Here’s what you need to take into account as Australia heads into tax season.
As the 2013-14 financial year draws to a close, individual and business taxpayers in Australia are being presented with telling illustrations of how their tax affairs, including year-end tax planning, can be closely linked.
For instance, the Senate’s rejection in March of the Bill to repeal the mining tax has implications for, among other things, the superannuation guarantee charge, government low-income super contribution offsets, accelerated capital allowance deductions for small business and carry-back of company losses.
Further, the Senate’s rejection, also in March, of the carbon tax repeal Bills has implications for the low-income tax offset and the tax-free threshold.
In short, the current Coalition Government in Australia wants to either abolish or delay a series of tax measures that the former federal government had intended to finance with the mining tax or had tied to the carbon taxes.
With the new Senate taking office on July 1, there is continuing uncertainty about the future of the mining and carbon taxes – and the cuts to personal tax that were to be funded from them. And this uncertainty could affect year-end tax planning for 2013-14 and beyond.
Another illustration of how the tax affairs of large and smaller taxpayers can be closely related concerns the increasingly intense focus by revenue authorities on international tax base erosion and profit shifting. This is not solely an issue for big business.
Paul Drum, head of business and investment policy for CPA Australia, urges the many small Australian businesses with international dealings not to ignore the attention that major countries are giving to cross-border tax arrangements.
“These firms should be paying closer regard to how they determine their revenue,” he says.
The OECD, the G20 and the Joint International Tax Shelter Information Centre, which was established by the tax commissioners of the US, UK, Canada and Australia, are among those focusing on aggressive international tax planning. (The G20 Leaders Summit will be held in Brisbane on 15-16 November.)
New Australian transfer-pricing rules from 2013-14 link the keeping of transfer-pricing documentation to tax penalties, warns Mark Morris, senior tax counsel for CPA Australia.
Essentially, the transfer-pricing rules require that an arms-length price be charged for the supply or acquisition of goods or services on comparable international transactions where one of the parties to the transaction is not resident in Australia.
A business without complying transfer-pricing documentation is deemed not to have a “reasonably arguable position” in the event that penalties are imposed on any underpaid tax arising under a tax audit, Morris explains.
Year-end tax planning should take into account the Part IVA anti-avoidance provisions of the Income Tax Assessment Act 1936.
Very broadly, these provisions apply where a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded (having regard to a number of factors)that a person who entered into any part of the scheme did so for the sole or dominant purpose of obtaining a tax benefit.
These complex provisions were strengthened from 14 November 2012 so that a taxpayer can no longer argue that Part IVA does not apply because they would have “done nothing” rather than enter the scheme. Taxpayers concerned with the possible application of Part IVA should seek specialist advice from a CPA Australia registered tax agent.
Ideally, efficient tax planning takes place throughout the year – not just in the final weeks before June 30. Taxpayers should consult a CPA Australia registered tax agent about their specific needs and for an update on what’s happening with attempts to repeal the mining and carbon taxes, and the implications for personal tax measures.
Employees and investors
Maximise super, remain within caps: Superannuation is central to year-end tax planning for many Australian taxpayers, providing potential tax savings over the short and long terms. Super members face the challenge of trying to maximise their opportunities to contribute while not falling into the trap of overshooting their contribution caps.
For 2013-14, the concessional contributions cap remains at A$25,000 for members aged under 60, or A$35,000 for members aged 60 or over. And the standard cap on non-concessional (after-tax) contributions remains at A$150,000 (or A$450,000 if averaged over three years by eligible members).
Concessional contributions consist of salary-sacrificed and superannuation guarantee (SG) contributions, as well as deductible contributions by the self-employed and eligible investors.
Members who intend to contribute up to their concessional cap should not leave their final contribution until near the end of the financial year, suggests Michael Davison, senior superannuation policy adviser for CPA Australia.
If a contribution does not reach the super fund by June 30, it will count towards next year’s contribution cap – and could lead to an excess contribution in that year and an unexpected tax bill.
Part of year-end tax planning is to prepare for the next financial year. From 2014-15, the standard concessional contributions cap will rise by A$5000 to A$30,000, through indexing, and apply to members aged under 50. And the higher temporary concessional cap for older members will remain at A$35,000 for 2014-15, but will extend to members aged 50 or over.
Employees wanting to take advantage of these higher caps from July should arrange with their employers before the end of the financial year to adjust their salary-sacrificed contributions.
Superannuation guarantee (SG) contributions – which rose from 9 per cent in 2012-13 to 9.25 per cent for 2013-14 – count towards the concessional contributions cap.
Under amendments introduced by the previous Australian Government, SG contributions were to rise to 9.5 per cent in 2014-15 and to progressively reach 12 per cent by July 2019.
However, the Coalition Government had provided in its Bill to repeal the mining tax, which was rejected by the Senate, to keep the SG rate at 9.25 per cent for 2014-15 and 2015-16. Given the changes to the make-up of the Senate from July, the SG rate for the financial year ahead is uncertain.
Super fund members aiming to maximise their super contributions should note that the non-concessional contributions cap will also rise for 2014-15, increasing by A$30,000 to A$180,000. Consider super co-contributions: Taxpayers earning less than A$48,516 in 2013-14 should consider making non-concessional (after-tax) super contributions to qualify for a government co-contribution, says Davison.
