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15 May 2019

2019 End of Financial Year Checklist 

 

Tax planning items to consider before 30 June 2019 

Business Considerations

1.       Is your business a "Small Business Entity"?

2.       Current company tax rates and maximum franking credits for small business

3.       Instant asset write-off for assets costing up to $30,000

4.       Small business concession for prepaid expenses

5.       Review of depreciable assets

6.       Ensure your employer superannuation contributions have been paid

7.       Maximise your superannuation contributions

8.       Ensure bonuses paid are tax deductible

9.       Is a motor vehicle being used for business purposes?

10.   Review of Work in Progress

11.   Write off bad debts

12.   Year-end stocktake

13.   Defer income and bring forward expenses

14.   Loans to shareholders/beneficiaries

15.   Defer Capital Gains Tax (CGT)

16.   Wages to children

17.   Defer termination payments

18.   Deduction for interest expenses

Individual Considerations

1.       Is a motor vehicle being used for work-related purposes?

2.       Defer Capital Gains Tax (CGT) and realise losses

3.       Do you have income protection insurance?

4.       Maximise your work-related deductions

5.       Maximise your donations

6.       Consideration for rental property owners

7.       Deduction for interest expenses

8.       Net medical expenses tax offset phase out

Superannuation Considerations

  1. Maximise your concessional contributions
  2. Maximise your non-concessional contributions
  3. Transfer Balance Account (TBA)
  4. Division 293 tax for high income earners

BUSINESS CONSIDERATIONS

1. Is your business a "Small Business Entity"?

From 1 July 2018 the Small Business Entity turnover threshold will remain at $10 million. This means that if you carried on a business during the year and the business has an aggregated turnover (your annual turnover plus the annual turnover of any connected/affiliated businesses) less than $10 million you will be eligible for a range of tax concessions from the ATO

2. Reduction in company tax rates and maximum franking credits for small business

For the year ended 30 June 2019 the company tax rate for small businesses remains at 27.5%. Companies with an aggregated turnover of less than $50 million are eligible for this rate under the new "Base Rate Entity" laws. This reduced tax rate also limits the maximum franking credits that can be allocated to a franked dividend to 27.5%. If your small business has already issued dividends based on the 30% company tax rate you will need to notify members of the correct franking credit amounts.

3. Instant asset write-off for assets costing up to $30,000

The 2019 Budget extended the small business instant asset write off value up to $30,000 for any assets acquired up to 30 June 2019 and for the 2020 financial year.  Prior to budget night further changes to the rules had been made which means for 2019 financial year there are three thresholds for determining if an asset is eligible for immediate deduction:

-          1 July 2018 – 29 January 2019                            $20,000

-          29 January 2019 – 2 April 2019                          $25,000

-          2 April 2019 – 30 June 2020                                $30,000

The turnover threshold for access to this concession has also changed, being up to $10m to access the first two thresholds to 2 April 2019 and then up to $50m for the third threshold to 30 June 2020.

  Also available is an immediate deduction for the balance of the small business pool if it is less than $20,000 at 30 June 2019.

4. Small business concession for prepaid expenses

Businesses with a turnover less than $10 million can make prepayments, up to 12 months, on expenses (e.g. interest, rent, subscriptions, etc.) before 30 June 2019 and obtain a full tax deduction in the 2019 year.

5. Review of depreciable assets

All businesses should undertake a review of their depreciable assets to ensure that a deduction is claimed for any items lost, stolen, destroyed or scrapped during the year.

6. Ensure your employer superannuation contributions have been paid

The superannuation guarantee requires employers to contribute a minimum of 9.5% of their employee's earnings to a complying superannuation fund at least every quarter. At the latest, the June quarter contributions need to be paid by 28 July 2019 in order for them to be tax deductible and to avoid the superannuation guarantee charge.

To claim a tax deduction in the 2019 financial year employer superannuation contributions need to be received by the superannuation fund before 30 June 2019.

7. Maximise your superannuation contributions

For the 2019 financial year the maximum employer or 'concessional' contributions that can be made are limited to $25,000.

Individuals wishing to 'top-up' their superannuation should consider approaching their employer about salary sacrificing. If the contributions exceed the above limits the excess amount will be included in the individual's assessable income and taxed at their marginal tax rate.

