Tax tips to consider before 30 June 2014

There is less than a month until the end of the financial year and following on from a very tough Federal Budget this is shaping up to be a very important year-end for tax planning.  This is largely thanks to the increase in tax rates we are likely to see next year from the proposed deficit levy. 

So in preparation for the changes coming, there are some important steps you can take, before the end of the financial year that will assist in reducing your tax payable when your 2014 returns are lodged and in the year beyond to 2015.

Here are a few, and you can see more in our downloadable tax preparation guide ‘113 Tax Tips‘.

 

Avoiding the Deficit Levy

The deficit levy, which is due to commence on 1 July 2014 is likely to impact individuals with a taxable income above $180,000 and is expected to last for 3 years (i.e. the 2014-15, 2015-16, and 2016-17 financial years).  Managing your tax affairs to minimize exposure to the levy is one of our most important tasks this year.

When combined with the 0.5% increase in the Medicare Levy from 1 July 2014, this represents a jump in the top marginal tax rate from 46.5% to 49%.

If you are already on the top marginal tax rate, then increasing your income this year with an offsetting reduction in next year’s income could save you 2.5% in tax on that amount. Strategies could include the following:

  • Choosing not to prepay expenses such as interest.
  • Bringing forward into 2013-14 any expected income from asset disposals via early sale.
  • Deciding not to delay income receipts (if this is a strategy you typically use).

You may also choose to make greater use of salary packaging in the next 10 months to reap the benefits. To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015. Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.

Changes to the rules around the purchase of depreciating business assets

In 2013 the Government foreshadowed changes to the ability of eligible small businesses to claim an  immediate deduction for expenditure on depreciating assets costing less than $6,500 (and the ability to claim $5,000 for motor vehicle purchases).

Whilst these changes have yet to be enacted they are intended to be retrospectively implemented from 1 January 2014, when the threshold will be reduced to $1,000.  So being aware of this is important in your tax planning process.

Superannuation contributions for the year ending 30 June 2014

Prior to year end it is also important not to forget about superannuation. You may consider any of the following strategies in looking over your superannuation:

  • Where appropriate, ensure that maximum concessional contributions are paid before 30 June. It is also critical that care is taken to not exceed the maximum contribution limits.
  • You may wish to give consideration to making non-concessional contributions to superannuation.
  • If you have a spouse, parent or child on a low income then consideration should also be given to making a non-concessional contribution for them and taking advantage of the government co-contribution.
  • If your superannuation fund is in pension phase then it is important to remember to make the minimum pension payments from your SMSF before 30 June 2014. This is discussed further below.

Understand your minimum Pension Payment requirements

It is worth noting that the pension drawdown relief provided by Government as a result of the downturn in the global financial markets ceased from the 2013-14 year. Minimum pension payment percentages have now reverted back to those last seen in the 2007-08 year.

While the table below provides further details, we recommend that you discuss your personal circumstances with your adviser before making the payment to ensure the correct amount is paid and to also ensure an appropriate buffer given changes.

Age                              Minimum

Under 65                               4%
65 to 74                                 5%
75 to 79                                 6%
80 to 84                                 7%
85 to 89                                 9%
90 to 94                                 11%
95 to whenever                    14%

 

Put in place appropriate trust distributions

As in previous years, if you operate a trust it is crucial that the trust resolves how it will distribute the income of the trust prior to 30 June 2014.

Other items

While there is various other year-end tax planning items that can be considered, it is not possible to provide a comprehensive list in an article such as this. Please discuss any items you wish to consider with your adviser or download our 113 Tax Tips for more insights that you can review in your own time.

Please note that our comments above are general in nature, and should not be relied upon without seeking further advice from your adviser.

Government Incentives

As we approach 30 April it is useful time to think about Government incentive programs. This is because 30 April marks 10 months from the end of the financial year and is therefore the deadline for the lodgement of your R&D project details with Austrade. Once approved these projects give access to valuable tax concessions.

If you are a business that tries to be innovative or a business that comes up with new ideas, then it is a good time to revisit what the R&D incentives are and the type of activities that will qualify.

