End of year tax planning
Tax minimisation strategies are beneficial for every taxpayer. Especially with major changes to the Budget introduced by our government from 1 July 2017.
You may be able minimise your tax liability if you had any one-off irregular income amounts.
Examples of additional income to consider:
- Capital gain on sale of shares or investment properties
- any lump sum income payments like bonuses or commissions
- If your working conditions have changed
There are several strategies available to help minimise your tax liability:
- Timing of assessable income – you should consider if there is an opportunity to defer income to future years
- Bringing forward deductible expenses or losses – as a small business you can prepay next year’s expenses, such as insurance cost, office supplies, interest, rent, lease payments, advertising, repair and maintenance expenses
- Interest of investment loan – consider interest in advance options for investment loans by prepaying annual interest charges for rental properties and shares.
- Investment property depreciation – Consider a property depreciation report to be able to claim maximum amount of depreciation and building write-off deductions on your rental property.
- Depreciation – small businesses can depreciate assets with cost of up to $20,000 in full. You should also review your existing depreciated assets schedule and check they are still current.
- Bad Debt – analyse your debtors and write off any non-recoverable amounts as bad debts
- Trading stock – consider whether to use cost, market selling or replacement value. You also should consider a detailed physical stock count. This will be a good chance to spruce up your business by putting slow moving items out on sale. It also enables you to write-off any obsolete or worthless stock items.
- Donations – any donations must be made prior to 30 June
- Staff bonuses – if you are paying bonuses, ensure payment is made before 30 June.
- Staff holidays – encourage staff to take holidays prior to 30th June. No deductions can be claimed for provision for annual leave, holiday pay is only deductible when taken.
- Staff superannuation contributions – to be able to claim deduction for superannuation expenses ensure that payments to employees’ superfunds made prior to 30 June.
- Research and Development – A government grant is available for companies which incurred R&D expenditure of $20,000 or more. Contact us for further information on your options.
- Directors loan – if during the year you borrowed money from your private company, make sure you have repaid it in full by 30 June to avoid interest being payable on the loan. If you are unable to repay it in full, make sure a loan agreement is in place to avoid a dividend being treated by the ATO as unfranked. For previous any years’ loans – make sure that the appropriate principal and interest repayments are made prior 30 June.
- Family trust distribution resolutions to be completed by 30 June 2017 – Ensure that the Trustee Resolutions are prepared and signed BEFORE 30 June 2017 for all Discretionary (Family) Trusts. Otherwise tax will be payable by the trust at highest individual’s rate (47% for 2017)
- Increase to the Small Business Entity (SBE) threshold – The ‘SBE’ definition has changed with respect to the turnover eligibility requirement. This has increased from $2 million to $10 million with effect from 1 July 2016 (i.e. the 2017 income year). However, this change will not apply with respect to the Small Business Income Tax Offset (‘SBITO’) and the Small Business CGT concessions (‘CGT SBCs’).
- Changes in income tax rates – Companies – the company tax rate for businesses with less than $10 million turnover reduced from 28.5% to 27.5% for the year ended 30 June 2017. With further reductions, as per below:
A company will be eligible for the lower corporate tax rate (i.e., starting from 27.5% before eventually dropping to 25% in the 2027 income year) from the 2018 income year onwards if it is a ‘base rate entity’, which will be the case where:
- Changes to the franking of dividends – from 1 July 2016 franking credits attached to franked dividend must be at the same rate as the income tax rate paid by the corporate entity. Meaning that if company paid tax at tare of 27.5% in 2017 financial year, the franking credits attached to dividend paid during 2017 year also must be 27.5%. Previously franking credit allowed to be distributed to beneficiaries at 30%.
- Moving to a corporate structure from sole trading or trust – with lowering of corporate rates you should consider if a company structure would be more beneficial for you. Just be aware that any Personal Service Income (PSI) still will be attributed to you personally. Personal services income (PSI) is income produced mainly from your skills or efforts as an individual. Income is classified as PSI when more than 50% of the amount received was for your labour, skills or expertise.
- Salary packaging – salary packaging is one of the solutions to reduce your taxable income. However, you should be aware that your employer is required to report the value of fringe benefits on your payment summary and that may influence some other government payments to you, such as Family Tax Benefit.
- Shift income to a taxpayer with a lower marginal tax rate – this can be done by distributing from your family trust or rearranging your investments to a lower income earner.
- Negative Gearing on property or shares – Negative Gearing isn’t suitable for everyone and the tax benefits should not be the only reason for the purchase of investment. It can lower tax liability, however, as the description implies, you need to fund a negative cashflow from other income sources. You should always seek expert professional advice to make sure the purchase is within your budget and will provide long term taxation and financial benefits.
- PAYGW Variation – if you have significant losses on your negatively-geared investment you can apply to the ATO for PAYGW variation. This will allow your employer to reduce your tax from salary at each payment instead of receiving one big refund from the ATO at the end of year.
- Utilising tax-free threshold – taxpayers with losses should consider to increase income up to tax free threshold ($18,200 for 2017 financial year) via stock valuation, director’s fees, dividend, bring forward or delay sales etc.
- Changes in income tax rates – Individuals – minor changes to the individual tax rates started on 1 July 2016. Marginal tax rate of 37% will applied on taxable income started from $87,000 instead of previous $80,000.
- Temporary Budget Repair Levy – From 1 July 2017 the 2% Temporary Budget Repair Levy will be removed. As the levy applied to the individuals with earnings of more than $180,000, high earning individual should consider opportunity to defer income until after 1 July 2017.
- Backpacker tax – the government introduced Backpacker tax effective from 1 January 2017. Foreign working holiday makers to be taxed at a 15% rate on assessable income from Australian sources on amounts up to $37,000. Employers of these persons must register with the ATO. If they fail to register, penalties may apply and tax must be withheld on payments at a rate of 32.5%.
