fully up to date and make a voluntary disclosure to the Tax Office. No late payment penalties will apply apart from the normal interest charges. Employers who ignore this amnesty could be subject to criminal prosecution under proposed amendments to the superannuation laws.
Splitting Concessional (ie Tax Deductible) Superannuation Contributions
A member of a superannuation fund in accumulation phase can elect to “split” part or all of their concessional (ie tax deductible employer and/or personal) superannuation contributions with their spouse where permitted by their superannuation fund. Up to the lesser of 85% of your concessional contributions and the $25,000 cap can be split with a spouse under age 55 or who is under age 65 and not retired.
This strategy is useful to help equalise superannuation entitlements where only one member has accumulated entitlements above the $1.6 million transfer balance cap. It can also increase the account balance for the older spouse who will reach the age 60 tax exempt status for benefits first.
Please contact us to confirm your eligibility and documentation requirements before undertaking contributions splitting.
First Home Super Saver (“FHSS”) Scheme
The FHSS allows voluntary superannuation contributions made from 1 July 2017 to be withdrawn for a first home deposit starting from 1 July 2018. The FHSS provides for contributions up to $15,000 per annum and $30,000 in total (both subject to the relevant contribution caps) to be contributed to superannuation. It normally provides a 15% tax saving on money channeled through superannuation for those 18 or over who have never owned real property in Australia and are buying their first home.
Eligible participants must buy or build their first home within 12 months after applying to the ATO for a release authority. Released amounts are taxed at the member’s marginal tax rate less a 30% non-refundable offset.
Transition to Retirement Income Streams Now Less Tax Effective
A transition to retirement pension income stream (TRIS) is a strategy to allow access to accumulated superannuation entitlements from preservation age (see above) without formally retiring. TRIS pensions paid before age 60 are taxed at your marginal tax rate subject to a 15% tax offset.
Under changes that have applied from 1 July 2017:
- Income from assets supporting a TRIS will become taxable in the superannuation fund
- TRIS cannot be taken as tax free lump sums
Six Member Self Managed Superannuation Funds Proposed from July 2019
From 1 July 2019 your self managed superannuation fund (“SMSF”) will be able to have up to 6 members rather than the current limit of 4 members. This will help larger family groups by splitting the fixed costs of running an SMSF over a larger investment base.
$300,000 Additional Superannuation Contributions on Downsizing Home Sales Made After 30 June 2018
Individuals aged 65 and over will be able to make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their home that they have owned for more than 10 years where the contract is entered into on or after 1 July 2018. This downsizer contributions cap of $300,000 for each spouse in a couple (i.e. up to $600,000 in total) will not count toward the non-concessional contributions cap. It will also be exempt from the contribution rules for people aged over 65 and also from accepting contributions from people with superannuation balances over $1.6m. Qualifying individuals should consider making any other non-concessional contributions before making a downsizer contribution.
Australian Financial Services Licence General Advice Disclaimer
Individual Tax Planning Issues Outside Superannuation
Limited Federal Budget Changes to Personal Tax Rates From 1 July 2018
From 1 July 2018 a non-refundable Low and Middle Income Tax Offset of up to $530 will be incorporated into future income tax assessments. The Levy, which completely phases out at incomes of $125,333 will not be incorporated into the PAYG withholding tables.
Also from 1 July 2018 the point at which the personal income tax rate increases from 32.5% to 37% will rise from $87,000 to $90,000. This equates to an annual tax cut of $135 for those with incomes over $90,000.
The recent Federal Budget brought only minor inflation adjustments to the Medicare Levy thresholds – a previous proposal to increase the Levy from 2.0% to 2.5% of taxable incomes was abandoned.
Further tax cuts are proposed for subsequent years.
Gifts and Deductions
Gifts or donations of at least $2 to eligible charities made by 30 June 2018 are tax deductible this year. Deductions for larger donations can be spread over up to 5 income years. In all cases you should ensure the charity is endorsed as a tax deductible gift recipient and keep receipts.