In addition to the R&D incentives, we will also look at the export market development grant. Like the R&D incentives, this is another government incentive that is very valuable to businesses.

Research and Development

What is R&D?
The R&D tax incentive program allows participants who satisfy the requirements to claim an additional credit in their return in relation to money they have spent on R&D. In some cases this credit can be refunded in cash.

In determining when R&D is being carried on core R&D means experimental activities that satisfy the following two requirements:

  1. The outcomes are not known and can only be worked out by applying some kind of systematic approach.
  2. Research is conducted for the purpose of generating new knowledge. For example better materials, or processes.

Leading on from the above it is also important that whatever the “thing” is, it is being developed for the purpose of commercialisation. Therefore the development of computer software for use within your business would typically not be R&D.

While we note there are quite a number of elements to the above, the potential application of these definitions is broad. There are also various more specific requirements such as specifically excluded activities. However as a starting point if your business does things that are new and involve some form of uncertainty regarding the outcome then it is worth considering these provisions further as you may be able to access these tax concessions.

What is the concession?
If the concessions are available then the following can be received:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.

Export Market Development Grant (“EMDG”)

What is the EDMG?
Like the R&D concession the EDMG is also administered by Austrade and is a Government funded financial assistance program for aspiring and current small and medium business that are establishing themselves as exporters of either goods or services.

One of the key incentives it provides is a reimbursement up to 50% of eligible export promotion expenses for expenses greater than $10K, with a maximum reimbursement of $150K.Other points to note include the following:

  • The Grant is provided in the year following expenditure.
  • Grants are provided up to seven years to each eligible applicant.

Who is eligible?
Australian individuals, partnerships, company associations, co-operatives, statutory corporations or trusts carrying on a business in Australia may apply for the EDMG provided they:

  • Have an ABN.
  • Had an annual income of not more than $50 million during 2012-13.
  • Spent at least $20,000 on eligible export promotion activities during 2012-13. First time applicants may combine expenses incurred in 2011-12 and 2012-13 to meet this threshold.
  • Are the principal – they must own the product they are promoting (some exceptions apply).
  • Promoted the product for export and their product is:
    –  A good made in Australia
    –  A good made outside Australia where Australia will derive a significant
    net benefit from its sale overseas
    –  A service except those specified as ineligible in the EDMG Regulations
    –  A tourism service
    –  An event held in Australia
    –  An intellectual property right that mainly resulted from work done in Australia
    –  A trade mark first used in Australia, or which has significantly increased in
    value from its use in Australia
    –  Know-how that mainly resulted from work done in Australia.

 Type of expenses that are claimable – nine categories

  1. Costs paid to overseas representatives to market / promote the product (max $200,000).
  2. Cost of engaging an arms-length consultant to undertake export market research or marketing activities (max of $50K).
  3. Cost of travel during marketing visits ($300 per day).
  4. Cost of communications to promote product.
  5. Cost of providing free samples of product promoting for export.
  6. Cost of granting, registering or extending rights under foreign laws in relation to eligible intellectual property (up to a maximum of $50K per application).
  7. External costs directly related to participating in an international trade fair, seminar, in-store promotion, international forum, private exhibition or similar activity.
  8. External costs of promotional material, such as brochures, videos, advertising and website development.
  9. Costs of bringing potential buyers who are non-residents to Australia for an eligible export promotion purpose ($7.5K per buyer per visit, maximum of $45K per application).

As you can see the potential application of the above concessions is quite broad and also quite valuable. Therefore if you are currently looking to expand your business overseas the above concession may be able to provide you with some assistance.

Act NOW if you wish to access immediate tax deductions for your small business

The Government is planning to remove the immediate tax deduction for depreciating assets costing less than $6,500 and the accelerated depreciation allowances for motor vehicles which  are currently available to small businesses (i.e. businesses with an annual aggregate turnover of less than $2 million).  It is important that you ACT NOW to access immediate tax deductions for your small business.  

These concessions were enacted by the previous Government and were to be funded by the Minerals Resource Rent Tax (MRRT). However following the proposed repeal of the MRRT, these concessions will be removed as well. The Bill, if passed, will be effective from 1 January 2014.

