May 2018
OVERVIEW
The fringe benefits tax (FBT) year ended on 31.3.2018. If you operate through a company or trust, carefully consider whether all FBT matters have been
attended to and whether a FBT return needs to be lodged.
We can help in this regard and the most common fringe benefit supplied to staff is a motor vehicle benefit. In a small business audit, the two main areas
of ATO focus are fringe benefits and Division 7A loans – READ ON.
SMALL BUSINESS
Check eligibility for small business tax regime
Small businesses (sole traders, partnerships, companies and/ or trusts with a turnover of less than $2 million) may be eligible for a range of tax benefits
including immediate write- off of assets costing less than $20,000, a 27.5 per cent company tax rate, simplified depreciation, capital gains tax concessions
and accounting on a cash basis.
These measures have now been extended to businesses with a turnover of less than $10 million with the notable exception of the CGT Small Business Concessions.
Maximise depreciation deductions
Small businesses can get an immediate tax deduction for nearly all individual assets purchased costing less than $20,000, to the extent such assets are
used for an income producing purpose and is installed ready for use by the end of the financial year. This measure expires on 30 June 2019.
For businesses registered for GST, the $20,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold
is calculated on a GST-inclusive basis.
Review salary sacrifice arrangements
Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either a packaged car for fringe benefits
tax (FBT) purposes, or they can make additional superannuation contributions. We note that the option for employees to make tax deductible contributions
became law on 29.11.2016 and took effect from 1.7.2017.
Make trust resolutions by 30 June
Trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2017-2018
financial year by 30 June.
In the event a valid distribution is not made then a default beneficiary may be assessable if there are no default beneficiaries, then the trustee will
be assessable at the highest marginal rate.
Seeking professional advice when starting a business
Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the year those expenses are incurred
rather than deducted over a five-year period as was the case prior to 1.7.2015.
Small business restructure rollover relief
Since 1.7. 2016, small businesses have been able to change the legal structure of their business without incurring any income tax liability when active
assets are transferred by one entity to another. This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating
assets used, or held ready for use, in the course of carrying on a business. Seek our advice.
Stream trust capital gains and franked dividends
Trustees of discretionary trusts may be able to stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee
to make a beneficiary “specifically entitled” to those amounts, the trustee must document this resolution before 30 June and the beneficiary receives
or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
Private company loans
Income tax law can potentially treat a payment or a loan by a private company to a shareholder or an associate as an unfranked deemed dividend unless an
exemption applies.
The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which
may be seven or 25 years depending on whether or not the loan is secured.
Prior to 30 June you should carefully review such debit loans on the company’s balance sheet.
Prevent deemed dividends in respect of unpaid trust distributions
An unpaid distribution owed by a trust to a related private company beneficiary that arises from 1. 7. 2017 will be treated as a loan by the company, if
the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed
dividend for the amount of the unpaid trust distribution in 2017-2018.
However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s
2017-2018 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement
for the sole benefit of the private company, and other conditions are satisfied. These rules are complex and professional advice should be sought.
Write-off bad debts
Businesses can only obtain income tax deductions for bad debts. If the debt still exists at the time it is written off. Thus, if the debt is forgiven or
compromised before it is written off as bad in the accounts no deduction will be available. The debt must also be unrecoverable and written off in
the accounts as bad prior to 30 June. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course
of carrying on a money-lending business.
Year-End “tax effective” investment products
Proceed with caution and make sure you get independent professional advice.
INDIVIDUALS
In general, individual income is derived and deductions are incurred on a receipts basis. The following suggestions may reduce your current year tax liability.
Prepayment of deductible expenses
An individual can claim a deduction for prepaid expenditure for a period not exceeding 12 months. The most common types of prepayments include:
- Income protection insurance
- Interest on investment loans
- Interest on share portfolios
- Investment properties
- Membership and subscriptions
- Investment property expenses
- Corporate Body levies
- Insurance
- Repairs and maintenance
- Rates
Prior to year-end an individual should review the gains and losses on each asset within their investment portfolio. There may be opportunities to:
- Make sure assets have been held greater than 12 months before sale so the 50% discount can be applied to the gross capital gain – remember this is
from “contract” to “contract” … not settlement; - Realise capital losses to offset any capital gains that were made earlier in the income year;
- Defer realisation of capital gains until July.
Salary Packaging Arrangements
An effective salary sacrifice arrangement will reduce an individual’s marginal rate of tax. The contractual arrangements should be documented or amended
before year-end as an individual cannot make a retrospective salary sacrifice arrangement for income already earned. A typical salary sacrifice arrangement
may include the following components:
- Motor vehicle expense
- Additional superannuation contributions
- School fees
The top marginal tax rate applies on income in excess of $180,000. With the “mark-up” factors, fringe benefits tax effectively applies the top marginal
rate regardless of your income. However, for taxpayers not on the top marginal rate it is still possible to take advantage of FBT concessions.
Ongoing Tax Planning Issues
Kindly note, there is no tax deduction for non-concessional contributions.
2018 Contribution Caps from 1 July 2017
- Concessional contribution (Employer contributions) $25,000.
- Non-concessional contribution (Personal contributions) $100,000 or 3-year limit of $300,000.
- Again, if you want to contribute more than $100,000 in non-concessional contributions contract your Accountant as this involves a 3-year average and
you need to be certain you are eligible.
Salary Sacrifice Bonus into Superannuation
You may be able to optimise your tax position by salary sacrificing any prospective end of year bonus into super. Seek advice to ensure it is tax effective
and that contribution caps are not breached.
Superannuation – income
Individuals aged over 60 are generally not taxed on any payments from a superannuation fund. Individuals aged between 55 and 60 will generally be taxed
concessionally.