Work Related Car Expenses – Limited Deduction Choices
Individual taxpayers can now only claim a deduction for car expenses using one of the following two methods:
- 66 cents per eligible kilometre travelled (up to a maximum of 5,000 kms)
- Log book method – the business usage percentage established by a log book kept during a representative 12 week period within the current year or the previous four years applied to actual costs of operating the car including lease rentals or depreciation and finance cost
Where an employee’s car has comparatively limited business use it may be tax effective for the employee to “salary package” the car if permitted by the employer. There is a range of service providers in this area offering novated lease salary packaging opportunities which reduce the employer’s administrative burden of providing fringe benefits.
Net Medical Expense Offset – Now Very Limited Application
The medical expense offset is now only available for payments for medical expenses in relation to:
- Disability aids
- Attendant care services
- Aged care services and accommodation
The offset only applies if your net expenditure on these items after Medicare and health fund reimbursements exceeds $2,333 (or $5,504 for certain higher income earners).A Medicare levy surcharge applies where your income for surcharge purposes exceeds prescribed thresholds and you do not have adequate private health insurance.
Medical Levy Surcharge - Inadequate Private Health Insurance
A Medicare levy surcharge applies where your income for surcharge purposes exceeds prescribed thresholds and you do not have adequate private health insurance.
The 1% surcharge commences to apply for individuals with income for surcharge purposes exceeding $90,000 (singles) and $180,000 (couples) plus $1,500 for the second and subsequent dependent children. The maximum surcharge of 1.5% applies for incomes above $140,000 and $280,000 respectively.
Income for surcharge purposes comprises:
- Taxable income of the taxpayer and their spouse
- Distributions to the above subject to the Family Trust Distribution Tax
- Reportable fringe benefits
- Reportable (eg salary sacrifice) superannuation contributions
- Total net investment losses
If you expect your income to rise above the relevant threshold next financial year and you do not currently have qualifying private health insurance you may need to consider taking it out. The cost of the premiums may be less than the surcharge involved.
Private Health Insurance Offset
Where individuals are covered by qualifying private health insurance they may qualify for the private health insurance offset on the associated premiums. This can be accessed as a reduction in the premium or a tax refund.
Singles qualify for a full or partial offset where their income for surcharge purposes (see definition above) is less than $140,000 plus $1,500 for each dependant child after the first. Couples qualify for a full or partial offset where their income for surcharge purposes is less than $280,000 plus $1,500 for each dependent child after the second. In both cases the offset varies between 8.6444% and 34.579% of the premiums depending on the contributor’s age and family income.
Lifetime Health Insurance Cover Loading – No Private Health Insurance After Age 30
If you do not have private hospital cover with an Australian registered health fund on your Lifetime Health Cover base day and then decide to take out hospital cover later in life, you will pay a 2% loading on top of your premium for every year you are aged over 30 and do not have cover.
Your Lifetime Health Cover base day is normally the later of 1 July 2000 or the 1st of July following your 31st birthday.
No Deduction for Personal Travel Expenses to Inspect Your Residential Investment Property
From 1 July 2017 personal travel expenses associated with inspecting, maintaining or collecting rent for a residential rental property ceased to be tax deductible. Normal property management expenses remain tax deductible.
Exotic “Tax Driven” Investments
We discourage investments in “tax driven” investments unless they can be expected to deliver sound commercial returns (assistance may be required from an Australian Financial Services Licence Holder to assess the viability of the project). We are not licensed to comment on the commercial merits of such investments.
Removal of Capital Gains Tax Main Resident Exemption for Certain Overseas Home Owners
Foreign residents and temporary tax residents have been denied access to the CGT main residence exemption for properties purchased after 9 May 2017.
Existing homes will be grandfathered for sales exchanged before 1 July 2019. After that time it appears the full gain since the purchase date could be taxed at rates up to 45% unless the home owner returns to Australia as a permanent tax resident.
TAX PLANNING FOR INVESTORS
Deducting Prepaid Expenses
Individual non-business investors and small business taxpayers (currently aggregate turnover recently increased to under $10 million) are able to claim tax deductions for prepayments of tax deductible expenses this financial year where the period covered by the prepayment does not exceed 12 months and ends by 30 June 2019. These taxpayers may be able to reduce this year’s taxable income by pre-paying up to 12 months of tax deductible interest expense by the end of June 2018 – banks have special loan products in order to facilitate interest in advance payments. Please check with your bank if you wish to prepay interest as not all loan products qualify.
Note that different rules apply to non-small business taxpayers and to “tax shelter” investments.