Current Rules

Presently, the main concessions available for small businesses with depreciating assets used in the business are as follows:

  • Plant and equipment – Assets costing less than $6,500 are subject to an immediate tax deduction; and
  • Motor vehicles – An immediate tax deduction of the first $5,000 value of the motor vehicle plus 15% of any residual value. The remaining value is allocated to the small business general pool with a rate of 30% to be claimed in subsequent income years.

Impact of the Proposed Amendments

The proposed amendments will remove the current rules and replace them with the following small business concessions:

  • Plant and equipment – The $6,500 threshold will be reduced to the previous limit of $1,000, with assets exceeding the $1,000 threshold to  be allocated to a general small business pool for tax depreciation claims (i.e. 15% tax depreciation in the first year and 30% in subsequent years on a diminishing value basis); and
  • Motor vehicles – No immediate tax deduction will be available. The total cost of your motor vehicle will be treated like any other depreciating asset and allocated to the general small business pool.

It is expected that if the Bill is passed to repeal the MRRT in the new year, the proposed amendments will be applied retrospectively. This means that the repeal of these small business concessions will be expected to commence from 1 January 2014, which is less than four weeks away.

What you can do

If you are an eligible small business wishing to maximise your tax deductions for the 2013-14 income year, it is advised that you bring forward your purchases of the above-mentioned depreciating assets to before 1 January 2014, so you can utilise the immediate deduction concessions currently available to you.

To be able to access these concessions the asset purchased will need to be installed ready for use before 1 January 2014.

Therefore if you have equipment that you know needs to be replaced shortly these concessions may make it worthwhile making the purchase and arranging delivery before the year ends. This could include for example ageing IT equipment or furniture.

 

Tax Tips to consider before 30 June 2013

With less than two weeks until the end of the financial year and after a federal budget designed to take away a bigger share of income than in previous years, there is no better time to put some effort into year-end planning.

To help you with this we have summarised some things that need to be done before year-end and some other useful ideas that may assist with reducing the tax payable when tax returns are lodged.

Trust distribution minutes

Similar to last year if you operate a trust, it is crucial that prior to 30 June 2013, the trust has resolved how it will distribute the income of the trust. Your adviser is aware of the importance of this issue and is currently in the process of preparing the required minutes. If the required resolution is not completed on time it can result in some unfavourable implications.

Don’t forget also that this year 30 June falls on Sunday. Therefore the target date for completing these resolutions needs to be Friday, 28 June. If you don’t hear from you adviser by 25 June please take steps to contact them.

Trust distributions to companies

Following on from the above distributing net income to a company can be an effective strategy to reduce tax.

While this will have the effect of capping the tax at 30%, consideration will need to be given to what is done with these funds once they are in the company.

In such a case our firm has designed some investment structures that you may find appealing. Please consult your adviser if you wish to find out more.

Loss carry-back rules

A new measure that is currently before the Senate and likely to be passsed soon, provides tax relief to companies by allowing them to carry-back tax losses so they receive a refund against tax previously paid.

These rules are new this year and will allow a one-year loss carry-back in the current financial year. These rules allow tax losses incurred to be carried back and offset against tax paid in the 2012 financial year.

For 2013/14 and later years, tax losses can be carried back and offset against tax paid up to two years earlier.

Loss carry-back will:

  • be available to companies and entities taxed like companies who elect to carry-back losses
  • be capped at $1 million of losses per year
  • apply to revenue losses only
  • be limited to the company’s franking account balance.

Are you thinking about buying a car?

If you operate a small business then there have been some changes from last year that mean that if you have purchased a new car since 1 July 2012, you can claim an instant tax write-off of the first $5,000.

The balance over $5,000 is depreciated as per usual.

Therefore if the business is in the process of buying a new car it is likely to be worthwhile ensuring the purchase happens before 30 June. This could combine with the year end run out sales to produce real benefit.

Purchase of depreciating business assets

In a similar vein to the previous point, the changes implemented from 1 July 2012 also mean that an eligible small business can claim an immediate deduction for depreciating assets costing less than $6,500.

If your business is therefore in need of any new equipment, such as computers or printers, then it might make sense to make those purchases before 30 June.

