‘Backpacker Tax’ Back-Pedal

Sad businessman pushing hand truck with taxes. Tax time and taxpayer finance concept

Jacqui Lambie’s push for a reduction in the ‘backpacker tax’ to 10.5% has won senate approval yesterday. The 10.5% rate is in line with New Zealand. The pressure is back on the coalition in the lower house to agree to lower its proposed 19% rate to 10.5%, or the impending 32.5% rate will apply from January 2017.

The requirement for employers to register with the ATO as employers of working holiday makers (WHMs) to withhold at the new rate appears likely to remain. This is despite some concern raised in the senate report issued on 9 November about the regulatory burden, particularly on smaller employers. The ATO are describing it as a simple, once-off registration, so it is hoped that the ATO will make the process relatively straight-forward.

The 19% rate to be applicable to incomes up to $37,000 was included in a bill that was passed in the lower house last month. This aligns with the tax rate for residents for incomes between $18,200 and $37,000.  It applies to Subclass 417 (Working Holiday) and Subclass 462 (Work and Holiday) visas that allow people aged between 18 and 30 years of age from 38 partner countries to work in Australia for up to 12 months (Subclass 417 visa holders can apply for a second year visa).

The debate has dominated question time with both sides of parliament arguing that the other is threatening to make Australia internationally uncompetitive. Malcolm Turnbull stating that the backpackers affected may be considered non-residents, so the 19% represents a benefit to them which labour was effectively blocking by demanding 10.5%. Scott Morrison further arguing that under the 10.5% rate backpackers could be better off than Australian residents in certain circumstances. Barnaby Joyce pointing to the loss of revenue under a 10.5% rate.

Labour are arguing that the 10.5% supports Australian tourism and agriculture, backpackers spend their income in Australia and if the government does not agree it will force the 32.5% rate to apply.

It is humbly proposed that perhaps a 10.5% rate applying only up to 18,200 may be a compromise both sides could swallow, however we could very well end up with a 12 – 15% rate based in part on comments by Pauline Hanson.

 

What is technology doing to our businesses?

Businessman touching a modern interface

Business Services Associate Director and Asian Business Desk specialist, Ruby Cheung discusses the increasing use of apps and other technology to communicate in the fast paced business community. Her recent trip to Hong Kong highlighted how this technology is becoming the ‘norm’ and ponders whether we are still being security conscious in this new business world. 

I’m definitely not the most tech-savvy person especially when it comes to knowing the latest developments and trends, not in my household or work or social circle. But like many of us, we’re forced by innovation, creativity, intelligence and market trends to keep up with the pace if we are to survive and stay competitive in this modern technological environment.

Technology has shaped, and continues to shape, the way we do business. The use of emails, text messages, video conferencing, Skype, live chats and the like are just part of the “norm”.  In recent years, the increased use of “Apps” has added another level of complication, or is it a revolutionary convenience for our business dealings?

Often now people have their heads down on the street, bus, train, ferry, restaurants or just queuing. It doesn’t matter what age, whether you are 5 or 70, students, working or non-working, families, retirees, there are Apps which are suited to you.

Many of us would have heard of Apps like “whatsapp”, “WeChat”, “LINE” – amongst the most popular communication Apps (or as the Chinese would refer to, the “A” “P””P”) used in particular by the Asian community. What was originally designed to be social mobile messaging tools, I believe, have found their way into our business dealings.

In recent years, I have occasionally used text messages and mobile messaging Apps to communicate with my business clients, however, they were almost the last resort or necessitated by the urgent responses/instant attention required to progress with a certain matter. My recent trip to Hong Kong though, has confirmed that in fact this is the way that most people communicate now, whether for business or personal matters.

For those of us who have been to Hong Kong you would no doubt associate the city with its fast pace setting – this is a city where people are literally everywhere, and where the MTR (subway) stations are often packed at midnight. Put aside the association with food, shopping and its vibrant night life, it’s one of the most westernised, commercialised, South East Asian cities. My observation, as soon as I landed, is that there are no shortages of Smartphone or mobile Apps being used all around me!