Capital Gains Tax (“CGT”) – Timing of Asset Sales
For CGT purposes, the date of acquisition or disposal of an asset is normally the date of exchange of the relevant contract (and not settlement). The difference between a 30 June and a 1 July sale contract date can be effectively a full year difference in the payment due date for any resulting CGT liability.
The long term CGT discount (50% for resident individuals; 0% for non-residents and 33.33% for superannuation funds in accumulation phase) is generally available where assets have been owned for more than 12 months between the dates of the purchase and sales contracts. If you are close to the 12 month ownership period, you should weigh up the ability to access this discount when considering the timing of a sale, along with other commercial considerations such as the asset’s current price and its potential price volatility.
If you have realised taxable capital gains from selling profitable investments during the year you may be able to reduce your CGT liability by selling other assets with unrealised capital losses by 30 June this year. For example, if you have unrealised losses on listed shares you could sell them to unrelated third parties in order to crystallise the loss. “Wash” sales to related parties, such as a family trust, can raise tax avoidance issues as can “parallel” trades in the same asset (eg one taxpayer sells listed shares and a related taxpayer buys shares in the same company).
Capital Loss Record KeepingWhere you have made a capital loss you should keep records of the transactions giving rise to the loss for a further four years after you receive your income tax assessment for the year in which the loss is applied against taxable capital gains.
You can choose the order in which capital losses are applied. In general they should normally be applied first against “short term” capital gains realised on assets held for less than 12 months which do not qualify for the 50% discount.
General Small Business Tax Issues Including New Corporate Tax Rates and Thresholds
Introduction - What is Your Company’s Tax Rate and Why it Matters
The rules for determining a “small” company’s tax rate are complex – at the moment it can be either 27.5% or 30%. This has important ramifications when it comes to franking dividends paid to shareholders.
Please note that some of the following comments relate to amending legislation that is currently before Federal Parliament and which is not yet law. If enacted this could further complicate the situation.
The 27.5% Company Tax Rate Currently Applies to Base Rate Entities. These are Companies That:
- Have Aggregated Turnover Under $25 Million; and
- Carry on a Business
The 30% Tax Rate Applies to All Other Companies
Dividend Imputation Issues for "Smaller" Corporate BusinessesThe cut in the qualifying small company tax rate to 27.5% was not all good news for shareholders in these companies, particularly where there are retained profits on which company tax was paid at the “old” 30% rate.
From 1 July 2016 these companies could only frank dividends at the 27.5% tax rate and not the higher 30% tax rate.
This will result in higher “top up” tax where fully franked dividends are paid to individuals on higher marginal tax rates.
As the ceiling for what is a base rate entity company rises there is some incentive to pay out franked dividends at the 30% rate whilst these companies are still “large”. This will, however, bring forward the shareholder’s top up tax liability.
Companies that qualify for the reduced tax rate have aggregated turnovers up to the following limits:
|Year ending 30 June 2018||$25 million|
|Year ending 30 June 2019||$50 million|
For individual shareholders with ongoing taxable incomes above $180,000, the top up tax rate on dividends currently franked at the 30% tax rate will rise on 1 July 2018 from 24.29% of the cash component of the dividends to 26.9% due to the reduction in the value of the franking credits. This measure may result in “trapped” franking credits that can never be distributed to shareholders.
A reminder that dividend statements for private company franked dividends paid during the current tax year must be issued by 31 October 2018.
Proposed Changes to Concept of Base Rate Entity and General 25% Corporate Tax Rate
Amending legislation currently before Federal Parliament seeks to:
- Restrict the current, lower, company tax rate to companies that have no more than 80% of their income which is base rate entity passive income – this comprises most forms of investment income; and
- Progressively extend the lower 27.5% corporate tax rate to all corporate tax entities by the 2023-24 tax year and then to 25% by the 2026-207 tax year
The Government continues to experience difficulties in getting this legislation passed.
Distributions to Passive Holding Companies
Where dividends are distributed to a corporate beneficiary that is not considered to carry on business the overall tax rate will be topped up to 30%. The issue of what qualifies as a business for tax purposes has proved contentious.