8. Ensure bonuses paid are tax deductible

To ensure that bonuses incurred before the year end are tax deductible employers should:

·         Evidence the bonus in writing prior to 30 June 2019

·         Determine the amount before the year end

·         Ensure that the payment is not subject to discretion, review or confirmation at a later date

·         Ensure that employees are told the amount prior to the year end

9. Is a motor vehicle being used for business purposes?

If the business use proportion of your motor vehicle is substantial ensure that you keep an accurate and complete logbook over a 12-week period. The start date of the logbook must be prior to 30 June 2019 to be applicable for the 2019 financial year. You should ensure to record the odometer readings at 30 June 2019 and keep a record of all motor vehicle expenses incurred

Alternatively there is the option to claim up to a maximum of 5,000 business kilometres (based on a reasonable estimate) using the cents per kilometer method.

10. Review of Work in Progress

Businesses are not required to pay tax on their Work In Progress at 30 June 2019 if in a profession where the services cannot be billed to the client until complete. If this is the case the business should carefully consider their Work in Progress before processing billings for 30 June 2019.

Note that businesses in the construction industry are not considered to be in this category.

11. Write off bad debts

Ensure to review your Trade Debtors and write off all bad debts before 30 June 2019. To qualify for a deduction the book entries need to be processed before 30 June rather than at a later time (e.g. when the accounts are being finalised).

If on the accruals method for GST you can also claim back any GST that was remitted on the original invoice on your next BAS.

12.      Year-end stocktake

A physical stocktake must be conducted at the close of business on 30 June 2019. Review your listing and write-off any obsolete or worthless stock items. Trading stock can be valued using either cost price, market selling value or replacement price.

Note that small businesses do not need to conduct a stocktake if the value of stock on hand does not fluctuate more than $5,000 from year to year.

12.        Defer income and bring forward expenses

Businesses that assess income on a 'cash' basis, where possible, may wish to delay the receipt of income until after 1 July 2019. This has the benefit of reducing taxable income. For example, interest income on term deposits can generally be deferred if the maturity date is after 1 July 2019.

It is important to note that when the ATO audits a 'cash' basis business they will look closely at banking in June/July to ensure there has been no artificial reduction at year end.

Similarly you may wish to ensure purchases are made before 30 June 2019 keeping in mind that assets purchased before 30 June 2019 and costing up to $30,000 will be immediately deductible for small businesses.

13.        Loans to shareholders/beneficiaries

If money has been withdrawn from a company or trust during the year it is possible that this could become a deemed dividend/distribution in the hands of the shareholder/beneficiary if "Division 7A" interest and minimum repayment requirements are not satisfied. This is a complex area and advice should be sought if this is the case.

14.        Defer Capital Gains Tax (CGT)

If business assets are likely to return a profit on sale, CGT can be deferred by ensuring the sale contract is dated after 30 June 2019. In addition, the effective rate of tax payable on the gain can be reduced to 15% by salary sacrificing the taxable portion of the gain into your superannuation fund. Where the gain is realised after 30 June 2019 a salary sacrifice arrangement can be put in place where the amount is sacrificed over the entirety of next financial year.

It is important to note that the capital gains tax discount, available to individuals, trusts and

superannuation funds, will only be available where the asset is held for longer than 12 months.

We encourage you to contact us should you be considering a significant purchase or sale to ensure the most tax advantageous position is achieved.

15.        Wages to children

Salary and wages earned by individuals under the age of 18 are taxed at normal adult taxpayer rates, rather than at the higher rates that apply to "unearned income" of minors (i.e. family trust distributions). You should therefore consider paying wages to children who have worked in the business. For the 2019 year they can earn up to $21,885 tax-free in the minor's hands whilst being a tax deduction for the business.

If wages are paid they need to be paid at arms-length rates with periods worked documented and a PAYG Payment Summary will need to be prepared.

16.        Defer termination payments

If an individual is nearing age 55 it is recommended that termination payments be deferred until they reach 55. This gives the individual substantial savings on tax rates and tax-free amounts of the payment.

17.        Deduction for interest expenses

Interest is deductible to the extent it is incurred in gaining or producing assessable income or in carrying on a business for that purpose and is not of a capital, private or domestic nature. Where a loan is taken out for two purposes, one business and one non-business, only a proportion of the interest will be deductible.

