Low Income Threshold

For the current 2009-10 income year, taxpayers are entitled to the low income tax offset of $1,350 if their taxable income is less than $63,750. For 2010/11, this upper threshold will increase to $67,500 to accommodate the previously legislated increase in the offset to $1,500. The low income tax offset will continue to phase out at a rate of 4 cents in the dollar for every dollar of income over $30,000.

Annual PAYG Withholding Reconciliation

Employers need to lodge their annual PAYG payment summary statement for the 2010 financial year with the Taxation Office by 14 August 2010.

PAYG payment summaries (formerly called “group certificates”) should be provided to all employees by 14 July 2010. Please note that summaries should also be prepared and issued to employees who left before 1 July 2009 but received reportable fringe benefits after 31 March 2009.

Reportable Fringe Benefits

If the value of certain fringe benefits provided to an employee exceeds $2,000 (including GST) in an FBT year, the employer must record the grossed-up taxable value of those benefits on the employee’s PAYG payment summary.

This reportable fringe benefits amount needs to be reported on the employee’s income tax return. Where we have assisted with preparing the FBT return for 2010 a schedule of the reportable benefits has been provided to you.

Self Managed Superannuation Funds

For ease of accounting and audit purposes, we suggest that the expenses of a self managed superannuation fund be paid directly by the super fund. Once again we remind you that money belonging to the fund should not be used for personal or business purposes.

Payment of personal super contributions, e.g. contributions for which a member is claiming a tax deduction, should not be made directly from related entities. The related entity should transfer the funds from its bank account to the member. The member then needs to pay the contribution from their personal bank account.

Choice of Superannuation Fund

Many employees have the right to choose which superannuation fund will receive their employer superannuation guarantee contributions. Employers must give new eligible employees the Standard Choice Form. If the employee does not choose a fund, the default employer fund should be used.

Under the new superannuation system, employers now have to pass the employee’s tax file number (TFN) on to the employee’s nominated superannuation fund within 14 days of the employee quoting it or before the next contribution is made.

Concessions for Small Businesses - "Small Business Entities"

Tax concessions apply to businesses with an aggregate turnover below $2 million. For example, small businesses can report GST on a cash basis. CGT small business concessions are also available, which provide the opportunity to significantly reduce the CGT payable on the sale of your business or business assets.

Tax Offset and Government Benefit Eligibility Changes

There have been changes made to eligibility tests for many tax offsets and deduction claims, including the following. (e.g. inclusion under definition of “income” of superannuation contributions, salary sacrifices and net investment losses):

2010/2011 Budget Changes

Individuals and families

From 1 July 2011, individuals will be entitled to a 50% discount on up to $1,000 of interest earned.

From 1 July 2012, individual taxpayers will be entitled to an optional standard deduction of $500, increasing to $1,000 from 1 July 2013.

The medical expenses tax offset threshold will be increased from $1,500 to $2,000 with effect from 1 July 2010. The threshold will also be indexed annually, with effect from 1 July 2011.

Money held in first home savers accounts will be able to be paid into approved mortgages where the account holder buys a home prior to the end of the four year period.

The Senior Australians tax offset regulations will be amended, with effect from 1 July 2010, to take account of the low income tax offset threshold.

The benchmark interest rate on capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008 is the Reserve Bank indicator rate for standard variable housing loans plus 1%.

Superannuation

The co-contribution matching rate will be permanently maintained at 100% and co-contribution thresholds will be non-indexed for the next two income years.

Companies and trusts

There will be changes to eligibility requirements for film tax offsets to provide a boost for the Australian film industry.

The IWT rate on borrowings of local subsidiaries from their overseas parents will be reduced from the current level of 10%.

GST

The margin scheme provisions will be restructured to clarify and simplify the current provisions, with effect from 1 July 2012. The Government will also make a minor technical amendment to ensure that a valuation can be obtained for the purposes of using the margin scheme for subdivided land.