In talking to people who work and live in Hong Kong, it’s clear that the use of Whatsapp or WeChat is “expected” of everyone. Not only is it a social media and messaging tool which allows business networking and promotion, it can often be the quickest, easiest and effective way to get a response or a decision made. I have learnt that (at least for SME businesses anyway), Whatsapp or WeChat are often used in business negotiation and even discussions on employment matters. I have seen them used on the run for intense discussions for business proposals, or just when you “don’t feel like having a face-to-face discussion” on pay reviews and appraisals! There is no holding back in messaging your boss or client or suppliers and anticipating an almost instant response or acknowledgement. It seems there is no hierarchy or much emphasis on formality anymore. The availability of these Apps at our finger tips means that they can be used on the go and allow us to “clear a few things” in between meetings, stuck in traffic or on the way to school pickups. As I expanded my horizons in Hong Kong and spoke to a few more people, it became apparent that this method of communication is also very common and widely accepted in the Middle East and other locations especially when internet connections are not reliable. Sending short messages or use of voice or video messaging via one of these Apps has become a more reliable alternative then emails and video conferencing for business conversations.

So if this is the way technology is trending us in business dealings, where does it leave us with data integrity, security and quality control?  Or do they not matter as much anymore?

In my opinion, I think technology is requiring us to be more self-disciplined on our acts as the speed of data flow means there are potentially multiplying damaging effects if we are not careful in what we say or share – and how quickly. Business etiquette also appears to be less important as often messages are direct and brief, without necessarily having the full sentences or correct grammar or spell-checker!

Although we may be caught up with the latest App/technology usages, are we up to speed with our document management system, data integrity and security? Is your business information secure? Have you got adequate measures to ensure your data is protected and all communications captured? It might be time to think again to make sure that your business is ready for this fast-paced environment – it certainly demands a continuous review and recognition of upgrade requirements.

I wonder if business dealings in Australia are trending the same way as in these other locations?

If the stress of selling or buying a $2m plus property isnt enough…dont forget about informing the Tax Office

expsnsive house

If you are thinking about selling Australian property valued at $2m or more, your ever growing To Do list should include this item: “Get Tax Office clearance certificate”.

Sweeping tax law changes from 1 July 2016 mean that unless you get special tax clearance as a “resident”, the purchaser of your property must deduct 10% from the purchase price and pay that amount to the Australian Taxation Office (ATO).

Put simply, affected ‘soon to be property vendors’ who are expecting to receive 100% of the sales proceeds (ignoring any bank debt) will have to enter into a formal ATO “vetting” process in order to prove their residency status.

The obligation to withhold only applies for transactions entered into post 1 July 2016. This means that property deals executed before 1 July but which do not settle until afterwards will not be caught by these rules.

While the broad objective of these requirements appears to be aimed at combating perceived tax avoidance by foreign vendors of Aussie property, the legislation is designed in such a way to capture all sales of Australian property interests valued at $2m or more.

In other words, the default position from the start of the next financial year is that you will effectively be classified as an overseas investor unless you provide the purchaser with an ATO clearance certificate. Even if you were born and raised in Australia and continue to live here, you’ll still need the blessing of the tax office to ensure that 100% of the sales proceeds are available to you.  Notably, the fact that the purchaser knows the vendor to be a resident is irrelevant.

The clearance certificate comprises a six page form and is now available to download from the ATO website. Fortunately, there is no fee for clearance certificate applications. Clearance certificates are valid for 12 months from issue, and must be valid at the time it is made available to the buyer.  For applications submitted online, most certificates will be issued electronically within a few days. Paper applications may take up to 2–4 weeks to process.

Penalties for purchasers who don’t withhold the required amount are severe, basically 100% of the amount not remitted to the ATO ie. a further 10% of the purchase price.

Some transactions are excluded from these rules, namely property valued at less than $2m and transactions involving company title interests valued at less than $2m and transactions that are already subject to an existing ATO withholding arrangement.

The legislation incorporates a variation measure (similar to PAYG on salary and wages variation) which if approved by the ATO would enable the transaction to be completed without having to withhold.  Reasons the ATO may permit variation would include that no tax liability will arise or that there are multiple vendors with only one foreign resident.

Importantly, the only way vendors can get a refund for any amounts paid to the ATO is by lodging a tax return. This could prove problematic for some particularly those vendors who are not up to speed with their annual tax return filings or whose reported levels of taxable income raise speculation about the affordability of the property being sold.