Superannuation – rebate
A rebate of up to $540 is available for superannuation contributions made during the 2018 year for your spouse where you spouse’s income is less than $37,000
p.a. (this rebate reduces for income amounts up to $40,000 p.a.).
Superannuation – government co-contribution
The maximum co-contribution amount that you received is $500, based on an after-tax contribution of $1,000 (i.e. for every $1 contribution made, the government
contributes $0.50). This is reduced by 3.33 cents for each $1 of income over $36,813 p.a. up to $51,813 p.a. As there are also other qualifying criteria,
you should contact this office if you wish you access this benefit in 2018.
Transition to retirement income streams
If you are 55 or older at 30 June 2018, you may be eligible to commence a “Transition to retirement” pension. Benefits may include:
- Receiving pension income while still working;
- Ability to salary sacrifice to superannuation to access lower tax rates; and
- Concessional tax treatment within your super fund.
Note that up to 30.6.2017, the income from assets supporting a transition to retirement income stream was tax exempt. From 1.7.2017 this exemption no longer
applies.
Medicare Levy Surcharge (MLS) and Private Health Insurance Rebate (PHIR)
The thresholds for the imposition of the MLS (If not covered by private hospital insurance) are broadly as follows:
- Singles (no dependants) – $90,000 pa; and
- Families – $180,000 pa (plus $1,500 for each dependant child after the first)
There are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions and investment losses counted in calculating
these thresholds.
Further, there is a “tiered” system for calculating MLS in the 2018 income year. The rate of MLS will be between 1% and 1.5% depending on the extent to
which income exceeds the relevant thresholds.
In addition, the PHIR is also means tested in the 2018 income year under a “tiered” system. The rate of rebate will be between 0% and 30% depending on
income levels. This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional
liability on lodgement of their return.
ATO recovery of Higher Education Loan Programme and Trade Support Loan Debt
The Higher Education Loan Programme (HELP) and Trade Support Loan (TSL) repayment rules to debtors who reside overseas have been extended by assessing
their repayment obligations on their worldwide income. Repayment obligations commenced 1 July 2017.
Since 1 January 2016, HELP and TSL debtors who are going overseas for more than 6 months are required to register with to ATO. Debtors already living overseas
had until 1 July 2017 to register.
ATO Data Matching
The ATO’s extensive data matching capabilities is based on information it receives from various sources including banks, share registries, employers, government
agencies and via its network of global information exchange agreements.
In terms of focus areas for compliance activities, the ATO continues to closely monitor:
- Claims for work-related expenses that are unusually high relatively to others across comparable industries and occupations;
- Excessive rental property expenses;
- Non-commercial rental income received for holiday homes;
- Interest deductions claimed for the private proportion of loans; and
- People who have registered for GST but are not actively carrying on a business.
INCUR EXPENSES BEFORE YEAR-END
Expenses that are incurred before year-end can reduce taxable income. Consider forthcoming liabilities and the value in incurring them before year-end.
If you have a rental property, consider whether you are maximising claims for capital works deductions on the property. A report from a quantity survey
or suitably qualified specialist will maximise your entitlements. Pay income protection insurance premiums before year-end.
Motor Vehicle Expenses
There are now only two methods which can be used to claim a deduction for motor vehicle expenses.
There are:
- The cents per km method (for up to 5,000 business kilometres travelled); and
- The log book method (log book kept over 12 weeks and updated every five years).
Also, since 1 July 2015, there is a single cents per kilometre rate of deduction determined by the Commissioner. For the year ended 30 June 2018 the single
rate of deduction determined by the Commissioner is 66 cents per kilometre.
Detailed records assist in maximising deductions.
Zone Tax Offset
Since 1 July 2015 the zone tax offset has been limited to those taxpayers whose usual place of residence is within the designated zones. The zone tax offset
is a concessional tax offset available to individuals against their income tax liability in recognition of the isolation, extreme climate and high
cost of living associated with living in designated zones.
The changes made to the zone tax offset removes “fly-in-fly-out” and “drive-in-drive-out” employees, whose usual place of residence is located outside
of the zone, from being eligible to claim the zone tax offset for the 2016 income year and later income years.
Claiming Travel Allowance Deductions
An audit focus by the ATO continues with travel allowance expenses being claimed by individual taxpayers. If you intend to use the exception for retaining
substantiation for these claims the following must apply:
- You must be receiving a bona fide travel allowance from your employer;
- You must be working away from home (on overnight stays) in the course of performing employment duties;
- You must calculate the claim correctly for your salary level and location of work; and
- You must be able to show that you are incurring travel expenses.
OTHER BUSINESS CONSIDERATIONS
Defer Income
- Cash or accruals reporting – recognition of income on a receipts basis will generally defer the point of derivation.
- Review service contacts – do the terms of the contract mean income can be recognised periodically when the services are performed?
Bad debts
Write off bad debts in the books of accounts prior to 30 June 2018
Bonuses
Ensure all bonuses are determined and properly documented before year-end.
Depreciation
- Scrap obsolete item of plant and equipment;
- Utilise depreciation pools to their full extent; and
- For SBEs (see above) consider taking advantage of the immediate write-off up to $20,000 for each individual asset acquired after 7.30 pm 12 May 2015
up until 30 June 2018.
Trading stock
- Consider these may be obsolete stock to write off and note closing stock can be valued at year-end at the lesser of cost, market value or replacement
value. - Generally, an entity must perform a stock take to determine the physical quantity and value of each item at year-end.
Prepayment of Expenses
In some circumstances, small businesses (with turnover of less than $10 million) should consider prepaying expenses prior to 30 June 2018. A tax deduction
can be brought forward into this financial year for expenses like insurance premiums, subscriptions and memberships, travel, advertising and interest.
A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2018 for services to be rendered within a 12-month
period.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.