Eligible supplies of boats used for recreational purposes will be GST-free if the boats are exported from Australia within 12 months, with effect from 1 July 2011. The current limit is 60 days.

A number of minor revisions will reduce GST compliance costs for businesses involved in the domestic transport of exported and imported goods.

TAX PLANNING - SUGGESTIONS TO CONSIDER BEFORE 30 JUNE 2010

 
While taxation is a major factor affecting many decisions, it should be remembered that it is normally only one of several factors to consider. In addition, keep in mind that you may need to consider other taxes such as stamp duty, payroll tax, land tax and GST and seek advice from licensed financial planners where appropriate.

Depreciable Assets

For those businesses that are not small business entities, a review of depreciable assets should be undertaken to ensure that a deduction is claimed for items lost, stolen, destroyed or scrapped during the year.

A deduction can also be claimed for depreciable assets no longer actually used in the business. It is not necessary to physically scrap the assets.

Small business entities are entitled to “6 months of depreciation” in the year of purchase, regardless of when the item was purchased, while assets costing less than $1000 are deductible in full.

Superannuation Guarantee Charge (SGC)

The superannuation guarantee requires employers to contribute 9% of each eligible employee’s earnings base to a complying superannuation fund, and to make the superannuation contributions at least every quarter.

If employers do not:

then they will need to lodge a superannuation guarantee statement and pay the superannuation guarantee charge. The superannuation guarantee charge is made up of the employee’s superannuation guarantee shortfall, nominal interest of 10% per annum and an administration fee of $20 for each employee with a shortfall. Unlike superannuation contributions, there is no tax deduction available for the superannuation guarantee charge (which will include the superannuation contribution which is being paid late). Other penalties may also apply.

To avoid the charge, we suggest that employers ensure that all superannuation contributions are paid by each quarterly cut-off date. In addition, we suggest that all contributions for the 2010 year be made by 30 June 2010, in order to claim a tax deduction in the 2010 year. We note that the date payment is made is the date the payment is received by the superannuation fund. If payment is made by cheque, it is the date of receipt of the cheque, not the date the cheque clears the bank, nor the date it is posted. If a cheque is dishonoured, it is deemed not to have been received.

From 24 May 2010, small businesses can register for the superannuation clearing house. The free service will help small businesses to save time and paperwork by enabling them to pay all their employees’ superannuation to a single location in just one simple electronic transaction. For more information visit, www.medicareaustralia.gov.au/about/super/index.jsp

It is also important that employers comply with their new “Choice of Fund” obligations. Please refer to page 2 of this document, or contact us for further information regarding Choice of Fund.

Superannuation Contributions by Employers

The total deductions allowable for contributions in respect of an employee, without the employee incurring excess contributions tax, are limited to the age-based limit applicable to the employee. For 2009/10, these limits are:

A spouse rebate of up to $540 applies where a taxpayer contributes to a superannuation fund for the benefit of a low income/non working spouse. The spouse must be earning less than $10,800 (including reportable fringe benefits) to get the full rebate and no rebate is available when the spouse earns more than $13,800.

Motor Vehicles

All individuals who claim motor vehicle expenses for income tax purposes should ensure that they record odometer readings as at 30 June. Readings are also required at the date of sale or purchase of a vehicle.

Work in Progress/Billings

Clients who are not required to pay tax on their work-in-progress at June 30 are generally those in professions where the services cannot be billed to the client and give rise to a recoverable debt because the services agreed to be provided have not been completed. (We note that construction industry businesses are not considered to be in this category.) We suggest that those clients carefully consider their work-in-progress before billings are done for 30 June.

Interest Expense

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:

Note that if interest is prepaid, the prepayment rules may preclude a deduction in certain circumstances. Interest is not deductible on borrowings to finance life premiums or personal superannuation contributions.

Bad Debts

To qualify for a deduction, the book entries to write off bad debts must actually be made by 30 June, rather than at a later time (such as when the accounts are finalised). To be a bad debt, you need to have brought the income to account as assessable income, and given up all attempts to recover the debt.

