Tax planning strategies
Business income and expenses
The timing and recognition requirements for income and expenses can have significant tax implications. If you are expecting a higher taxable income during the 2016/17 financial year compared to that in 2017/18 you may want to consider deferring income until after 30 June 2017. For most, income becomes taxable when the invoice has been issued. However, for those operating on a cash basis income will be taxed on receipt.
Getting a tax deduction for the wear and tear and loss of value on business assets that are used to derive assessable income is a common tax deduction. To make sure you are taking advantage of every tax deduction it is prudent to review your enterprise’s depreciation schedule. Any number of opportunities can be discovered, including the ability to scrap and write-off amounts of redundant assets, reassess remaining effective lives, or allocate assets to a low-value pool. This is important for the current and following tax year as the $20,000 instant asset write-off has been extended until 30 June 2018. It will thereafter revert to $1,000.
Trading stock valuation is often an important area for consideration. By selecting the lower figure, of cost or market value, it may be possible to postpone gains until the product is sold. If you are expecting to make a tax loss for 2016/17, or your income is expected to be significantly higher during 2017/18 your preferred valuation method may change. And remember, each item of trading stock can be valued differently for tax
Businesses that account for tax on an accruals basis are entitled to claim a tax deduction for an expense in the year in which the business has committed to the liability. If you have committed to pay employee or director end-of-year bonuses, the accrued expense can be claimed as a tax deduction even though it is physically paid in next financial year. For a company to claim a deduction without physically paying the money, the company must, before the end of the financial year, commit to the payment of a specific amount. The amount need not be quantified but the calculation methodology must be fixed (for example, a formula based on profits or revenue amounts yet to be finalised). The commitment should be documented (such as minutes of a directors’ meeting).
There may be a case to offset prior-year losses against current-year income; however for companies and trusts the ability to do so can be subject to certain conditions (the carry forward loss rules). These include the continuity of ownership test and same business test for a company.
If you are expecting to have a lower taxable income during the 2017/18 financial year (thereby falling into a lower tax bracket) you may want to defer income until after 30 June 2017. One method is to arrange for term deposits to mature on a set date in the next financial year. For couples and joint tenants it may be advantageous to purchase income producing property in the name of the partner with the lower income. Assets that are negatively geared should be held in the partner’s name with the higher taxable income. Making any deductable donations in the name of the partner with the higher taxable income can also help reduce the overall tax payable.
Timing of capital gains
Capital losses can be offset against, and therefore reduce, taxable capital gains that you may make on selling other assets. So if you are due to sell some assets that will realise a capital loss, try to crystallise these losses before June 30. If
Capital losses can be offset against, and therefore reduce, taxable capital gains that you may make on selling other assets. So if you are due to sell some assets that will realise a capital loss, try to crystallise these losses before June 30. If however the sale will produce a capital gain, delay crystallising this gain until the 2017/18 income year so that you will have a full fiscal year to get in place options to offset that gain with capital loses or revenue expenses. It may be worthwhile for you to sell an underperforming asset, and realise a loss, if this suits your Capital Gains Tax (CGT) circumstances. And remember, as a general rule the “CGT event” for a disposal occurs at contract date. This could help in your planning if you sell an asset where settlement and/or payment takes place in 2017/18 but the contract is executed in 2016/17. In this scenario, for tax purposes the capital gain would be dealt with in the 2016/17 year.
From 1 July 2016 only the out-of-pocket medical expenses relating to disability aids, attendant care and aged care will be eligible to claim for the Net Medical Expenses Tax Offset.
Those making repayments towards their HECS and HELP debts will no longer receive the 10% upfront payment discount or the 5% HELP voluntary repayment bonus.
If you have resided outside of Australia for an extended period of time we may need to review your residency status. Foreign residents visiting or working in Australia may also be regarded as Australian residents for tax purposes. From 1 January 2016 all taxpayers with HELP and TLS debts that move overseas for longer than 6 months will be required to repay HELP and TLS debts in the same manner as Australian residents.
Companies with an annual turnover of less than $10 million (previously $2 million) will now fall into the small business category. For these companies, the reduced tax rate of 27.5% will apply from 1.