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Year-End Tax Tips

As the financial year draws to a close, it is timely for individuals and small businesses to consider the following;

Record Keeping

Records are normally required to be retained for tax purposes for at least five years, but special requirements apply in some areas.  For example, in the case of capital gains tax and the substantiation rules, records have to be held for longer periods.

Work-Related Expenses (WREs)

The Australian Taxation Office’s (ATO) compliance program again focuses on over-claiming of employees’ work-related expenses. Such expenses typically include employee claims for expenditure incurred on items such as travel, uniforms, subscriptions, union fees and self-education.

Dividends and Interest

To ensure that interest and dividends are returned by taxpayers, the Tax Office matches information provided in tax returns with information from external sources.

And don’t forget to put in your imputation credits. The best way to avoid trouble here is to include all such income in your return and retain supporting documents such as bank and company dividend statements.

Rental Properties

The Tax Office is maintaining its strong focus on this area because of the large amount of revenue involved. The types of things the Tax Office looks out for are repairs versus improvements, ensuring the property was really a rental property (and not just your weekender), and that interest on any property loans was correctly claimed.

Certain building capital works (including construction and improvement costs) may be written off as a tax deduction over a 40-year period (2.5 per cent per annum).

Capital Gains Tax (CGT)

Any capital gain on the disposal of an asset can be reduced by ensuring that all eligible items are included in the asset's cost base.  This includes improvements, stamp duty, legal fees, commissions, and the application of any capital losses.

There are other concessions like the general 50% discount, with further small business concessions for the small business owner.

The ATO will be closely scrutinising asset transactions, using its expanded data matching projects.  This includes information from state land titles and revenue office, securities exchanges, share registries and managed funds.

Aggressive Tax Planning

Taxpayers should continue to be cautious about year-end tax schemes, and carefully consider all the information in the market on this type of higher-risk investment.  This includes product rulings and taxpayer alerts issued by the Tax Office.  You should stick with those products that have Tax Office product rulings, but note that these are not intended to be any guarantee of an investment’s profitability.  Also, they may not be worth much if the investment venture is not aligned with the business plan as set out in the original prospectus.

Deductions will be available for investments in non-forestry agri-business managed fund schemes taken up before 1 July 2008.  Specific rules apply for forestry schemes.

Taxpayers should beware of wash sale arrangements, particularly in relation to shares.

Salary Packaging and Fringe Benefits

This can be a useful way to obtain some tax savings, particularly if you are on the top marginal tax rate and your employer offers it.  Some of the most common and tax-effective items to consider include superannuation, laptop computers and motor vehicles.

You must ensure that the arrangement is inplace before the applicable salary or bonus ir earned.  Note that your employer will include the reportable fringe benefit amount on your payment summary, which must be included in your tax return.  This may impact on your liability for Medicare levy and entitlement to certain benefits.

Business owners should note that Fringe Benefits Tax (FBT) may be applicable to entertainment expenses (from business lunches to tickets for sporting events), company motor vehicles, some directors’ loans or a range of other benefits received by employees and directors.

Family Tax Benefit

Family tax benefit (FTB) is available to eligible families (including sole parents) with children. You can claim the FTB as a direct payment from Centrelink, or as a lump sum via your tax return or periodically through reduced PAYG withholding payments. But make sure you don’t 'double dip'.

Rebates

Tax rebates (or offsets) can reduce your tax bill, so it pays to know what you are entitled to.  What you can claim depends on the level of your income and family circumstances. Examples, subject to satisfying certain criteria, include certain childcare expenses, private health insurance, medical expenses, dependent spouse rebate, low-income rebate and the tax offsets for mature-age workers and senior Australians.

A 25% Entrepreneurs Tax Offset is also available to Small Business Entity (SBE) taxpayers who enter the SBE system.

Stock on Hand

It’s not sufficient to simply make an estimate of your stock, or to take a guess.  Each year you need to include a value in your accounts of stock on hand and work-in-progress at 30 June. Closing stock can be valued at cost, replacement or market value or less if obsolete, but you have to document which method you use.

Private Company Loans?