An additional advantage of writing off any bad debts if you are on the accruals method for GST is that you will be able to claim back the GST remitted on the invoice originally raised.

Trading Stock

A physical stock-take must be conducted as at the close of business on 30 June. (Small business entities do not need to take a physical stock-take if the value of stock on hand does not fluctuate by more than $5,000 from year to year.)

The method of valuing trading stock on hand can be changed each year, the three basic methods being cost price, market selling value or replacement price. It is normally appropriate to value the stock at cost price, however the option of valuing certain items of stock at replacement prices to lower the overall value of stock should be considered. If this option is exercised, a specific election must be made in your income tax return in regard to those items.

Obsolete trading stock could be disposed of prior to 30 June and the resulting loss would be claimed in the current year's accounts, or alternatively an application could be made to the Commissioner for a valuation based on the "fair and reasonable" value of the trading stock.

In a manufacturing context, "cost" includes a proportion of manufacturing overheads for finished and partly manufactured goods.

Note that trading stock does not include stationery and other consumable stores, if the supply is "reasonable" to ensure the "normal continuity of operations". Such expenditure will still be deductible.

A ruling from the Tax Office indicates that packaging items may be classed as trading stock in certain situations.

Year end stock take records are very important, as the Taxation Office expects that all businesses with trading stock will be able to produce stock sheets and other relevant documents which would indicate that an actual stock take was undertaken at the year end and that the level of stock has been reported accurately.

Timing of Payments and Receipts

Clients whose returns are submitted on a “cash” basis should remember that income received up to 30 June will affect your current tax liability, while income received after 30 June will affect next year's tax liability. You may wish to delay the receipt of further income until 1 July. Generally, interest income on term deposits can be deferred if the maturity date is after 1 July.

We are aware that when the Taxation Office audits a cash basis profession, the level of banking in June and July are carefully looked at, to ensure there has been no artificial reduction in May/June.

Clients can take steps to incur expenses in this year, which might otherwise have been deductible in the following year. In each case, the work would need to be complete and an invoice received dated 30 June or earlier (and must have been paid if using the Simplified Tax System cash accounting method).

Examples would include:

Bonuses due to be paid to arms-length employees will be deductible this year if the decision to pay has been made and documented prior to 1 July, and the amounts to be paid are quantified. A company resolution constitutes suitable documentation.

Small business entity taxpayers with a 3-year average group turnover of less than $2 million are entitled to a deduction where the relevant services will be wholly provided within 12 months of the date of expenditure, such as office supplies, stationary, rent, advertising, interest, preventative maintenance contracts, etc.

A possibility also exists to enter into a one-year lease before 30 June, prepaying all the lease payments (40-50% of the cost of the goods) and then financing the residual value in 12 months’ time.

Wages to Children

Salary, wages and payments for services rendered by unmarried persons who are under 18 years of age on the last day of the income year are taxed at the rates applying to adult taxpayers. You should therefore consider paying wages to children who have worked in the family business, as the income will not attract tax in their hands (provided their total income is less than $15,000) and will be a tax deduction to the business. Care should be taken to pay normal arms-length rates and to document periods worked. PAYG payment summaries are required to be prepared in these circumstances and the child may need to have a tax file number.

We note also that where the above income is accumulated by the child and invested, the income earned on the investment is also subject to tax at normal rates, rather than at the higher rates applying to "unearned income" of unmarried minors. Naturally, these funds legally belong to the child who then has complete control over them. Where the funds are invested back into a business undertaking, the Commissioner of Taxation has discretion enabling him to form an opinion on how much of the income should be taxed at normal rates. The main factors considered hinge around "real and effective conduct, and control" over the business.

Foreign income

Changes to the taxation of income earned overseas will require this income to be included in Australian tax returns for the 2010 year and onwards. You may be able to claim a tax credit for any foreign tax paid in your Australian tax return.

