BDH & Co Year End Tax Planning Newsletter

Year End Tax Planning Tips 

Some of the decisions you make now can affect the amount of tax you will pay this financial year.  Below is an outline of some of the things you should consider before 30 June but of course it is always important to seek professional advice before acting on items mentioned below. 

Timing of Income Derivation

-         Is the amount income or a capital receipt?

-        What is the appropriate method of income recognition: cash or accruals?

-        There are specific rules to determine when the income is derived for various types of income?

-        If a SBE you may be able to use the cash basis?

-        Can you defer income receipt until after 30 June 2010?

-        If you have losses, can you accelerate income receipt prior to 30 June 2010 to recoup losses that may not be available in future years?

Income Received in Advance

-         May not be derived until services provided to the customer.

-        Must be credited to an unearned income suspense account, which generally requires the payment to be refundable if the services are not provided.

-        Must be released to profit when the services are provided, or if the services are not provided, when it is determined the services will not be provided.

 Timing of Expenses

 Expenses will generally be deductible if incurred by 30 June 2010. A few points to remember are: 

-           There must be a presently existing liability at 30 June for the expense to be   “incurred”;

-           Provisions are generally not deductible;

-           Some accruals are not deductible;

-           Most prepayments are not deductible.

 Repairs

 Expenses for repairs on or before 30 June 2010 are generally deductible, but must not be:

-           Initial repairs;

-           Substantial replacement of an asset;

-           Improving an asset

 Gifts

 Donate gifts to tax deductible charities on or before 30 June 2010. 

-       Check that payment is to an ATO endorsed “deductible gift recipient” (DGR). This information is publicly available on www.abn.business.gov.au by searching for the organisation’s name.

Home Office Expenses

-       Portions of interest, rent and insurance are not deductible unless carrying on business from home and the area is separate and distinguished from private living areas.

-       Power and depreciation can be claimed at the rate of 26 cents per hour (as per Tax Pack) 

-       Complete a 4 week diary to substantiate home office expense (as per Tax Pack).

Car Expenses

-       If claiming actual expense, check that your log book is current.

-       Check that log book details are correct.

-       Remember to start a new log book if your circumstances or travel patterns have changed this year, for example if you have started a new job or purchased a new vehicle.

-       Ensure year end odometer readings are taken.

-       Ensure all relevant receipts have been kept.

Prepayments/Advanced Expenditure

Where expenses are paid but allocated over a period of time because the benefit will be provided over time (such as insurance) the deduction is also allocated over the same period of time and if applicable across tax years.

These prepayment rules do not apply to “excluded expenditure” so consider prepaying deductible expenditure prior to 30 June. Excluded expenditure includes:

-           Salary (but remember this will be assessable in the hands of the recipient);

-           Amounts required to be paid by law or a court;

-           Expenditure under $1,000;

-           Expenditure of a capital nature 

Prepayments for Non-Business Individuals 

There are a separate series of concessional prepayment rules that apply to individuals who prepay expenditure (not carrying on a business). They are:

-           12 Month Rule – An immediate deduction for expenditure incurred before 30 June 2010 if eligible service period does not exceed 12 months and the service period ends in the 2010/2011 income year: examples include prepaid interest for rental property loan;

-           Other prepayments deductible over service period.

Superannuation

The following superannuation fund issues require advice from a qualified financial adviser: 

-           If over 55 years of age, consider salary sacrifice superannuation contributions and use transition to retirement pension while still working;

-           Employee superannuation guarantee contributions required - 9% of employee’s gross wage by 28 July 2010 HOWEVER to claim the deduction this financial year the payment needs to be made to by 30 June 2010. 

-          Ensure that at least the minimum pension payments have been made for those in pension phase.

-         Before making any further contributions prior to year end, make sure that you take into account contributions that have already been made, and ensure that contributions made for the year do not exceed the concessional or non-concessional                 contribution limits.

-           Reminder – the maximum deductible contributions for superannuation is as follows:         

o   Age over 50               $50,000

o   Age under 50            $25,000

Directors’ and Employees’ Entitlements

-       Conduct  shareholders’ meetings before 30 June 2010 to approve directors’ fees and bonuses to get deductions for 2010 year.

-       Ensure arrangements for employee bonuses based on 2010 results are in place before 30 June 2010.

Depreciation

-       Scrap all obsolete plant and equipment by 30 June 2010.

-       Plant acquired after 21 September 1999, use effective life rates issued by ATO or self-assessed by taxpayer.

-       Consider reassessment of effective life if plant has excessive use etc.

-       Balancing adjustment on disposal – excess is assessable/ deficit is deductible – rollover is available.

-       Consider delaying disposal of plant items for a profit until after 30 June.

-       Consider bringing forward disposal of plant items for a loss to before 1 July.

-       Cars acquired after 1 July 2002 use 8 years effective life.

-       Items of plant costing less than $1,000 – option to allocate assets to low value pool:

o   Depreciated at diminishing rate value of 37.5%.

o   First year rate 18.7% diminishing value;

o   All new low value assets must go into low value pool.

Private Company Loans

Loan from a company to shareholders or associates will be a Division 7A deemed dividend unless loan is repaid by the earlier of the lodgement or due date for the company tax return for the year (lodgement day) or:         

-           The loan made under a written agreement and on commercial terms by the lodgement day;

-           Has minimum benchmark interest rate; and

-           Has repayment term of at no more than 7 years, or 25 years for registered mortgages over real estate.

-           The statutory minimum rate of interest is prescribed by the ATO every year.

-           In subsequent years if minimum repayments are not made by end of the year the payment shortfall will be deemed to be a dividend.

-           Division 7A deemed dividend is unfranked.

-          Certain payments and debt forgiveness by the trust to the shareholder or associate can also be a deemed dividend.

-          There is an ATO discretion for non-complying loans to either not treat as a deemed dividend or to treat it as a franked dividend if it resulted from an honest mistake or inadvertent omission. Taxpayers can self assess this discretion if corrective action is taken by 30 June 2010.

   If you would like to discuss any of these matters further please contact Tas Demos, Gede Barone or Brad Hodge.