What are the Current Small Business Entity (SBE) Tax Concessions -$10 Million Turnover Test
An entity now qualifies as a SBE if:
- it currently carries on a business and either or both
- its aggregated turnover for the previous (2017) income year was less than $10 million;
- its aggregated turnover for the current (2018) year is likely to be less than $10 million
However if aggregated turnover for both of the two previous years was over $10 million an entity cannot be a SBE unless its turnover drops this year (reduced concessions apply).
Aggregated turnover refers to the SBE’s annual turnover (see below) and the turnover of the SBE’s:
- connected entities – these are entities controlled by the SBE or which control the SBE
- affiliated entities – these are entities that act or could reasonably be expected to act in accordance with the SBE’s directions or wishes or in concert with the SBE
Annual turnover means the total income that the relevant entity derives in the ordinary course of carrying on a business. It does not include income that is not connected to a business.
The current tax benefits of qualifying as an SBE include:
- capital allowance (depreciation) concessions
- trading stock concessions
- potential access to CGT small business concessions (see below)
- deductions for certain prepayments
- option to use GST adjusted notional tax method to work out PAYG instalments
- FBT exemption for certain on site car parking
- Ability to account for GST on a cash basis
The turnover threshold for the small business CGT concessions remains at $2 million where the alternative $6 million net asset value test is failed. The aggregated turnover for the CGT small business rollover is also $10 million.
$20,000 Instant Business Asset Write Off for “Small” Businesses Extended to 30 June 2019Eligible small business taxpayers (see above) can immediately deduct the cost of business plant and equipment, including motor vehicles, where that cost is less than $20,000 (GST exclusive for businesses entitled to GST input tax credits) and the relevant asset was first acquired between 7:30pm (AEST) 12 May 2016 and installed ready for use by 30 June 2019. These measures apply to both new and second hand assets. The Tax Office will monitor the cut off dates to prevent abuses. This measure does not apply to assets that have previously been owned by the relevant taxpayer.
If an asset costs more than $20,000 the full cost can be placed in a small business simplified depreciation pool and depreciated at 15% in the first year and 30% in subsequent years. If the total pool balance falls below $20,000 after 12 May 2016 and before 1 July 2019 that balance can be written off in the relevant tax year.
The following exclusions apply:
- Horticultural plants
- Capital works
- Assets allocated to a low value pool or software development pool
- Primary production assets where an election is made to apply standard depreciation rates
- Assets leased out under a depreciating asset lease
Off the shelf computer software is eligible for the write off. In house software is also eligible except where the cost is allocated to a software development pool.
Where an asset costs less than $20,000 and is only partially used for business purposes the estimated taxable purpose proportion of the cost is an outright tax deduction. Where an asset costs more than $20,000 but the taxable proportion is less than $20,000 that cost must be depreciated under existing rules rather than as an immediate write off.
Deferring Business Income Generally
Income received in advance of the provision of the relevant goods or services may be able to deferred until the next tax year. The Tax Office has ruled that income which is subject to a “contingency of repayment” can also be deferred.
Larger small business companies that defer income beyond 30 June 2018 will also benefit from the reduction in the small business corporate tax rate.
Deductions for Employee Bonuses
Deductions can be claimed this year by business taxpayers for bonuses to be paid after year end to unrelated employees where the business has definitely committed to pay the bonus by 30 June 2018. This requires that the amount of the bonus (or its method of calculation) has been finally determined and, preferably, notified to the relevant employees by this date.
Bad Debt Deductions
In order to claim a bad debt tax deduction this financial year the debt must have been included in the taxpayer’s assessable income and be physically written off in the business’ accounting records on or before 30 June. Businesses may then also be able to recover any GST remitted on these debts.
Moneylenders can also claim bad debt deductions for normal business loans.
If there has been a significant change in ownership or control of a creditor company, bad debt deductions may not be available unless the company satisfies the “same business test”. A discretionary trust may need to make a family trust election or satisfy an alternative test.
Trading Stock Valuation Rules
Trading stock on hand at year end can be valued at (full absorption) cost, market selling value or replacement cost. Normally the lowest value is chosen to minimise taxable income. However, if your business has incurred losses or you expect your marginal tax rate to rise in future, a higher year end value may be preferred.
Obsolete Stock or Plant and Equipment
Obsolete stock and obsolete plant and equipment should be physically scrapped by 30 June 2018 in order to claim a full tax deduction this year. However, where obsolete stock is not scrapped it may still be possible to justify a lower value for tax purposes.
