One reporting season over and another looms! Review now to make the most of tax benefits.
Whether you’re running a business, a super fund or both, the clock is ticking towards the end of the financial year. Taking time to check through a few critical items now can make a big difference to tax deductibility and maximisation of superannuation benefits for this and future years.
1. Write off any bad debts through the accounting software before year end
To be tax deductible the debt must be bad, not merely doubtful and must have been previously included in assessable income. If not processed through the accounts by year end, written evidence of the decision to write off the debt must be in place before year end (e.g. minutes of a meeting pre-year end).
Action: review debtor reports and identify any debt likely to be irrecoverable.
2. Instant write off for small businesses
An instant write off is available for any assets purchased at a cost of less than $20,000, excluding GST. The purchase by a small business of an eligible asset by 30 June 2017 will give rise to a full tax deduction in the 2017 year. Most cars, machinery and equipment will be eligible, however a small number of assets will not be eligible for this immediate write-off, such as horticultural plants, capital works and in-house software. This cost limit includes the cost of the asset, together with all associated costs such as freight, duties and installation. A small business is an entity that is operating a business with an annual turnover of less than $10 million (when aggregated with the turnover of associated entities).
Action: without stretching cash flow, consider planned purchases that may be brought forward by 30 June.
3. Closing stock levels affect cost of goods
Obsolete stock may be scrapped, which could reduce your profit and therefore your tax liability.
Action: make sure you complete a year end stock-take to ensure your 2017 profit recorded in your accounts is accurate.
Writing off obsolete plant and equipment will increase deductions.
Action: review your latest fixed asset depreciation schedule. This can be done post 30 June 2017 and included in the accounts for the end of year.
5. Motor Vehicle Expenses
If you claim tax deductions for motor vehicle expenses, you should note your odometer records at 30 June each year so that you can calculate the kilometres travelled. Maintaining a logbook of work related use of your vehicle will usually maximise the tax deduction you can claim. If your current logbook is 5 years old you will need a new one for a continuous 12 week period. If you do not have a valid logbook, you will only be able to claim a work-related deduction based on kilometres travelled up to a maximum of 5,000 at $0.66 per kilometre. This caps the deduction at $3,300. If you use your car for work and do not have a logbook, you could be losing out on a valuable tax deduction. The other 2 methods (12% of the value of the car and 33% of operating costs) previously available to calculate the deduction without the use of a logbook have been removed.
Action: make sure your motor vehicle log books or work related travel diary are up to date and less than 5 years old to substantiate business / work-related expense deductions.
6. Superannuation Contributions
SGC contributions are only deductible for the 2017 year if they are received into the respective funds by June 30. If they’re accrued and waiting to be paid in July, they become a 2018 deduction.
Action: establish if this payment can be made in time without compromising cash flow.
For Property Investors
If you have not had a review done since you purchased your business/investment property, consider arranging for a qualified professional to review your property to identify any depreciating assets and/or any construction costs (generally post Sep 1987) qualifying for capital works deduction. This review could result in a significant tax deduction and the cost of the review itself is tax deductible. You can also revise tax returns for the past 2 or 4 years to claim any deductions identified which were not previously claimed, if the expected refund warrants it.
Action: arrange a quantity surveyors report, if you have not done one before.
Sale of Property to a non-resident
Note: From 1 July 2016 for any contracts entered into for the purchase of certain Australian assets (mainly real property) from a non-Australian resident entity (e.g. individual or company), the purchaser is obliged to pay 10% of the first element of the cost base, usually the purchase price, to the ATO. This may be withheld from the purchase price but is not required to be. This obligation is imposed when the purchaser knows or has reason to believe the vendor is a foreign resident.
For Superannuation Funds
As of 1 July 2017, individuals with a superannuation balance of more than $1.6m will no longer be able to make non-concessional contributions (this cap is indexed in $100k instalments in line with CPI, meaning it will be some years before it is increased). The individual’s account balance will be tested at 30 June of the previous financial year. Those with account balances close to $1.6 million would only be able to make use of the bring-forward rule to the extent that the sum of the fund balance, the current year contribution and each brought forward contribution is less than $1.6 million. The threshold amount will be linked to the transfer cap amount relating to amounts being transferred to pension phase.
Action: If you are over or close to the cap, considering making non-concessional contributions prior to 30 June whilst you are able to do so.
Lowering the concessional contributions cap to $25,000 per year starting 1st July 2017. Currently the cap is $30,000 per year if under 50 and $35,000 per year for those over 50 and the Government has previously announced the proposal to cut this to $25,000 for all from 1 July 2017, which continues to be the case. However, commencing 1 July 2018, you will be able to “carry forward” up to five years of your unused concessional contributions cap. This will be limited to those with superannuation balances less than $500,000 just before the beginning of the financial year.
Action: Review salary sacrifice arrangements to ensure compliance with the new $25,000 cap (which includes superannuation guarantee payments). Also consider maximising current year contributions under the higher cap if not already doing so.
Lowering the non-concessional contributions cap to $100,000 p.a. from $180,000 p.a. Individuals under the age of 65 will be able to continue using the bring-forward rule of two years. This means they can currently contribute $540,000 each
Action: Consider making large non-concessional contributions before 30 June 2017 should your position allow.
Removal of the tax exemption on pension funds supporting a Transition to Retirement Pension. Currently all earnings within Transition to Retirement pension are exempt from tax. This exemption will be removed and earning will be taxed at the standard 15% and capital gains at 10% – 15% (depending on how long the asset is held for).
Action: Review appropriateness of any ‘Transition to Retirement’ pension strategy used for generating tax saving from within super. These strategies also need to be reviewed in light of the changes to the concessional contributions cap.
Introduction of a $1.6m ‘transfer balance cap’ for each individual on assets that can be transferred into the tax-free pension phase. Where an individual has more than $1.6m, they will need to roll these funds back to accumulation phase. Earnings will then be taxed at the standard 15% and capital gains at 10% – 15% (depending on how long the asset is held for). There are relief provisions for CGT on assets being transferred into the accumulation phase which will apply on a case by case basis.
Action: Review any pension balances over the cap amount that will need to be transferred back into accumulation phase. Unrealised capital gains will also need to be assessed as to whether to apply the relief provisions.
Note: There are several other measures being put in place. These are summarised on the ATO website https://www.ato.gov.au/Individuals/Super/Super-changes/
These include changes to the spouse contribution offset, additional 15% contributions tax levied on those with salaries over $250,000 p.a. and changes to how concessional contributions can be made.
Announced in the 2017-18 Budget – measures yet to be passed into law:-
- From 1 July 2019, the Medicare levy will be increased from 2% to 2.5% of taxable income.
- The $20,000 instant asset write-off for small businesses will be extended by 12 months to 30 June 2018, for businesses with a turnover less than $10m.
- Deductions for travel expenses relating to inspecting, maintaining or collecting rent for residential rental properties will not be allowed from 1 July 2017.
- Plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017.
- New repayment thresholds and rates under the higher education loan program (HELP) will be introduced from 1 July 2018.
- From budget night, CGT main resident exemption will be removed for foreign and temporary residents.
- From 1 July 2018, a person aged 65 or over can contribute up to $300,000 from the proceeds of the sale of their home as a non-concessional superannuation contribution into superannuation.
- From 1 July 2017, the use of limited recourse borrowing arrangements will be included in a member’s total superannuation balance and transfer balance cap.