Superannuation contributions for the year ending 30 June 2013

Just like prior years don’t forget to lock some money away. While superannuation has taken a few punches from the government and the media during the year it is still the most tax effective environment for saving for the future.

It’s therefore critical that contributions are paid before 30 June. It is also critical that care is taken to not exceed the contribution limits.

The maximum concessional contributions for the year ending 30 June 2013 are $25,000. This limit applies on a per person basis and includes concessional contributions from all sources.

The concessional cap will increase to $35,000 for individuals over the age of 60 from 1 July 2013.

At this point it is also useful to note another widely publicised change to the super rules. This change will increase the contributions tax from 15% to 30% for individuals who have income of more than $300,000. It is proposed that this change will apply from 1 July 2012. These changes however are not yet law as their application depends on the passage of the law through parliament.

Government co-contribution

If you have a spouse, parent or child on a low income then consideration should also be given to paying a non-concessional contribution for them.

Non-concessional contributions up to $1,000 will be matched by a government co-contribution of $500 for people earning less than $31,920. Transitional rules apply for incomes up to $46,920.

To be eligible the person must be employed or self-employed.

Non-concessional contributions

While on the topic of superannuation it is also necessary to note non-concessional contributions. These contributions are broadly contributions you make to super from after tax dollars. This is typically used to get additional money into the low taxed super environment

The non-concessional contribution limits are $150,000 per member per year, or $450,000 per three-year period.

As penalties can apply to excess non-concessional contributions, please discuss this with your adviser before making a large non-concessional contributions.

Superannuation pensioners

If your superannuation fund is in pension phase then an important thing to remember is to make the minimum pension payments from your SMSF before 30 June.

While the table below provides further details, we recommend that you discuss this with your adviser before making the payment to ensure the correct amount is paid and to also ensure an appropriate buffer.

Age Minimum
Under   65 3%
65 to   74 3.75%
75 to   79 4.5%
80 to   84 5.25%
85 to   89 6.75%
90 to   94 8.25%
95 to whenever! 10.5%

 

Are you over age 60?

If you are over age 60 and have not started a superannuation pension then you need to call your adviser ASAP, because you are missing out. The taxation benefits of starting a pension mean that there is no tax in the hands of the fund and no tax on the pension income in your hands.

Medical expenses claim

For the current financial year the net medical expenses rebate, which currently allows you to claim a 20% tax offset on out-of-pocket medical expenses above $2,120 (this includes medical costs for all family members), is means tested.

The test applies to people with adjusted taxable incomes in excess of $84,000 and in excess of $168,000 for couples. For people in this income category, the offset will only be available for out of pocket expenses above $5,000 allowing a claim of 10% only.

However the more important point this year is that the net medical expenses tax offset is being phased out from 1 July 2013. This basically means that you need to claim it this year to be able to claim it next year. Therefore if you are close to the line it may be worthwhile bringing forward the payment of some medical expenses to protect access to this concession next year.

Tax rates for 2012/13 and 2013/14

As previously advised new tax rates apply from 1 July 2012. These new rates broadly mean that individuals earning less than $80,000 will pay less tax than in previous years. If your trust distributes to multiple family members then this will be to your advantage.

The tax rates for 2012/13 and 2013/14 are shown below:

Taxable income Tax on this income
0 to $18,200 Nil
$18,201 to $37,000 19 cents for every dollar over $18,200
$37,001 to $80,000 $3,572 plus 32.5 cents for every dollar over $37,000
$80,001 to $180,000 $17,547 plus 37 cents  for every dollar over   $80,000
$180,001 and more $54,547 plus 45 cents for every dollar over $180,000

 

Other items

While there are various other year-end tax planning items that can be considered, it is impossible to provide a comprehensive list in an article such as this, please therefore discuss this with your adviser if there are other items you wish to consider.

This could include prepaying expenses, other issues that affect the timing of deductions, other issues that affect the timing of income receipts, or managing the sale of different assets to either delay a tax payment or offset other capital gains.

Please note that our comments above are general in nature, and should not be relied upon without seeking further advice from your adviser.

Grant Ellis is an Associate Director with Prosperity Advisers Group.