Reportable Fringe Benefits and Employee Share Scheme Income on PAYG Payment Summaries
Where the grossed up value of fringe benefits provided to an employee during an FBT year exceeds $2,000 this total must be reported on the employee’s annual payment summary. Certain benefits are excluded principally:
- Meal entertainment unless salary packaged
- Car parking
- Certain “pooled” cars
Employees of Not for Profit Organisations are now subject to a $5,000 annual cap on salary sacrifice meal entertainment.
Where corporate employers provide company shares or share options to employees or their associates the relevant taxable income, if any, must also be reported to the Tax Office.
Single Touch Payroll for Larger Employers Starts on 1 July 2018
Single Touch Payroll (“STP”) means employers will report payments such as salaries and wages and allowances, PAYG withholding and super information to the ATO directly from their payroll solution at the same time they pay their employees. For employers with 20 or more employees, STP reporting starts from 1 July 2018. The Government has announced it will expand STP to include employers with 19 or less employees from 1 July 2019.
Research & Development Tax Incentive
Companies spending more than $20,000 annually on eligible Research & Development (“R&D”) activities may be eligible for the following offsets
- Companies with aggregated turnover under $20 million can claim a 43.5% refundable tax offset
- Companies with higher turnover can claim a 38.5% non-refundable offset on the first $100 million of qualifying R&D expenses and 30% thereafter. The 2018 Federal Budget proposed a premium R&D rate for qualifying companies.
R&D related expenses incurred to an associate should be physically paid before 1 July 2018 to qualify for the current year’s offset.
Qualifying companies should be registered with AusIndustry on behalf of Innovation Australia within 10 months after year end (ie by 30 April 2019 for a company with a 30 June year end).
Individuals with “Non-Commercial” Business LossesIndividuals with annual adjusted taxable incomes (the sum of taxable income, reportable fringe benefits, reportable (ie salary sacrifice) superannuation contributions and net investment losses) exceeding $250,000 are not able to deduct any business losses against their other taxable income.
Other individuals incurring business losses cannot deduct those losses against their other taxable income unless that business satisfies one or more of the following tests:
- A farmer whose non-primary production income is less than $40,000
- The assessable income from the activity is at least $20,000 (full year equivalent)
- The activity has been profitable in at least three of the last five income years
- The value of real estate used in the business is at least $500,000
- The value of other business assets is at least $100,000
Thin Capitalisation – Deductibility of Interest Expense and Other Finance Costs
The thin capitalisation rules can reduce debt (ie interest) deductions for taxpayers which:
- Have significant foreign investments (10% or more of total assets); or
- Are foreign owned; or
- Are foreign investors
The measures apply where annual debt deductions exceed $2 million.Debt deductions are not denied to the extent that the taxpayer satisfies certain debt to equity ratios. For most taxpayers the “safe harbour” tax deductible debt cannot exceed 60% of total assets (ie $10 of gross assets supporting $6 of debt for every $4 of equity). Higher gearing ratios may be permitted under the alternative “arm’s length” debt test. This looks to the hypothetical amount the relevant taxpayer could have borrowed from an unrelated financier without related party guarantees.
Where the measures apply it was previously possible to reduce the amount of disallowed debt deductions by revaluing assets and/or a share capital raising by 30 June 2018. Proposals in the 2018 Federal Budget restrict the ability to revalue assets after 8 May 2018.
The transfer pricing rules may also reduce interest deductions where a taxpayer borrows from offshore related parties on uncommercial terms in relation to the interest rate, the gearing ratio or both.
Private Company Loan and Trust Issues
Loans to Shareholders and Debt Forgiveness
Loans or payments made by private companies to their shareholders or associates can give rise to “deemed dividends” for income tax purposes (“Division 7A”). These are assessable to the recipient as an unfranked dividend.
No action is required before 30 June 2018 for new loans made since 1 July 2017.
No deemed dividends arise for outstanding loans made in the 2017 and prior years where:
- The loan was repaid in full by the earlier of the due date for lodging the company’s tax return for the year it was made or the actual date the return was lodged (“the lodgement date”); or
- The loan is covered by a written loan agreement for either 7 years (as an unsecured loan) or 25 years (where secured over real estate) made before the lodgement date and the required minimum interest charges and principal repayments are made by 30 June each year commencing with the year after the year in which the loan was made; or
- The company had accumulated accounting losses and did not have a “distributable surplus” as defined in the 1936 Tax Act in the year the loan was made (but note that a deemed dividend can arise when loans are forgiven in a subsequent year if there is a distributable surplus at the end of that year).