It will be interesting to see if the Government increases the threshold beyond $2m in years to come as rising property prices will inevitably bring more people into the system.

An important implication under these rules is early ATO engagement…one wonders how this might ultimately play out from an ATO compliance and audit perspective.

Why Small Business Owners Should Make and Keep These New Year’s Tax Resolutions

To view article please click here.

Are you an importer or exporter with more than 50 transactions each year?

Empty road and containers in harbor at sunset

Import and/or export trade reviews

In today’s financial environment, cost minimisation is a key driver in the logistical cost structure of each good’s cost of goods calculation. Costs associated with the importation of goods are variable, not fixed. It is therefore essential that such variable costs are minimised. Additionally, administrative penalties arising from compliance errors (e.g. Australian Border Force (ABF) – previously Customs, Department of Agriculture and the ATO) can impact on product costs long after the relevant goods have been imported and on-sold.

The Prosperity Advisers customs and trade review service offering, in conjunction with Trade Consultants, is relevant for any importer or exporter with more than 50 transactions each year. Whether you pay import duty or not, cost and charge savings are able to be identified when there are sufficient transactions each year.

We can help your business save on cross border regulatory costs, customs duty and other related taxes, identify and mitigate risks, and develop a compliance framework for the future.

Our approach

We use a multi-phased approach to border compliance. You can achieve significant cost savings with limited input.

Phase One – To determine whether there are sufficient opportunities to proceed to our savings and risk review, we typically undertake a high level review so we can quickly identify potential target areas for a more detailed savings and risk review. This involves only a visual examination of a previous import/export activity period (up to four years) and reporting back to you on what we see.

Phase Two – Once it is determined that a detailed savings and risk review is warranted, we analyse the data that you (or your customs broker) have declared to the ABF at the time of import or export over the previous four years. We typically review all the key factors that affect the customs duty and GST payments made by your business, including:

  • Tariff classification of your imported or exported goods
  • Use of import customs duty concessions (e.g. TCOs or the Enhanced Project By-law Scheme)
  • Use of export incentives and concessions (e.g. duty drawback or Tradex schemes)
  • Customs valuation, particularly for multinational companies and branded goods
  • The correct identification of the country of origin and use of preferences including Free Trade Agreements
  • Purchase and/or sales contracts

Phase Three – We review your purchase/order cycle, including relevant purchase orders and documentation relating to the physical receipt of goods into store. From such a review, we are better able to provide you with systems improvement advice.

Recent results

For a client in the furnishing industry, more than AU$184,000 was identified in overpaid GST plus more than AU$25,000 in overpaid customs duty. Demurrage charges and excess freight
charges were also identified requiring amended systems controls.

For another importer in the trucking spare parts and components industry, more than AU$1 million in overpaid GST was identified plus AU$15,000 in overpaid customs duty. Demurrage charges and excess freight charges were also identified requiring amended systems controls. Significant savings from using a different supply chain function are
currently being negotiated.

Another client was found to be using more than thirty different customs brokers to make binding declarations to Customs. Over 30% of the client’s importations did not gain release from Customs and Agriculture within a normal processing time, potentially incurring material additional storage charges. The client had insufficient documentation available at the time of clearance to allow proper declarations to be made. It purchased over 30% of its importations from related overseas companies, none of which were declared to Customs as
related, thereby potentially exposing it to multiple repetitive penalties. The client was unaware of any of these exposures to administrative penalties and imbedded costs.

Fees

We are offering “Phase one” at no cost. It is simple to commence “Phase one” – you will only need to provide us with a signed letter of authorisation to the ABF for us to start our review.

Before undertaking “Phase two” and “Phase three”, we will provide and agree a fee quote with you.

Contact your adviser for more information.

Prosperity helps clients make sense of data

iStock_000014169773Medium

Below is an excerpt of CEO Allan McKeown’s comment in an article published by the Australian Financial Review 17 June 2015 by Agnes King

Technology is completely changing the face of accountancy workplaces.

Prosperity Advisers wants to be on the front end of this trend.

It embarked on a move to cloud-based accounting software some years ago, but has since expanded that initiative into a client-facing service, called Prosperity Predict, helping clients make sense of the reams of data they generate in real time.

The firm has half a dozen pilots in train with clients in retail and medical services that revolve around benchmarking and dashboards.