Some of the situations in which interest may be deductible include:

·         Where the money is borrowed by a partnership to repay money advanced by a partner for working capital. This rule does not extend to co-owners of income-producing assets such as rental properties.

·         Where the money is borrowed to acquire shares, if it is reasonably expected that dividends will be derived from the investment. Interest will not be deductible where the shares are acquired solely for the purpose of making a capital profit on their resale.

·         Where the money is borrowed by persons in business for the purpose of paying income tax, in certain circumstances.

·         Where the money is borrowed to acquire units in a split property unit trust


INDIVIDUAL CONSIDERATIONS

1.             Is a motor vehicle being used for work-related purposes?

If the business use proportion of your motor vehicle is substantial ensure that you keep an accurate and complete logbook over a 12-week period. The start date of the logbook must be prior to 30 June 2019 to be applicable for the 2019 financial year. You should ensure to record the odometer readings at 30 June 2019 and keep a record of all motor vehicle expenses incurred.

Alternatively there is the option to claim up to a maximum of 5,000 business kilometers (based on a reasonable estimate) using the cents per kilometer method.

2.             Defer Capital Gains Tax (CGT) and realise losses

If assets are likely to return a profit on sale, CGT can be deferred by ensuring the sale contract is dated after 30 June 2019. It is important to note that the capital gains tax discount will only be available where the asset is held for longer than 12 months.

If a capital gain has been realised in the 2019 financial year you may wish to consider selling any non­performing assets or investments before 30 June 2019. The capital loss can be utilised to offset any capital gains and can be carried forward to offset future capital gains.

We encourage you to contact us should you be considering a significant purchase or sale to ensure the most tax advantageous position is achieved.

3.             Do you have income protection insurance?

Income protection insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. The premium is generally tax deductible if bought as a stand-alone policy (i.e. not through your superannuation fund).

4.             Maximise your work-related deductions

Ensure to keep receipts and records of any work-related expenses incurred such as uniforms, training courses, learning materials and travel, as these may be tax-deductible.

5.             Maximise your donations

Any tax-deductible donations should be made before 30 June 2019. Note that the deduction must be claimed in the return of the individual whose name is on the receipt.


6.     Consideration for rental property owners

Rental properties are high on the ATO's radar, particularly with landlords looking to increase deductions before the end of the year. The following should be taken into consideration when reporting your rental income for the 2019 financial year:

·         Repair vs. capital improvements – Genuine repairs that relate directly to wear and tear as a result of renting the property will generally be tax deductible in the year they are incurred. This generally relates to replacing or renewing a worn out or damaged item.

Alternatively, new or improved items are likely to be capital in nature and can be written off over a number of years. For example, replacing an entire fence is likely to be capital as opposed to repairing a few broken palings.

·         Depreciation report – A Quantity Surveyor report will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself. From 1 July 2017, deductions for depreciation will be limited to NEW plant and equipment actually purchased by the investor. Note that existing investment properties can continue to claim deductions for plant and equipment forming part of the property as at 9 May 2017.

·         Renting to family members – If you or family members have used the rental property throughout the year all expenditure will need to be apportioned between private and investment. To be considered non-private use, rent needs to be charged to the family member on arms-length terms, i.e. generally at market value.

·         Deduction for travel expenses disallowed – From 1 July 2017, investment property owners can no longer claim deductions for travel expenses in relation to inspecting the property, etc.

7.     Deduction for interest expenses

Interest is deductible to the extent it is incurred in gaining or producing assessable income or in carrying on a business for that purpose and is not of a capital, private or domestic nature. Where a loan is taken out for two purposes, one business and one non-business, only a proportion of the interest will be deductible.

Some of the situations in which interest may be deductible include:

·         Where the money is borrowed to acquire shares, if it is reasonably expected that dividends will be derived from the investment. Interest will not be deductible where the shares are acquired solely for the purpose of making a capital profit on their resale.

·         Where the money is borrowed to acquire units in a split property unit trust

·         Where the money is used to purchase a rental property

8.     Net medical expenses tax offset phase out

For the 2019 financial year the offset can only be claimed for expenses relating to disability aids, attendant care or aged care. The offset will be abolished completely from 1 July 2019.