Deemed Dividends and Provision of Company Property
The private company loan rules extend to situations where a private company’s property (boats, holiday houses etc) is available for the private use of shareholders or their associates and less than a market rental is charged. Where these rules apply, we recommend that a register is kept of the dates company property was either used for private purposes or was available for private use by the shareholders.
New safe harbour rules for the use of private company assets are proposed to apply from 1 July 2019.
Interest Free Credit Loans to Private Companies
Loans to companies that are the economic equivalent of shares can be treated as equity for tax purposes. This can have unintended tax consequences.
Interest free loans to private companies will continue to be treated as debt for tax purposes where:
- The loan is from a connected entity; and
- The loan does not have a fixed term; and
- The loan is repayable on demand or at the end of a reasonable period or on the death of the individual who made the loan; and
- The company’s GST turnover is under $20 million
Ideally there would be some documentation confirming the terms of the loan.
Proposed Denial of Interest Deductions for Holding Vacant Land
The 2018 Federal Budget proposes to deny interest deductions for holding vacant land after 1 July 2019. This measure is intended to discourage land banking. The proposal generally excludes land held for commercial development.
If you or an associated entity currently have a geared investment in vacant land please contact us for further advice.
Discretionary Trust Distribution Issues
Discretionary Trust Distributions
Trustees of discretionary (ie non-fixed) trusts must resolve and document their decision on how to distribute the current year’s trust income including any realised capital gains by 30 June 2018 or such earlier default distribution date as is specified in the trust deed. The tax laws authorise trustees to “stream” capital gains and/or franked dividend income to particular beneficiaries where permitted by the terms of the trust deed. Other classes of income such as interest are blended and cannot be streamed.
In order for distribution resolutions to be as tax effective as possible, trustees should have a clear understanding of the trust’s likely accounting and taxable income (including capital gains) and expenses of the trust and of potential beneficiaries for this current financial year.
Where we are aware that you control a discretionary trust we will be contacting you before 30 June to discuss the proposed distributions.
Beneficiary Tax File Numbers
Where current year trust distributions are contemplated to adult taxpayers who have not previously provided their Tax File Numbers (“TFNs”) to the trustee, those TFN’s must be provided to the trustees by 30 June 2018 and reported by Trustees to the Australian Taxation Office (“ATO”) by 31 July 2018. Where a trustee does not have the TFN of an adult beneficiary, the trustee must withhold 49% of any trust distribution to that adult for the current year and remit that amount to the ATO by 30 September 2018.
Trust Losses/Family Trust Elections
Where a discretionary trust or other trust that does not qualify as a “fixed” trust incurs an income tax loss or bad debt it may need to make a Family Trust Election or satisfy an alternative test in order to preserve the benefit of those deductions into future years. A Family Trust Election restricts the class of potential beneficiaries that can receive trust distributions without the trust being subject to the 49% Family Trust Distribution Tax.
Family trust elections may also be required where a discretionary trust has substantial franked dividend income or where it has a significant interest in a private company that has tax loss and/or bad debt deductions.
Family trust elections raise a number of complex issues that are best discussed with your UHY advisor.
Unpaid 30 June 2017 Trust Distributions to Private CompaniesAny outstanding (ie unpaid) trust distributions made to corporate beneficiaries during the 30 June 2017 tax year will need to be addressed before the due date for lodging the company’s 30 June 2018 income tax return (normally 15 May 2019 or actual lodgement date if earlier).
Making a cash payment to the company is the most straightforward way to clear the unpaid distributions.
Other options are available to manage the unpaid amount over a period of time. The most common involves documenting the transaction by way of a written Division 7A private company loan agreement repaid over 7 years on a principal and interest basis for unsecured loans (or 25 years when secured over real estate) with interest commencing from 1 July 2018. More complex strategies involving sub-trusts are possible.
If you're feeling a little under prepared for the end of the financial year, or would like further information on any of the information discussed please contact your client service partner at UHY Haines Norton.
The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.