“The intepretation of this data is the value add, that’s the bit accountants can do,” Prosperity chief exceutive Allan McKeown said.

He said the desire to interpret and make sense of data – and to benchmark against competitors – is a gap in the market. “If we don’t fill it, someone else will,” Mr McKeown said.

Prosperity has recruited the aid of a young tech entrepreneur, Mat Vandervoort, to steer its Prosperity Predict program.

“Our aim is to get where clients will need us to be in five years time rather than a slight improvement on last year’s model,” Mr McKeown said.

“Input from younger, edgier team members like Mat give us a greater chance of success in being there.”

To view full original article click here

 

Create a financial roadmap for 2015

As we bounce back after the Christmas break it’s timely to spend a few moments to think about how we can make sure 2015 is more financially rewarding than this year.

Everyone’s individual circumstances will be different and our goals will be affected by our particular life stage, be it an early 20s accumulator or a retiree. Nevertheless the opportunities that may be available to you in the fields of finance and investment are both varied and complex.

Like any project such as getting fit or learning a hobby, there is an important framework that is followed by those who get results.

Firstly, it’s important to start with the end in mind and understand your financial goals whatever they may be. They may be challenging longer term ones such as retiring debt free with $1 million in investable assets or equally worthwhile shorter term targets like reducing your mortgage by an extra $50k this year.

This isn’t novel advice but most Australians don’t follow it. Be as specific and realistic as possible.

The second important step is to get some assistance. Money management is now a team sport and some initial advice can ensure you have the right goals and understand the journey necessary to achieve them. Importantly, an adviser or a friend with similar financial goals can also act as an accountability partner and help you to measure and review your plan.

The third piece is to actually design your plan. It may be a complex set of professional recommendations or on a simpler level setting out an action list including the five most important things you need to do in the next year to move closer towards your stated financial goal. While the five things will all be important, identifying the top priority will help you maintain your focus.

Finally, it will be important to set up a review and measurement process with your adviser or accountability buddy that will not only keep you on track but will help you maintain your momentum by gaining a sense of progress.

Even professionals need to have a financial plan. For what it’s worth here are my top 5 for 2015.

  1. Reduce non deductible debt. I am undertaking some major renovations on a new home so after a long period of having only tax deductible debt, I now have a large ‘bad debt’ loan that needs attention.
  2.  Improve the returns in my SMSF. Due to inattention and some conservatism I have more cash on deposit in the fund than desirable. I am in the process of selecting some investments that will increase the yield at an acceptable risk level.
  3. Diversify my assets. I have some investments that it may be opportune to reduce or cash out of entirely to take advantage of some potentially higher growth opportunities.
  4. Structure my affairs for better tax efficiency. Tax laws are continually changing and I am aware of some opportunities that need examining that may legally reduce my overall tax impost.
  5. Improve the discipline in regularly reviewing and measuring results and progress. EVERYONE needs an accountability buddy or coach.

Share scheme changes herald clever country thinking

A significant concession, and improvement, was announced to the Employee Share Scheme rules on Tuesday by the Federal Government. Employee shares schemes in emerging businesses had faded from relevance over the last 5 years following the implementation by the former Government in 2009 of measures that had the broad effect of taxing any discount on shares or options issued upfront to employees of most businesses.

Taxation occurred at a time prior to the employee shareholder having any cash flow with which to pay their tax bill – clearly a killer consequence. This removed the major form of employee remuneration that emerging businesses could use as an incentive to employees without affecting free cash flow. It also led to clumsy arrangements where a company would have to “loan” the employee the value of their shares to prevent then obtaining any taxable benefit.

The Tax Office become notorious for 20:20 hindsight valuation reviews which left employees unwilling to expose themselves. Many employees just would not buy the idea of their employer becoming a major creditor. What if the shares tanked? The employee could be stuck with repayment of a loan without any benefit.

The shareholder/ employee loan created a variety of difficulties ranging from potential requirements for the employee to use real cash flow to repay the loan under statutory “Division 7A” private shareholder rules. In some cases the loan became a problem for the employer who was required to manage it under the FBT regime. An employee might make a long term commitment to a company and be subject to a vesting period of 3-5 years before they became entitled to deal with the shares. However when this period expired, the employee would be obligated to “cash-out” their loan, often by taking a fully taxable one-off bonus.  This one off bonus often distorted the employee’s real earning position over their period of employment and forced them to be taxed on this component at a tax rate which was unfairly high.