Landlords Beware

Rental properties are high on the ATO’s audit radar, especially with owners looking to accelerate deductions before the end of the year by way of expenditure on repairs and maintenance. Landlords need to be aware that repairs and replacements are likely to be deductible, whereas new and improved items are more likely to be capital expenditure and depreciated over time. If it’s new, bigger and brighter than what was already there, it’s likely to be capital expenditure and depreciated.

The question is, are you improving or repairing and maintaining? Repairs relate directly to wear and tear as a result of renting out the property. They generally involve a replacement or renewal of a worn out or broken part.

Replacement of an entire structure is capital. For example, replacing an entire fence is likely to be capital as opposed to repairing a few broken palings. Also, be wary of holiday homes that are rented out. If you or family members have used the holiday home throughout the year then you will need to apportion the expenditure on the property between private and investment.

Donations

Any promised tax deductible donations should be made prior to 30 June.

Net Medical Expenditure Rebate

This rebate is allowable only when net medical expenditure exceeds a threshold of $1,500 for the year ending 30 June 2010, increasing to $2,000 from 1 July 2010. The rebate is calculated on the excess of expenditure over these limits.

Consideration should be given to maximising the claim in one year, e.g. by delaying payment of medical expenditure until July if it appears that the threshold of $1,500 will not be reached this financial year.

Alternatively, if the threshold will be reached, outstanding medical expenditure could be paid prior to 30 June.

Expenditure for medical rebate purposes includes doctors, dentists, hospital fees, chemist prescriptions etc.

Medical expenditure incurred for cosmetic operations for which a Medicare benefit is not payable and dental services and treatment which is solely cosmetic are no longer subject to the rebate.

Unrealised Exchange Gains/Losses

Where possible and appropriate, the realisation of exchange gains should be deferred until after June 30, and foreign exchange losses crystallised prior to June 30.

Capital Gains Tax (CGT)

If assets are likely to return a profit on sale, CGT can be deferred by delaying the sale until after June 30. In addition to this, the effective rate of tax payable on the gain can be reduced to 15% by salary sacrificing the taxable portion of the gain into super. Where the gain is realised after June 30, a salary sacrifice arrangement can be put in place where the amount is sacrificed over the full 2011 financial year.

Clients who have realised capital gains in the 2010 year should ensure that expected capital losses are incurred prior to June 30. The ATO has concerns regarding “wash sales”, where the item sold at a loss is reacquired soon after.

A reminder that the normal date for both acquisition and disposal is the date of contract and not the date money is paid or received.

The capital gains tax discounting provisions (individuals, trusts and super funds) will only be available where the assets are held for greater than 12 months.

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

Super Co-Contributions

Employees who earn less than $61,920, a year and make personal (non-deductible) superannuation contributions may be eligible for Government Super Co-contributions.

Where the eligible employee’s assessable income is $31,920 or less, the government will put in $1 for every dollar the employee puts into super, up to a maximum of $1000 a year. Where the employee’s assessable income is between $31,920 and $61,920 reduced co-contributions are available.

There are some other conditions attaching to this, so please contact us if you are considering making a payment.

Shareholder/Beneficiary Loans

Legislation effective from 4 December 1997 has the potential for loans and other payments to shareholders and beneficiaries, to be deemed as dividends/distributions to the shareholder/ beneficiary. This area is complex and advice should be sought if your company or trust has advanced loans to shareholders/beneficiaries or associates.

Deferring Termination Payment

Individuals who are nearing age 55 and who are about to receive a termination payment that is not to be rolled over into another approved fund can achieve a tax reduction by waiting until age 55. There are substantial savings on tax rates and tax free amounts for 55 year olds compared to people aged under 55.

Transition to Retirement & Salary Sacrifice

An individual who is over age 55 can access superannuation as a non-commutable income stream. Assessable income can be salary sacrificed to a level where minimal tax is paid, while at the same time accessing a low tax (tax free if over 60) pension.

Where the assessable income is low enough and at least 10% of it is generated from employee type activities or carrying on a business, a taxpayer can also make an undeducted contribution into super and qualify for the government’s co-contribution.

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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.