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Tax Planning Techniques


Plant and Equipment
New laws have passed that allow small businesses to claim an immediate deduction for assets they start to use – or have installed ready for use – provided each depreciable asset costs less than $20,000. This will temporarily replace the previous instant asset write-off threshold of $1,000.

This measure starts 7.30pm (AEST) 12 May 2015 and will end on 30 June 2019.

The balance of the general small business pool is also immediately deducted if the balance is less than $20,000 at the end of an income year that ends on or after 12 May 2015 and on or before 30 June 2019 (including existing general small business pool).

The current 'lock out' laws will also be suspended for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they have opted out) until the end of 30 June 2019.

Assets excluded from these depreciation rules include horticultural plants and in-house software allocated to a software development pool. In most cases specific depreciation rules apply to these excluded assets.

Assets that cost $20,000 or more (which can't be immediately deducted under other provisions) are deducted over time using the general small business pool. Under the pooling mechanism a deduction for 15 per cent of the cost is allowed in the first income year with a diminishing value rate of 30 per cent deduction on the opening pool balance allowed for each income year thereafter.

The new laws also include changes to allow primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills.

Contact us to discuss the purchase and timing of all new assets.

Maximise and accelerate deductions

Tax planning techniques that may be utilised and points to consider include:

  • Bad debts - write-off before year's end;
  • Repairs - review and complete necessary repairs before  year's end;
  • Compare lease v buy alternatives;
  • Review effect of ownership changes on a company's ability to  deduct carried forward losses and ensure compliance with same  business test if necessary;
  • Avoid deriving exempt income in a year in which losses are  being incurred or claimed;
  • Realise any unrealised losses (eg exchange losses);
  • Ensure compliance with the non-commercial loss provisions i.e. where sales are less than $20,000 you may not be able to offset these against other income from employment or investment.  Consider whether you can force sales over the $20,000 threshold if you show a loss position from the business, thereby enabling you to claim this loss against other income;
  • Consider the special rules that spread deductions for  prepayments over the service period;
  • Charitable donations - avoid making in year of losses;
  • Charitable donations - donate towards end of income year;
  • Ensure that obligations to pay bonuses, leave pay  and superannuation etc are incurred before  year's end;
  • Pay small gifts (under $300 per employee) to your staff, best customers, business associates;
  • Pay tax agent fees before year's end;
  • Pay accrued leave loading before year's end regardless of  whether leave taken;
  • Funding of overseas subsidiaries - ensure deductibility of  interest;
  • Comply with thin capitalisation rules;
  • Ensure seminars providing meals last at least 4 hours,  excluding meal and other rest breaks;
  • Ensure that primary production operations are conducted in  such a way that a business is clearly being carried on;
  • Primary production - use elections on livestock destruction  or forced disposal;
  • Negative gearing - use for income-producing investments,  rent-producing property etc;
  • Trading stock - review valuation at year's end for  obsolescence; and
  • Research and development expenditure - ensure projects are  registered, project plans are completed and all eligible costs are  included in claims for deductions;
  • Review personal spending during the past year to see if anything can be claimed as a tax deduction.

Minimise and defer income

Tax planning techniques that may be utilised and points to consider include:

  • CGT - time disposals to defer CGT payment for as long as possible;
  • CGT rollover relief - use rollover provisions if applicable;
  • Capital allowances rollover relief - use balancing  adjustment rollover relief where CGT rollover relief is available;
  • ETP rollover relief - where ETP to be received before 55  years of age, utilise rollover election;
  • Even though CGT rollover relief is obtained, consider  possible assessments under other provisions (eg trading stock) and stamp duty consequences;
  • CGT - realise capital losses if capital gains have been derived;
  • Work-in-progress - do not render accounts earlier than  necessary;
  • Compensation or damages - arrange for receipt as composite  lump sum rather than in income form or with specific income  components;
  • CGT active assets exemption - if disposing of small business  and seeking the active assets exemption, remember need to also  focus on any related businesses;
  • CGT - obtain independent valuations for disposal of any  composite assets;
  • Trusts - defer actual distribution to trust beneficiaries of  excess accounting income over taxable income;
  • Trusts - take care with manner in which trustee exercises  discretion in trusts with pre-CGT assets so as to avoid triggering  Div  149 of ITAA  1997; and
  • Mortgage interest offset accounts - use if circumstances  permit.