- Reporting obligations for HELP & TLS if living overseas – Individuals living overseas with Higher Education Loan Program (HELP) and Trade Support Loan (TSL) debts – from 1 July HELP and TSL repayments will be based on worldwide income. Individuals with such debt must now inform the ATO if they intend to depart Australia for more than 183 days in a 12-month period, or are already living overseas. They also must report their worldwide income to the ATO.
- First home super saver scheme – from 1 July 2018 individuals will be able to apply to withdraw voluntary contributions made to super after 1 July 2017 for a first home deposit.
Voluntary contributions include:
- Un-deducted (non-concessional) personal contributions
- Deducted (concessional) personal contributions
- Salary sacrifice contributions.
The maximum amount that can be released is $30,000 of personal contributions plus an associated deemed earnings amount. Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30 per cent offset.
- Concessional superannuation contributions – these are amounts you can claim a tax deduction. You should consider to pay super before 30 June to get a tax deduction this year. The concessional superannuation contributions cap will be lowered to $25,000 for all individuals. (These caps are currently $30,000 for those under age 50; $35,000 for those aged 50 and over). You can pay it personally if you are self-employed or organise salary sacrifice arrangement with your employer.
Also, remember, contributions don’t count when the payment is sent, only once the payment is received by the fund. Make sure the funds receive all contributions by 30 June.
- Non-concessional superannuation contributions (also called: after tax contribution or un-deducted contribution). The current $180,000 after-tax contributions cap, and the 3-year $540,000 bring-forward cap (for people under 65 years old) will remain in place until 30 June 2017. From 1 July 2017, the cap will be replaced with $100,000 annually cap and the 3-year $300,000 bring-forward cap. Individuals with a balance of more than $1.6 million will no longer be eligible to make non-concessional contributions.
If you go over the non-concessional cap, the ATO allows you to withdraw the excess non-concessional contributions, and any earnings. The earnings would then be included in your income tax assessment. If you choose not to withdraw your excess contributions, they are taxed at the top marginal tax rate.
- Catch-up concessional superannuation contributions – from 1 July 2018 Individuals with superannuation balances of less than $500,000 will be able to make additional concessional (before-tax) contributions by way of utilising unused annual Concessional Contribution Caps going back up to five years.
- Tax deductions for personal superannuation contributions – from 1 July 2017 all individuals under age 75 will be able to claim an income tax deduction for personal superannuation contributions. However, individuals aged 65 to 74 still need to satisfy the work test. Currently only individuals who derive less than 10 per cent of their income from employment sources can claim this tax deduction.
- Government co-contribution – if your income is below $51,021 you may also consider contributing to your superfund up to $1,000 after tax contribution to receive up to $500 government co-contribution.
- Additional tax on contributions for high-income earners – an additional tax of 15% on Concessional Contributions currently applied to the individuals with earnings of above $300,000. From 1 July 2017, the threshold will be reduced to $250,000, meaning more people will be affected by this additional tax.
- Improve superannuation balances of low income spouses – from 1 July 2017 the current 18% tax offset of up to $540 will be available for any individual, whether married or de-facto, contributing to the super account of a spouse whose income is up to $37,000. This is an increase from the current income threshold of $10,800.
- Low Income Superannuation Tax Offset (LISTO) – individuals with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation contributions, to a cap of $500
- Changes to TRIS – from 1 July 2017 earnings on assets supporting transition to retirement income streams (TRIS) will now be taxed concessionally at 15 per cent (currently tax exempt). This change will apply irrespective of when the transition to retirement income stream commenced. Individuals will also no longer be allowed to treat certain superannuation income stream payments as lump sums for tax purposes.
- $1.6 million pension cap – from 1 July 2017 tax free pensions will be capped at $1.6 million. Individuals with accounts already in retirement phase before 1 July 2017 with a balance more than $1.6 million will need to either:
- transfer the excess amount to a superannuation account in accumulation phase (and be taxed at superfunds rate of 15%).; or
- withdraw the excess amount from their account.
Individuals who breach the cap will be subject to additional tax, like the tax treatment that applies to excess non-concessional contributions.
- Limited recourse borrowing arrangements (LRBAs) – on 9 May 2017 the Government announced that LRBAs entered after 30 June 2017 will be treated differently. The outstanding balance of a relevant LRBA will not reduce the assets total value. I.e. a $2 million asset with a $500k LBRA the members total Superannuation Balance (TSB) will be $2 million, not $1.5 million.
- Contributing the proceeds of downsizing to superannuation – on 9 May 2017 the Government announced that from 1 July 2018, individuals aged 65 or over will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds of selling their home. These contributions will not count towards the non-concessional contribution cap and the individual making the contribution will not need to meet the existing maximum age, work or $1.6m balance tests for contributing to super. The home sold must have been owned by the individual for the past ten or more years, and have been the principal residence of the individual. Both members of a couple can contribute to super under this policy from the proceeds of the sale.
Property owners can claim expenses against rental income including:
- advertising for tenants
- agent’s fees and commissions
- bank charges
- body corporate fees
- council rates
- depreciation on plant and equipment
- interest on loans borrowed for the property acquisition, renovations or extensions
- land tax
- lawn mowing
- lease costs relative to preparation of documents for the rental
- legal expenses relative to dealing with tenants
- pest control
- repairs and maintenance
- travel and accommodation for inspection of the investment property
Please note, expenditure for travel and accommodation for inspection of the investment property has been abolished from 1 July 2017
Depending if your home is your business premises, or you are working from home, different home-office expenses could be claimed (proportionally), including:
- depreciation of fixtures and fittings
- plant and equipment for the home office
- repairs and maintenance for the office
- telephone usage for business purposes