Tax planning is a year round activity however our focus becomes heightened around this time of year. For your benefit, and as a timely reminder, we have listed below some year end strategies and divided these into two categories;
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General Tax Planning for business
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Specific Tax Effective Investments for Business Owners & Individuals
Please take some time to consider the alternatives and options below and please contact your C&J advisor should you wish to discuss a more specific scenario.
In attending to specific year end tax planning, the following matters should be attended to annually as a matter of course;
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Trade debtors
– Review aged debtors listing prior to 30
th
June and give consideration to the collectibility of debtors. The decision to write off bad debts should be documented prior to 30
th
June and the accounting systems updated accordingly.
Consider deferral of billing (for accrual based tax payers only) to the 1st July for clients or customers who are notoriously bad payers.
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Stock Valuation
– Stock is required to be valued at the end of the income year at its cost, market selling price or replacement value. There is no obligation to use the same method for each item of stock. Therefore consideration should be given to the valuation methodology for each stock item. For your reference, the definition of each method is as follows,
Cost – is the cost of acquiring the trading stock plus any further costs in getting it into its existing condition or location.
Market Selling Value – is the current selling value of the item in your selling market.
Replacement Value - is the cost of replacing the particular item.
Obsolete Stock – You may also elect to value an item of stock below the values determined above, if it is warranted, because of obsolescence or any other special circumstances.
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Trade Creditors
– Review trade creditors as at 30
th
June to ensure all invoices have been received for goods and services provided during the period ended 30
th
June.
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Staff Superannuation
– In order to obtain an income tax deduction for superannuation, the payments must be cleared from the company bank account by 30
th
June. Ensure superannuation for all staff is up to date and paid prior to 30
th
June.
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Director Superannuation
– Contributions for directors may be made up to the age based deduction limits and again must be cleared from the company bank account prior to 30
th
June. The relevant aged based limits are,
Aged 50 years and over - $100,000
Aged up to 49 years - $50,000
Note:
These contribution levels are for each individual and that the rates levels apply in the year in which the employee turns the relevant age, so long as the final contribution of the year is paid after that birthday. For example, if an employee turns 50 on the 31
st
May, then so long as the last contribution for the year is made after 31
st
May, then the higher limit of $100,000 will apply.
Note:
After the May Budget announcement this is the last year that contributions limits will be at these levels. From 1 July 2009 they will be lowered to $50,000 for over 50’s and $25,000 for under 50’s
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Bonus Payments
– Bonus payments will be deductible, even though the physical payment is not paid until the following year, if, prior to the 30
th
June, the company is definitively committed to the payment of a quantified amount. This will be evidenced by reference to employment contracts and directors resolutions.
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Asset Schedule Review
– The asset register of the company should be reviewed on an annual basis prior to 30
th
June to determine whether there are any items present on the listing which have been scrapped since the last review, and need to be written off in the accounts of the company prior to 30
th
June.
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30% & 50% “one-off” capital allowance
– A one-off tax deduction of 50% of a new depreciating asset's cost will be available to a small business entity (SBE – turnover generally under $2mil) for assets costing > $1,000 so long as the asset is acquired before 31
st
December 2009 and installed for use by 30 June 2010.
A general one-off tax deduction of 30% (or 10%) of a new depreciating asset's cost will be available to other businesses where assets costing > $10,000 are purchased between 13 December 2008 and before 30 June 2009 (30%) (or 10% if purchased before 13 December 2008) and installed for use by 30 June 2010
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Government Co-contributions -
Those with an assessable income less than $60,342 can benefit from the government co-contribution scheme by making an additional contribution to super with ‘after tax money’ (up to $1,000) the Government will also contribute up to $1,500 to their super fund.
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Spouse Contributions -
Where a spouse has an assessable income below $13,800 a tax rebate up to $540 can be received by their spouse who contributes to super with after tax money on their behalf.
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Capital Gains Tax “Wash Sales”
– gone are the days when the strategy was to crystalise a capital loss on shares and then buy the same stock back almost immediately. The ATO view this as an anti-avoidance strategy nowadays so you might do well to heed the advice and leave it out of your tax planning.
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Capital Allowance & Depreciation Schedules for Investment Properties
– Are you maximising your tax deduction for depreciation of your investment property? If you have a property that was constructed after 1 July 1985, or even renovated since that date, you may do well to commission a quantity surveyor to produce an extensive depreciation schedule for your property and even any eligible assets attached to the common property that you effectively have a pro-rata ownership interest in. The cost of the report is tax deductible and the tax savings from the depreciation claim will generally recoup the after-tax cost within the first year.
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There are a number of tax effective investment products available covering a range of industries & investments.
The key issues to note in regard to investments with inherent tax advantages are as follows;
#. regardless of all else, if the dominant purpose is to avoid tax, then under the law the ATO can disallow the deduction at a later date.
#. regardless of how good the tax saving (deferral) might be there must be an underlying commercial outcome from the investment itself OR from the adjunct investment undertaken utilising the tax saving / refund. For instance the tax refund from an agricultural investment may be used as a deposit on a rental property or share investment. Whilst ideally the outcome from both would be positive - at least one must yield a return to cover the other and importantly yield a positive return.
#. at best, negative gearing will only recover 46.5% of your cash shortfall (which converts to more where ‘non-cash’ depreciation allowances exist in some cases). It is the capital growth that ultimately recoups the balance of any cash deficiency.
#. generally you will take on twice the amount of debt for the amount of tax refund / saving derived.
#. the longer the interest only period on any promoter finance offered the longer the tax deferral attained will be. Paying back principal is effectively using your tax refund / saving. Principal repayments would ideally fall at the same time as cash return from the investment is derived.
#. the window of opportunity to invest in the more commercial 'savvy' investments can be narrow as demand will often exceed supply. This however is not a reason to enter a specific tax effective investment unless you have personally satisfied yourself as to it's commerciality.
The range of product types available includes, but is not limited to;
- Agribusiness – Product specific cash flows, but generally cash flow positive within 3 to 4 years.
- Hardwood Timber – Positive cash flows in the range 9 to 13 years.
- Softwood Timber – Positive cash flows in the range 18 to 25 years
- Capital Protected Equity Products – Positive cash flows in 3 to 4 years.
- Infrastructure Bonds – These may be difficult to obtain as they are promoted usually by the larger banks and often fully subscribed by private clients of the promoter.
- Prepaid expenses on investment properties including interest and management costs
Such products must have a Product Ruling from the ATO and a Product Disclosure Statement (PDS). Note that where the transaction involves a deduction for the prepayment of associated expenses, the deduction will not be available if the investment is made by a company.
For business / company clients we would recommend that any such investments be made individually, and that additional remuneration be paid from the company if required to offset anticipated deductions. This also ensures that the company is not involved in the investments hence complicating any future sale of the business nor mixing investment assets with trading activities.
Should you wish to discuss any of the above please do not hesitate to contact your C&J advisor.
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