Other CGT issues

The abolition of cost base indexation and the  introduction of a 50% CGT exemption for individuals and  superannuation funds, but not companies, provides a strong incentive  for individuals to own appreciating assets directly or via a trust structure rather than  through companies.

There will also be a general preference for  individuals on the top marginal income tax rate to acquire assets that tend to appreciate quickly (for example, high growth shares)  instead of acquiring assets that tend to appreciate at or slightly  above the rate of inflation but also produce assessable income. It  should be borne in mind, however, that the government intends to  introduce anti-avoidance rules to prevent the conversion of income  to capital gains.

Other CGT measures that may impact on tax  planning include:

  • The small business CGT provisions including a 50% exemption for gains on the disposal of all "active assets";
  • Scrip-for-scrip rollover relief;
  • CGT relief for demergers; and
  • The reduction of the capital gain or loss a company makes  from certain CGT events happening to shares owned in a foreign  company, to the extent that the foreign company has underlying  "active business" assets.

Increase offsets and rebates

Tax planning techniques that may be utilised  and points to consider include:

  • Medical expenses - have one spouse incur all concessional  expenditure to maximise the possibility of obtaining the medical  expenses rebate;
  • Spouse superannuation contributions - consider making  superannuation contributions on behalf of low- or  non-income-earning spouse to reduce the tax rate applicable to  future earnings through the fund;
  • Do not derive dividends through a loss company (franking credits will not be refundable);
  • Remember that individuals, complying superannuation funds,  trustees assessed on a resident beneficiary's share of net trust  income and certain other entities (but not companies other than  life insurance companies) can now obtain refunds for excess  franking tax offsets;
  • Do not derive franked dividends through a trust structure  unless the trust will have sufficient net income to allow  beneficiaries to obtain the franking tax offset;
  • Consider other practical considerations concerning a  company's ability to distribute profits and frank dividends.

Reduce tax rate

Tax planning techniques that may be utilised  and points to consider include:

  • Tax file number - disclose to investment bodies,  superannuation funds and employers;
  • Minors - avoid derivation of unearned income;
  • Salary sacrifice - consider payment of ETPs to employees  approaching retirement in lieu of increased salaries;
  • Salary sacrifice - consider employer making increased  superannuation contributions in lieu of salary increases or in lieu  of employee contributions;
  • Fringe benefits - take advantage of fringe benefits for  which concessional valuation methods apply, eg motor vehicles;
  • Private health insurance - take out private health insurance  to avoid the Medicare levy surcharge if a high-income earner;
  • Maintenance payments - consider arrangements to transfer the  tax burden from a high-rate payer to a low-rate recipient through  the direct derivation of income by the recipient;
  • Structure the holding of investments between family members  so that negatively geared investment properties are held by members  with higher incomes, and interest-bearing investments are held by  low-income earners; and
  • Minimising penalties - take reasonable care to comply with  taxation laws, ensure there is a reasonably arguable case, consider  obtaining a private ruling and utilise objection rights.

Alienation 

Alienation of income, including some income  splitting arrangements, can be considered. Other tax planning techniques to  consider include:

  • Transfer of income-producing assets; and
  • Assignment of right to property income for a period greater  than 7 years.

The alienation of personal services income  rules in Divs  84 to  87 of ITAA  1997 must always be taken into account.

Anti-avoidance provisions

Anti-avoidance provisions must always be  considered in any tax planning arrangement. The following matters  should be considered:

  • Test all proposals against specific anti-avoidance  provisions relevant to the legislative provisions and the  structures under consideration; and
  • Consider the potential application of Pt  IVA.

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