PRT Chartered Accountants - Business Advisors - Innovative Solutions

YEAR END TAX PLANNING - JUNE 2009

INTRODUCTION

Last Notice!

We have raised these matters already, however this newsletter highlights some tax matters that, if appropriate, will need attention by the end of this month.

INDIVIDUAL TAX PLANNING

Defer Income until after 1 July 2009

With the reduction in tax rates from next month there may be some advantages in deferring taxable income until next year and bringing forward deductible expenses to this year. The tax cuts reduce the tax scales for incomes between $34,000 and $180,000 as follows:

Current thresholds to
30 June 2009 - income range $

Tax Rate
%

Thresholds from
1 July 2009 - income range $

Tax Rate
%

0 - 6,000

0

0 - 6,000

0

6,001 - 34,000

15

6,001 - 35,000

15

34,001 - 80,000

30

35,001 - 80,000

30

80,001 - 180,000

40

80,001 - 180,000

38

Over 180,000

45

Over 180,000

45

Superannuation Contribution Opportunities

This is the last year when individuals 50 years of age or older at 30 June can benefit from up to $100,000 of tax deductible personal and employer superannuation contributions without breaching their concessional contributions cap. For those under 50 the cap is currently $50,000. Both amounts will be reduced by 50% next year (see below).

The non-concessional (ie non-deductible) contributions cap is $150,000 for a single year contribution or, for those under age 65, up to $450,000 where three years’ contributions are brought forward.

Note that the contributions must be received by the fund by Tuesday 30 June. It is not sufficient to post the cheque on that day.

Superannuation Contribution Traps

Employees with salary sacrifice agreements to reduce their cash salary and increase employer superannuation contributions made on their behalf should review these arrangements before 1 July. From that date the maximum employer superannuation contributions that can be made without triggering the 31.5% excess contributions tax is $25,000 (or $50,000 for those aged 50 or over by 30 June 2010). This limit applies to all tax deductible superannuation contributions (ie the 9% compulsory contributions as well as voluntary contributions). The 31.5% tax is in addition to the 15% contributions tax in the fund (ie 46.5% total tax).

Where the Personal Services Income rules apply to private companies or trusts, superannuation deductions for individuals who are associated with the main individual can be restricted to the 9% compulsory contributions.

From 1 July 2009 salary sacrificed superannuation contributions will be treated as employment income for the purposes of determining whether an individual is predominantly self employed. This may prevent some self employed people who are also part time employees (for example, visiting doctors in public hospitals) from making personal tax deductible contributions where previously less than 10% of their income was from employment (as defined).

Superannuation Pension Drawdowns

If you are receiving a superannuation pension or income stream, you must ensure you receive the minimum annual pension payment by 30 June. For the 2008/2009 and 2009/2010 income years the required minimum pension payments have been halved.

Superannuation Co-contributions for Low Income Earners

The superannuation co-contribution scheme is an arrangement whereby the government makes additional superannuation contributions for low income earners who make personal (ie non-deductible) superannuation contributions.

Currently the maximum co-contribution is $1,500 for contributors whose income (assessable income plus reportable fringe benefits) is less than $30,342 who make a $1,000 after tax contribution (ie 150% of eligible contributions). The co-contribution phases out at income levels of $60,342.

From 1 July the maximum co-contribution falls to $1,000 (100% of eligible contributions).

Gift Deductions

Donations to tax deductible charities made by 30 June 2009 are deductible this year. You should ensure the charity is endorsed as a tax deductible gift recipient.

TAX PLANNING FOR INVESTORS

Prepayments

Individual non-business investors and small business taxpayers (aggregate turnover under $2 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 2010. For example, these taxpayers may be able to reduce this year’s taxable income be pre-paying up to 12 months of tax deductible interest expense this month.

Note that different rules apply to most business taxpayers and “tax shelter” investments.

Offsetting Capital Gains and Capital Losses

If you have realised taxable capital gains from selling 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 third parties in order to crystallise the loss. Sales to related parties, such as a family trust, can raise tax avoidance issues.

Capital Loss Record Keeping

Where you have made a capital gains tax loss you should keep records of the transactions giving rise to the loss for a further four years after you lodge your tax return for the year in which the loss is applied against a taxable capital gain.

PRIVATE COMPANY TAX ISSUE

Shareholder Loans

Loans made by private companies to their shareholders or associates can give rise to “deemed dividends”.

No deemed dividends arise where:

The loan is repaid in full in the year it is made; or
The loan is covered by a written loan agreement and the required minimum interest charges and principal repayments are made; or
The company has made losses and does not have a “distributable surplus”.

Private Use Of Company Property

From 1 July the private company loan rules will be extended to situations where company property (boats, holiday houses etc) is made available for the private use of shareholders or their associates. In these circumstances we recommend that a register is kept of the dates company property is used for private purposes.

TRUSTS

Trust deeds should be reviewed to ensure they allow streaming of particular types of income, such as franked dividends and taxable capital gains, to particular beneficiaries. Distributions can only be made to beneficiaries contemplated by the trust deed.

Particular care is required when distributing trust income to private companies, especially if there will be a time lag before the distribution is paid.

Trust Losses

Where a discretionary trust makes an income loss or a capital loss it may need to make a family trust election in order to preserve the benefit of those losses. This can restrict the class of potential beneficiaries in future years.

BUSINESS TAXPAYERS

Investment Allowance Reminder

For “large” business taxpayers (annual turnover, including related entities, of more than $2 million) the investment allowance rate falls from 30% to 10% for plant and equipment ordered after 30 June. For further information on the investment allowance see our previous newsletter.

Bad Debt Reductions

In order to claim a bad debt deduction this financial year the debt must have been returned as assessable income and be physically written off by 30 June.

If there has been a change in ownership or control of the company bad debt deductions may not be available unless the company satisfies the same business test.

Trading Stock Valuation Rules

Trading stock on hand at year end can be valued at cost, market selling value or replacement cost. Normally the lowest value is chosen to minimise taxable income. However, if your business has incurred losses, a higher value may be appropriate.

Obsolete Stock or Plant and Equipment

Obsolete stock and obsolete plant and equipment should be physically scrapped by 30 June in order to claim a full tax deduction this year.

Non-Commercial Losses and High Income Levels

From 1 July 2009 “high income” individuals will not be able to offset business losses against their other income. The measures impact individuals whose annual adjusted taxable income (basically salary, reportable fringe benefits and salary sacrifice superannuation) exceeds $250,000 and who have a loss making business activity. Whilst the measures target “hobby farms” they could also affect other unprofitable business activities.

There may be scope to ameliorate the effects of these measures by:

Prepaying expenses if the individual qualifies as a “small business entity” – relevant turnover under $2 million; or
Where the business involves real estate, for example a farm, arranging for a related party to conduct the business and leasing the land to that entity. This may change the individual’s activities from a business to a rental property potentially outside the scope of the new rules.

These rules are in addition the existing non-commercial loss measures.

Research and Development Tax Concession - Next Year

In order to claim the R&D tax concessions for projects undertaken next year, eligible companies must:

Have an approved R&D plan in place before the R&D project work commences; and
Register with Innovation Australia within ten months after year end.

EXOTIC "TAX DRIVEN' INVESTMENTS

We discourage investments in tax driven schemes unless they can be expected to deliver sound commercial returns (assistance may be required from an Australian Financial Services Licensee to assess the viability of the project). In our experience many such schemes are mainly run for the benefit of the promoter. The recent collapse of two timber management companies highlights some of the risks for investors whose total return is likely to be a fraction of their investment.

DISCLAIMER

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.