Phasing issues emerged with the 50% CGT discount which generally applies to long term shareholdings. Deficiencies in these rules became so profound for early stage IT companies it became part of the reason emerging businesses began to leave the country. Most notably the IT success story Atlassian. The new rules remove some of the obstacles.

Actions to consider

  • If you presently have any form of share or rights scheme in place, it is likely that it can be “rebooted” under the new rules to drive significantly improved outcomes to employees.
  • Remuneration contracts currently being negotiated should be reviewed for the effect of the new rules.  The rules you thought applied when you inked the deal may not apply for the term of the arrangement.
  • Share schemes are not just for IT businesses.  If you have a SME business where you want to incentivise and tie employees into the growth of your business without a cash flow impact on your businesses – there is no better incentive. Costs of administration have dropped significantly in recent years.
  • If you are an SME owned “stuck” with the problem of how to exit the business and collateralise ownership interests into cash, employee share schemes can be a key tool in opening a dialogue and pathway to business succession.
  • Employee share schemes also have relevance to family businesses where they can be used as a tool to incentivise high performance in the next generation family owners. They are a form of participation which is not just a “gift”. They can be a key tool to assist with perceptions of fairness between family members who are “in the business” and those that are not.

A summary of key points in the new rules

  • Discounted options will generally be taxed when they are exercised (converted to shares), rather than when the employee receives the options.
  • Shares provided at a small discount by eligible start-up companies to will not be subject to up-front taxation, if held for three years. Options under certain conditions will have taxation deferred until sale.
  • Small discounts will be exempt from tax
    • The maximum time for tax deferral is lifted from seven years to 15 years.
  • The existing $1,000 up-front tax concession for employees who earn less than $180,000 per year will be retained.
  • The rules are expected to become effective from 1 July 2015.  Transitional arrangements are presently unclear.

Forecasting tools for every SME business toolbox

Most Small and Medium Enterprises (SME) have an accounting software package, engage a book-keeper to balance the books, have an accountant prepare year-end financials and tax returns, and will retain boxes full of source documents for as long as they are required to do so1.  Often the compliance burden is seen as exactly that, a burden that while relevant to understanding their position, performance and how much tax they need to pay, is not terribly helpful as a management tool to manage and drive their business forward.  But this need not be the case.

There are a lot of things that differentiate a poor business from a good one.  From a financial perspective, those businesses that closely monitor and respond to changes in their position, performance and liquidity (cash resources), are likely to run operationally better and be in a stronger position to develop and implement more effective growth strategies.

This blog explores at a handful of financial management tools that will help the typical SME business manage its day-to-day operations and help shape its strategy.

The three-way forecast

Most businesses will set an annual P&L budget built from a combination of previous years results, the owner’s growth aspirations, market demand and other economic factors, and sometimes with little or no science at all.  This is an important business discipline.

The process requires you to develop a series of assumptions to drive each individual line of forecast income and expenditure on a monthly basis.  Some assumptions are easier to formulate than others as they may be based on the fixed price nature of items of expenditure, while others will require more subjectivity and ultimately be a sensible estimate.  To formulate assumptions you need to look at:

  • your previous results – often this will be the best indication of what you have demonstrated you can deliver
  • the pricing and length of current contracts both with customers and suppliers
  • interest rate forecasts for variable debt
  • annual rental increases stipulated in your lease
  • economic factors including your industry’s growth
  • your current sales pipeline can help some businesses more accurately forecast – particularly in the earlier months
  • if you are a services business consider your capacity to deliver – make sure you have enough people with the right amount of time available to meet your budget
  • if you are a retailer, wholesaler or manufacturer consider your available inventory levels and pricing
  • think about your phasing of income and expenditure over the year and the seasonality relevant to your business

Once you have formulated your P&L budget you have a realistic base case operating scenario for the business to work toward achieving.  Now it is time for the prudent to think about the things that if they were to occur would have the most material impact (positively or negatively) on your business’ ability to deliver its forecast.  This is known as undertaking a sensitivity analysis to your forecast P&L so you can try to avoid negative scenarios and work towards achieving the positive outcomes..

