BRM Holdich E-News
7 June 2012
Tax planning involves arranging the taxpayer’s affairs in order to comply with the income tax legislation at the lowest possible cost. As such, tax planning is contrasted from tax avoidance, which is the entering into a scheme in order to obtain a tax benefit and can result in significant penalties.
As 30 June approaches taxpayers should engage in tax planning, many strategies require action prior to 30 June in order to be effective. The items in the following sections are by no means exhaustive but provide a number of issues for consideration.
The timing of derivation of income and incurring of expenses may impact the timing of income tax liabilities. Further, such timing may also impact the quantum of tax liabilities where income tax rates and / or the level of taxable income differ between financial years. In addition, changes to existing, or the introduction of new, legislation may also impact.
In particular, the passing of the Carbon Scheme Bills sees changes to the individual income tax rates and thresholds and new small business depreciation rules effective 1 July 2012, refer to our recent Federal Budget Newsletter for more information.
Further, the passing of the Private Health Insurance Bills with effect from 1 July 2012 may impact the decision to take or not take private health insurance cover, and prepaying premiums may be of benefit where available.
Finally, changes to superannuation legislation may impact planning strategies, particularly for high income earners and those aged 50 years and over.
Please contact us should you wish to discuss any of these items.
Income is assessable when derived, the timing of derivation will depend on if the business applies the cash or accrual basis. Under the cash basis, income is generally derived when it is received, whereas under the accruals basis income is generally derived when a recoverable debt is created such that the taxpayer is not obliged to take any further steps before becoming entitled to payment. A non-business taxpayers’ income is generally assessable when received.
In any event, tax planning should consider the timing of deriving income.
- Ensure that any income received in advance is identified as this may not be assessable until the services are provided. For this principle to apply, the accounting records must classify the unearned income separately from the income already earned.
- Taxpayers who provide professional services may consider rendering invoices after 30 June. Work in progress of such businesses is not included in assessable income.
- Consider the timing of asset disposals before or after 30 June in terms of applicable tax rates, realised capital gains and losses and the availability of any capital gains tax concessions, such as the 50% discount, small business CGT concessions or rollover relief. However, be mindful of the tax office’s negative view of ‘wash sales’ where an asset is sold and then reacquired in order to realise a capital loss.
Expenses are deductible when the expense has been incurred, this is generally defined as when there is definite commitment to the expense even if no actual payment has occurred. However, small business entities that continue to utilise the cash accounting rules under the former simplified tax system can only deduct an outgoing when it is paid.
Therefore tax planning should consider the timing of expenses being incurred.
- Debtor ledgers should be reviewed prior to 30 June with amounts considered bad written off. Only debts that are bad and written off at 30 June can be claimed, a provision for doubtful debts is not deductible. However, ‘writing off’ does include a board authorisation and financial controller recommendation of the bad debt prior to 30 June even if the physical writing off occurs later. Note that before the debt can be considered bad appropriate steps must have been taken to attempt to collect the debt. Such steps may include contacting the debtor, issuing reminder notices or taking more formal action. Also note that a deduction can be available for the partial write off of a bad debt.
- A deduction may be available for obsolete stock, stock should be reviewed and obsolete items written off or reduced in value where appropriate. Relevant considerations include the stock being out of use, out of date, unfashionable or outmoded.
- Ensure that all incurred expenses, including trade creditors, are processed reflecting the appropriate timing. Further, planned deductible expenditure could be brought forward and incurred in the current year.
- Bonuses may also be deductible if they are incurred by 30 June. For this to be the case the employer must be definitely committed to the bonus, the bonus cannot be subject to any later discretion or review. Further, the amount must be determined or be able to be calculated by 30 June, even if the actual calculation happens at a later date.
- Cashflow permitting, consider prepaying expenditure where an immediate income tax deduction is available. Such expenditure includes salary or wages and expenditure that is less than $1,000. Investors may consider prepaying interest on investment loans. Further, small business entities may claim a deduction for expenditure that satisfies the 12 month prepayment rule (the relevant service period does not exceed 12 months and ends in the next financial year).
- Superannuation Guarantee Levy amounts should be paid by 30 June, only contributions received by the relevant superannuation fund by 30 June are tax deductible in that year. The accrual of an incurred superannuation guarantee liability is not sufficient to qualify for a deduction.
- Review asset registers to identify any low cost assets eligible for immediate write off, opportunities to pool assets achieving accelerated depreciation and assets no longer held which should be written off.
- A deduction for personal superannuation contributions may be available where less than 10% of assessable income is received from activities that are conducted as an employee for superannuation guarantee purposes. Note that assessable income includes capital gains, so this test may be passed in years where a capital gain is realised. Note that the concessional contributions cap is $25,000 ($50,000 for those aged 50 to 74), and this cap is inclusive of employer contributions. Similar to superannuation guarantee amounts, only contributions received by the relevant superannuation fund by 30 June can be claimed as a tax deduction in that year.