It is important to ensure that private company loans that extend beyond the end of the income year are properly documented, to ensure that a tax liability is not triggered under the tax rules in this area (Dividion 7A).  Adequate annual repayments of a properly documented loan are also required.  Non-compliance with the rules can result in the loan balance being deemed a dividend, which willl increase the income of the 'borrower', with no franking credits attached.

Bad Debts

If you want to claim for bad debts, remember that they must be bad and written off before the end of the financial year.  To do this, the debt must generally have been brought to account as assessable income and you must have given up all hope, and more importantly, all action for recovery.  Bad debts cannot be claimed by taxpayers who recognise income on a cash basis.

Why should I Review my Assets?

It’s too easy to carry assets on your books that have no real value, are obsolete or have been scrapped.

The only way to get a write-off deduction for them is to review your asset register and take the necessary action before 30 June.  The asset register is the list you should be keeping of all plant, equipment, furniture, fittings and any other assets, including all items bought, sold or disposed of during the year.

The SBE System

The SBE system commenced on 1 July 2007, and is the change in name to the simplified tax system (STS) that had iperated previously.  It is a concessional scheme for small business taxpayers whose aggregate turnover is less than $2million.  The key attractions are the treatment of assets and accelerated depreciation, including the $1,000 write-off rules.  SBEs are subject to a reduced audit review period from four to two years.

If you are not already in the SBE system, consider if you qualify and whether you should elect into the system. To obtain the SBE benefits, the election must be lodged with the ATO when you lodge the income tax return for your business.

Prepayments

Most business taxpayers must pro rata the deduction for prepaid expenses over the period to which the expenditure relates.  However, individual non-business and SBE taxpayers can prepay some expenses up to 12 months in advance.

Superannuation

Employers must ensure they have made sufficient superannuation contributions (9 per cent) for all employees on a quarterly basis throughout the financial year to avoid the risk of incurring a penalty under the Superannuation Guarantee Charge (SGC) regime.

Eligible superannuation contributions for the June quarter must be paid by 30 June to be tax deductible and to avoid penalty.  Book entries alone are not enough.  Even if you miss the 30 June deadline for deductibility, you must make the payment by 28 July to avoid SGC penalties.

Recent changes allow self-employed taxpayers to claim all their contributions to a complying fund as fully tax deductible up to age 75.  The deduction is not available if more than 10% of the assessable income is as an employee.

Contributions to complying funds that exceed the limit of $50,000 per person (or $100,000 for persons aged over 50) will be taxed in the fund at 46.5% rather than 15%.

Low income earners will also be able to access the government co-contribution, where for $1,000 after-tax contribution the goverment will put in $1,500.  To get the full $1,500 taxable income must not exceed $28,980, and the co-contribution reduces where income is over $28,980 until it cuts out when income reaches $58,980.

Self-employed taxpayers will also have equivalent access to the co-contribution from 2008, which will be more beneficial than claiming a deduction for such a contribution.

Personal Services Income

The Personal Services Income (PSI) measures are designed to limit the level of deductions available to certain contractors whether they are operating as a sole trader or through a company, trust or partnership, and to also extend the PAYG withholding rules in such cases.

A taxpayer that meets certain specified tests such as the 'results' test will be treated as carrying on a personal services business and will be able claim a wider range of deductions.  But such taxpayers need to be aware of the ATO’s strict approach to income retention and income splitting (with some exceptions such as for standard 'mum and dad' partnerships).

Non-Commercial Losses

For a business to be commercial under these rules, it needs to meet certain prescribed tests.  If the tests are not met, any losses arising from the activities will have to be carried forward and offset in a later year, against future income of the same type or source.

At-Call Loans

A carve-out from the rules applicable to certain related-party at-call loans is available for small businesses that have an annual turnover of less than $20m.  The carve-out or exemption applies from 1 July 2005.

Is there anything else?

Don’t forget the substantiation rules that apply to motor vehicles, travel expenses and WRE claims by employees.  Records itemising travel expenses and appropriate receipts for other expenses need to be kept.

Source: In The Black, CPA Australia, June 2008