If you earn up to A$33,516, the federal government will contribute A50 cents for every dollar you contribute up to a maximum government contribution of A$500. The maximum co-contribution then gradually reduces with every dollar of net total income, reducing to nil when incomes reach A$48,516. Defer income, accelerate deductions: A fundamental year-end tax strategy for individuals and businesses is to defer income into the next financial year and to accelerate deductions in the current financial year.
Tax-deferral strategies to discuss with your CPA tax agent, says Drum, include the possible postponement of taxable asset sales until 2014-15 to defer any assessable balancing adjustment or capital gain (if justifiable under Part IVA), timing the issuing of invoices and claiming the small business capital gains tax (CGT) concessions if eligible (following the sale of “active” small business assets). The ability to defer income depends a lot on a taxpayer’s circumstances.
Ways for individuals and eligible small businesses to accelerate deductions include prepaying for up to 12 months such expenses as deductible interest on loans and deductible insurance premiums. Eligible small businesses can, for instance, prepay rent which will be immediately deductible if it covers a period of 12 months or less. (The prepayment rules also do not apply to “excluded expenditure”, which a taxpayer can claim as an outright deduction.)
Claim work-related deductions: Typical work-related expenses, says Morris, include the cost of running a home office, employment-related telephone, mobile phone and internet usage, computer repairs, and subscriptions. The current Australian Government will not proceed with the plan by the previous federal government to put a A$2000 cap on annual deductions for self-education expenses.
Claim depreciation deductions: Immediate deductions can be claimed for depreciating assets that cost under A$300 and are mainly used to earn non-business income. The deduction is only available to an individual employee or rental property owner to the extent the asset is used mainly to earn salary, wages or rent.
Maximise motor vehicle deductions: Taxpayers can claim deductions for work-related car expenses in one of four ways: cents per kilometre (limited to claims of 5000 business kilometres), 12 per cent of your vehicle’s original value with no need for a logbook, one-third of actual expenses (written evidence required), or the logbook method.
List rental property deductions: Landlords can claim immediate deductions for expenses such as interest on investment loans, land tax, council and water rates, body corporate charges, insurance, repairs and maintenance, agent’s commission, gardening, pest control, leases (preparation, registration and stamp duty), advertising for tenants, and reasonable travel to inspect properties. Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital-works deductions spread over a number of years (for such structural improvements as remodelling a bathroom).
Maximise tax offsets: Tax offsets directly reduce your tax payable and can add up to a sizeable amount, says Morris. Eligibility for tax offsets generally depends on your income, family circumstances and conditions for particular offsets.
For 2013-14, taxpayers should check their eligibility for such offsets as the dependent spouse offset, low-income tax offset, mature-age worker offset (new restrictions apply), senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse.
The means-tested tax offset for high net medical expenses is being phased out. Only taxpayers who claimed the offset for 2012-13 are eligible to claim again for 2013-14 provided they also satisfy the relevant income and net medical expenditure tests.
Check eligibility for small business tax regime: Small business entities (individuals, partnerships, companies and trusts with a turnover of less than A$2 million) may be eligible for tax benefits including simplified depreciation, CGT concessions/exemptions and accounting on a cash basis. Morris emphasises that while meeting the turnover test automatically entitles small businesses to certain concessions, such as simplified rules for tax depreciation and trading stock, additional tests apply for, say, the small-business CGT concessions.
Take care with instant asset write-offs: Another example of an uncertainty in tax planning is the future of the A$6500 instant asset write-off for small businesses. Under its mining tax repeal Bill, the current government intended to wind back the instant asset write-off to A$1000. But those considering the tax advantage of the A$6500 instant asset write-off should act with caution, Drum says. If the new Senate repeals the mining tax, the cutback of the instant asset write-off could be backdated to 1 January 2014 – the date initially announced for it to take effect.
Another uncertainty is the A$5000 initial write-off for motor vehicles. As part of its mining tax repeal Bill, the government planned to remove this immediate deduction from 1 January 2014. Again, this measure could be backdated if the new Senate passes the repeal Bill.
Make and document trust resolutions: Trustees of discretionary trusts are required to make and document resolutions by June 30 at the latest as to how trust income for the 2013-14 year is to be distributed. Where a valid resolution is not executed by June 30, Morris explains that any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal rate.
Stream trust capital gains and franked dividends if appropriate: Trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries subject to certain conditions being met. For example, the trust deed has to allow a trustee to make a beneficiary specifically entitled to a capital gain or franked dividend.
Comply with Division 7A: The tax commissioner can treat a payment or a loan to a shareholder or associate (such as a family member) as an unfranked deemed dividend under Division 7A – unless an exemption applies or a formal loan agreement is in place requiring minimum interest and principal repayments.
There are various ways private companies can act before the lodgment or due date for their 2013-14 tax returns to minimise the risk of deemed dividends on loans. Depending on the circumstances, these strategies may include repaying the loan, declaring a dividend or entering a complying loan agreement before the due date of lodgment.
Prevent deemed dividends for unpaid trust distributions: A trust distribution unpaid to an associated private company beneficiary could be regarded by the Australian Taxation Office as a deemed dividend in the hands of the trustee. These are known as unpaid present entitlements. Depending on circumstances, a deemed dividend may be prevented if the unpaid entitlement is paid or a complying loan agreement is entered into before the due date for lodgment of the company’s tax returns. Alternatively, a deemed dividend will not rise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company and other conditions are satisfied.
Write off bad debts: Review your debts before the end of the financial year and decide if any should be written off as bad.
This report was written on the eve of Australia’s 2014 Budget.
This article is from the June 2014 issue of INTHEBLACK.