- Non-concessional contributions as part of a superannuation strategy should also be received by the relevant superannuation fund by 30 June. Note that the non-concessional contributions cap is $150,000, although a bring-forward may be available.
- The Federal Budget included the proposal to from 1 July double the superannuation contributions tax for taxpayers whose income is above $300,000. This therefore effectively reduces the superannuation tax concession for such taxpayers from 30% to 15%, so it may be beneficial for such taxpayers to maximise their concessional contributions this financial year.
- The Federal Budget also included deferral of the proposed higher concessional superannuation contributions cap for those aged 50 and over with superannuation balances below $500,000 to 1 July 2014. The existing higher cap ceases on 30 June 2012, so taxpayers aged 50 and over will only be able to make concessional superannuation contributions up to $25,000 for the years ended 30 June 2013 and 2014, the same limit as for all other taxpayers. This deferral will potentially impact salary sacrificing arrangements, personal superannuation contributions and transition to retirement pension strategies for effected taxpayers, so these strategies should be reviewed and current year concessional superannuation contributions maximised where appropriate by 30 June.
- Self Managed Superannuation Funds that are in ‘pension mode’ should ensure that the 2012 minimum pension amounts are paid to members by 30 June 2012. Please contact us if in doubt as to what payments are required.
- Low-income earners (including self-employed persons) may consider making a personal non-deductible superannuation contribution to qualify for the government superannuation co-contribution payment. Further, taxpayers with a low income earning spouse may consider making a superannuation contribution for their spouse where they qualify for the related tax offset.
With the Carbon Tax and Minerals Resource Rent Tax Bills receiving Royal Assent, small businesses should remember the changes to the small business depreciation rules, in particular:
- Increasing the small business immediate asset write off threshold from the existing $1,000 to $6,500, effective 1 July 2012; and
- Allowing small businesses to claim an upfront deduction of $5,000 for motor vehicles purchased from 1 July 2012, with the balance of the cost pooled for depreciation purposes.
These measures will provide small businesses with tax deduction timing benefits where available. Where small businesses have the flexibility to manage their depreciable asset purchases and requirements consideration should be had to the timing of such purchases in light of these effectively accelerated depreciation write offs.
Private Health Insurance Changes
The passing of the Private Health Insurance Bills with effect from 1 July 2012 results in the medicare levy surcharge rate and private health insurance rebate changing where applicable based on the level of taxable income.
The changes mean that the amount of rebate available is dependent on an income test for individuals and families (thresholds are doubled for families). The changes will apply from 1 July 2012 and will introduce three new "Private Health Insurance Incentive Tiers". The tiers start to reduce the rebate from $84,000, phasing it out to nil at $130,000.
Further, the rate of Medicare Levy Surcharge for individuals and families without private hospital cover will increase based on their level of income. The Surcharge commences at 1% at income of $84,000, increasing to a maximum of 1.5% when income is over $130,000.
The following table details how these changes will operate:
For families with more than one dependent child the relevant threshold is increased by $1,500 for each child after the first as is presently the case.
The decision to take or not take private health insurance cover is a personal one, likely based on the costs and benefits of that cover in that particular person’s circumstances. Clearly, both the private health insurance rebate and the medical levy surcharge impact on the effective cost of private health insurance cover. Therefore, these changes will likely impact the effective cost of private health insurance cover for a significant number of taxpayers and their families.
For many of these this change in effective cost may not ultimately impact on the outcome, being to take or not take the cover. However, in some cases it may be that any increase in the effective cost of the cover through a reduction in the available rebate may result in a decision to no longer take private health insurance cover, even after allowing for any impact from the medicare levy surcharge. Conversely, in some cases the increase in the medicare levy surcharge may result in a decision to now take out private health insurance cover in order to avoid the liability of that levy, even after allowing for any reduction in the rebate available.
The private health insurance rebate can be claimed as a reduction in the premium paid, or where the full premium is paid it can be claimed as a cash refund via Medicare or on lodgement of the income tax return. It is anticipated that taxpayers will be able to advise their fund of the level of rebate to be claimed as a reduction in the premium paid, with any adjustment necessary being made on lodgement of the income tax return.
Further, it is noted that the rebate applies to the financial year in which the private health insurance premiums are paid rather than for the period for which the cover applies. Therefore, prepaying private health insurance premiums by 30 June can access the rebate at 30%, this may be beneficial for taxpayers whose rebate entitlement is going to reduce from 1 July. Note that the ability to prepay premiums, and the length of any prepayments, will be determined by the relevant health insurance provider.
We understand that health insurance providers are presently communicating with members on these changes and opportunities, and we are available to assist by discussing the impacts in your particular circumstances.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
Level 8, 420 King William Street
Adelaide SA 5000