SUPERANNUATION CONSIDERATIONS

1.          Maximise your concessional contributions

For the 2019 financial year the maximum concessional contributions (employer or personal tax-deductible) that can be made are limited to $25,000.

If you are wishing to 'top-up' your superannuation you could either consider approaching your employer about salary sacrificing or make a personal concessional contribution up to the cap amount.

You are able to make tax-deductible personal contributions to superannuation to reduce your taxable

Income:

·         under the age of 65;

 

·         the age is between 65 - 74, to be eligible for this deduction in the 2019 financial year you must have met the "work test" – been gainfully employed for at least 40 hours in no more than 30 consecutive days - prior to and in the same financial year as the contributions are made by member or employer

 

·         If you are aged 75 and over, you are generally not permitted to make a contribution and claim a tax deduction. You can only claim a deduction for contributions you make before the 28th day of the month following the month in which you turned 75, plus you must still pass the "work test"

A 'notice of intention to claim a deduction' must be lodged with your superannuation fund if you wish to claim a tax deduction.

If the contributions exceed the above limits the excess amount will be included in your individual assessable income and taxed at your marginal tax rate less a 15% tax offset plus an interest charge.

Note: Unreleased excess concessional (before-tax) contributions count towards the non-concessional (after-tax) contributions cap. Which can also create issues if your total superannuation balance (TSB) is close or above $1.6 million (details below).

2.          Maximise your non-concessional contributions

For the 2019 financial year the cap for non-concessional contributions is limited to $100,000. This cap is reduced further to nil if your total superannuation balance (TSB) is above $1.6 million.

 

The TSB includes the combined balance of accounts (in accumulation and pension phase) in ALL of your superannuation funds.

The 3-year bring forward rule has changed depending upon your superannuation balance on 30 June 2018. It is also only available to members under age of 65 at any time in financial year in which "bring forward mode" is triggered.

Total super balance on
30 June 2018

Maximum non-concessional
contributions cap for the first year

Bring-forward
period

Less than $1.4 million

$300,000

Over 3 years

$1.4 million to less than
$1.5 million

$200,000

Over 2 years

$1.5 million to less than
$1.6 million

$100,000

No bring-forward period,
general non-concessional
contributions cap applies

$1.6 million

nil

n/a

 

If "bring forward mode" is triggered in 2018/2019 financial year and not fully utilized, member will only be able to make contributions within their non-concessional cap during the remaining years of the bring-forward period if total super balance that applies for the future year(s) is less than $1.6 million. If TSB that applies for the future year(s) is $1.6 million or more, member's non-concessional cap in the future years will be NIL, despite being mid-way through bring forward period.

 

If the contributions exceed the above limits the excess amount can be either released from the Fund    (option 1) or left in the super fund (option 2). When option 1 is chosen – excess contributions are not subject to tax, but associated earnings amount taxed at marginal rate plus Medicare Levy less 15% tax offset, levied to member (strict process to be followed). Option 2 – excess contributions are subject to tax of 47%, levied to member but must be paid from Super Fund.

 

Note: To make sure you don't accidentally trigger the bring-forward arrangement, you will need to take into account all your contributions made to all your super funds. Unreleased excess concessional (before-tax) contributions also count towards the non-concessional (after-tax) contributions cap.

 

3.          Transfer Balance Account (TBA)

From 1 July 2018 there is a limit on how much superannuation you can transfer from your accumulation accounts to your tax-free 'retirement phase' accounts to receive pension income.

The cap is currently set at $1.6 million (lifetime limit) and includes the combined balance of accounts from ALL of your superannuation funds. If balance of TBA exceeds cap, excess plus excess transfer balance earnings amount must be moved back to accumulation phase or withdrawn as lump sum commutation. Excess transfer balance earnings taxed at 15%, levied to member.

4.          Division 293 tax for high-income earners

Individuals earning over $250,000 adjusted taxable income are subject to an additional 15% tax on concessional contributions within the cap, levied to member.

The information in this newsletter is general in nature. It does not take into consideration all your personal financial information, goals or objectives and is designed to bring your attention to the various options that may impact you. Please ensure that you seek the appropriate financial and taxation advice. Please contact us before 30 June 2019 to discuss your tax planning opportunities in more detail.

For more information regarding the proposed changes handed down in the recent 2019-20 budget, see our 2019 budget newsletter available on our website.

 

 * * * *

This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.

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