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Fundamental Year End Tax Planning Issues

Posted by Northadvisory on February 26, 2018

It is best practice to review clients’ taxation affairs in advance of the year end to identify any tax planning opportunities that may exist. Good planning opportunities do not necessarily have to be most complex / innovative, simple strategies are often the most effective. Opportunities can be found by adopting a methodical approach, ensuring compliance with new laws & ATO practice / administration being informed on proposed legislative amendments / Government announcements.

  1. Minimising or managing assessable income involves being mindful of timing and derivation of income:
    • Individuals tax on a cash receipts basis unless carrying on a business (TR98/1)
    • Businesses generally taxed on an accruals (earnings) basis i.e. based on invoices issued rather than cash received
    • Long term construction projects taxed on billings or estimated profits basis (IT2450)
    • Partners in a partnership are taxed on their share of profits at the end of the income year
    • Trust Distributions are assessable to beneficiaries when they become presently entitled, or else assessed to either the trustee or default beneficiary (review trust deed)
  2. Ways to manage assessable income include:
    • Reviewing contracts for provision of services, determine whether income on the contracts ‘derived’ when services rendered and consider whether any specific contractual arrangements determine point derived
    • delay billing WIP where possible, but care required because if a ‘recoverable debt’ exists then WIP is already ‘derived’ for tax purposes
    • a ‘recoverable debt’ – describes point in when you are legally entitled to an ascertainable amount as the result of having performed an agreed task, you may have recoverable debt even though, at the time, you cannot legally enforce recovery of the debt [TR 98/1]
    • Trading stock – The simple and effective practical planning tips are therefore to consider :
      • using lower value for particular items of closing stock (obsolescence or other special circumstances)
      • scrapping or discarding unwanted stock before year-end (ensure obsolete stock written-off prior to 30 June 2017 to bring forward deduction)
    • defer sales until the next financial year
    • defer contract date for sale of CGT assets
    • review basis on which interest or other income derived & whether scope to defer
    • delay the disposal of assets that have recouped depreciation
    • consider timing of insurance recovery claims & negotiations with insurer/final payment
    • ensure ESS entitlements reviewed to determine when discount assessable
  3. Maximising or managing allowable deductions involves being mindful of the timing of expenses:
    • s 8-1 ITAA 1997 allows general deduction for losses & outgoings to extent that:
      • they are incurred in gaining or producing assessable income; or
      • they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income
    • generally, loss or outgoing is ‘incurred’ if you are ‘definitively committed’ to the loss or outgoing, irrespective of whether there has been an actual disbursement
  4. Ways to manage allowable deductions include:
    • Review debtors to identify any debts that should be written off
    • ensure that all bad debts are written off during the year of income in which the deduction is sought – write off may be done by:
      • actual write-off in books of account; or
      • a written record evidencing decision to write off debt from accounts (e.g. minutes of a pre-year-end meeting) – must also have documentation to evidence debt is ‘bad’
    • companies – consider whether any substantial change in ‘continuity of ownership’ because companies claiming bad debts must meet stringent tests requiring COT or SBT to be satisfied
    • trusts may not be able to claim deduction for bad debts where there has been a change of ownership or control in the trust [check application of the trust loss provisions]
    • ensure that contributions for the June quarter are made (i.e. paid) to a complying fund by 30 June 2017 (otherwise the deduction is delayed until 2017/18)
    • review all superannuation contributions to ensure compliance with quarterly SG obligations
    • remind all employers that SG contributions of 9.5% for period 1 April 2017 to 30 June 2017 must be paid to a regulated superannuation fund by no later than 28 July 2017
  5. Strategies for managing prepayments include:
    • Identify excluded expenditure (fully deductible) amounts:
      • prepayments under a contract of service
      • amounts required to be paid by law or by Court Order or by law e.g. council rates, motor vehicle registration, land tax, workers compensation premiums, etc
    • For SBEs, identify prepayments where services are to be performed within 12 months (full deduction available in year expenditure incurred), and identify prepayments where services are to be performed beyond 12 months (expenditure can be apportioned over the service period)
  6. Managing Capital Allowances for SBEs:
    • review schedules of depreciable plant
    • the instant asset write-off (available from 12 May 2015) for the business portion of assets costing less than $20,000 is extended by 12 months to 30 June 2018 – threshold reverts to $1,000 from 1 July 2018
    • other assets depreciated in general small business pool – DV rate of 30% is applied to the pool
    • review schedules of depreciable plant & write-off any obsolete items
    • separate schedules should be maintained to identify items of plant acquired before 21 September 1999 & items acquired since that date [separate rules apply to depreciation & working out effective lives]
    • work out new effective life for any items acquired after 21 September 1999 [accelerated depreciation rates are not available to non-small business entity taxpayers]
    • calculate depreciation & balancing adjustments under UCA provisions
    • review black hole expenditure items to determine whether clients can benefit from s 40-880 of the ITAA97
    • business capital expenditure not recognised elsewhere in the ITAA97 or ITAA36 may be deductible and written off over five years where the expenditure relates to an existing, past or prospective business
  7. Managing Capital Allowances for Non-SBEs:
    • balancing adjustments are assessable (or deductible), except where:
      • automatic roll over relief applies;
      • optional roll over relief applies; or
      • an involuntary disposal takes place
    • ensure clients bring to account any gain/(loss) on termination of plant [CGT rules generally do not apply to disposal of depreciable plant – exception is CGT event K7 in relation to depreciating assets used for non-taxable purposes]
    • pool items costing $1,000 or less into a ‘low value pool’ % write-off at annual rate of 37.5% DV [18.75% in the first year to reflect that plant is allocated to the pool throughout the year]
    • confirm whether opportunity to write-off specific post 30 June 2002 capital expenditure under the UCA regime [e.g. costs of raising equity, establishing or converting a business structure and defending against takeovers]
    • ATO updates the effective life of assets from time to time [do not rely on previously used rates]
  8. For effective trust distributions, consider:
    • the terms of the Trust Deed & any Deed(s) of Variation
    • the trust income for the year & whether there are capital gains / franked dividends that may be ‘streamed’
    • the present entitlement of the beneficiaries
    • the distributions required for the year
    • the resolutions that have to be put in place
    • read & understand the trust instrument particularly in relation to such matters as:
      • who are or can be the beneficiaries;
      • are there default beneficiaries;
      • is there a power of accumulation;
      • is there a definition of income and capital; and
      • when does the trust vest.
    • check for any Deeds of Variation to the original deed that may impact on the administration of the trusts
    • deceased estates are another form of trust & fall broadly within same taxing rules as inter vivos trusts
    • the term ‘present entitlement’ is not defined in law, but High Court has interpreted the expression to mean:
      • where beneficiary has absolutely vested beneficial interest in possession as to the income legally available for distribution & which beneficiary will succeed in an action to recover it from trustee [Taylor v FCT (1970) HCA];
      • a right to income ‘presently’ existing such that the beneficiary may demand payment of the income from the trustee [FCT v Whiting (1943) 68 CLR 1999]

If you have questions on any of the above issues raised, please do not hesitate to contact us.

Kim Edwards
Accountant
T: 02 9984 7774
E: kime@northadvisory.com.au