It is once management have a forecast to work towards that for many SMEs the planning stops.  This is an unfortunate trap that far too many businesses get caught in and it is not until the profits are delivered at expectations but the business has run out of cash, that management realise they may have a problem on their hands.  Remember that an insolvent business is one that cannot afford to pay its debts as and when they fall due not necessarily an unprofitable business – although related, distinctively different and important to understand.  This is why you need to take your P&L forecast and ensure it interacts with a forecast balance sheet and cash flow statement.

Getting a P&L, a balance sheet and a cash flow forecast to talk to each other and reconcile can be tricky, but essentially you need to:

  • take your opening balance sheet position from your prior years financial results and your newly developed P&L forecast
  • from the P&L forecast develop timing assumptions for the payment of creditors, receipts from debtors and the take-up of inventory.  Often debtor days, creditor days and inventory days sourced from previous results can be helpful in determining realistic payment cycles.  You will also need to unwind the opening balances on your balance sheet (ie. you need to pay creditors from the prior period in the current period).  These assumptions are important and will have a large impact on your cash position
  • link non-cash items of expenditure to the relevant asset on the balance sheet (ie. depreciation and amortisation).  This wont impact your cash position
  • consider the amortisation of any loans required over the period (this will reduce the loan and reduce cash)
  • consider items of capital expenditure not considered in the P&L and the cash outlays required

You now have a P&L forecast, a balance sheet forecast and a cash flow forecast.  The cash balance in the balance sheet should reconcile to the cash flow forecast and the net profit on the P&L should reconcile to the increase in equity in the balance sheet.

Now it is important to keep yourself accountable.  Prepare a set of management accounts every month and compare your actual results to your forecast results.  Use this to identify and respond to trends.  If you find that you are falling well short of your forecast, you can always re-forecast.  The more accurate the forecast you are working to, the more control of your financial position you will have.

The short term cash flow

The short term cash flow is a tool to help manage the intra-month cash position of the business.  It will be much more relevant for cash and working capital intensive businesses than others, but every business can benefit from a more detailed understanding of their short term cash position.  Short term cash flow forecasts are often stand alone tools (without the need to link them to P&L’s and balance sheets) that involve more precise assumptions over a 13 week period.  You are always going to have more certainty over your debtor collections next month than you will over your collections in 12 months time.  Depending on the business, the short term cash flow will forecast the receipts and payments on either a weekly or daily basis (use your judgement).  The tool should be used by management to identify and remedy any intra-month liquidity constraints identified by the forecast.  Unlike longer term forecasts that will often be set in place for the year, the short term cash flow needs to be a dynamic tool that should be updated either daily or weekly to track the forecast cash position in as close to real time as possible.

The return on investment consideration

Entrepreneurial small business owners often have the ability to identify an income producing asset and quickly attribute a value to purchase the asset and start driving growth.  This is great when the income associated with the acquisition, when adjusted for the time value of money, exceeds the expenditure following as short as possible “pay-back” period but can be troublesome if things don’t work out exactly how they thought.  An SME owner should consider the following before committing to outlaying new capital on an income-producing asset:

  • What are the cash flows (not profits) that the asset is forecast to generate once operational?
  • What are the sensitivities to those cash flows?
  • What are all the costs associated with the acquisition (consider professional fees, assessments, commissioning, decommissioning, training etc)?
  • What is the rate of return required (a ten year government bond returns 3.45%2 relatively risk free) or if debt funded the cost of funding?
  • What is the pay-back period for the asset – how long will it take to pay back the outlay before surplus cash flows are produced?
  • How do the sensitivities impact the length of the pay-back period?

 

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As a chartered accountant and business advisor for over ten years, I have advised a number of distressed businesses on implementing turn-around strategies.  A common theme with all clients of that nature is poor viability around their forecast position (or no forecasting at all).  A small investment in developing and entrenching these tools within your business can accelerate your businesses growth.  At Prosperity Advisers, we can work with you to develop a three-way forecast, implement a short term cash flow forecast and consider your return on proposed investments.  Call us for an obligation free discussion.

 

Sources:

  1. Seven years for a company per the Corporations Act 2001 and generally five years for small business taxpayers per the Income Tax Assessment Act 1936.
  2. As at 8 September 2014

 

 

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.