With the Federal Budget now behind us, the end of the financial year is fast approaching and that means it’s time to get your tax affairs in order.
While your focus should be on wrapping up the current financial year there are a couple of changes announced in last month’s Federal Budget that you may need to factor in. These include the changes to the personal income tax rates under the Temporary Budget Repair Levy, the increase in the Medicare Levy arising from the National Insurance Disability Scheme and rephasing of the Superannuation Guarantee rate. In addition, the changed Fringe Benefit Tax rates which become effective on April 1, 2015, the reduction in company tax rates effective July 1, 2015 and the impact on larger corporate tax payers of the Paid Parental Leave initiative may also require thoughts as you wrap up the 2014 financial year. The issues that need your attention before June 30, 2014 are a mix of basic and more technical matters and the list here is by no means comprehensive! First, a couple of the basics, starting with bad debts. You need to ensure that any bad debts for which you expect to get a tax deduction have actually been written off before June 30. There must be evidence that the debt has been written off before year-end for it to be deductible. Another basic is ensuring that your superannuation contributions are actually paid before year-end and that means actually debited to your bank account. If that hasn’t occurred, you’re not entitled to the deduction, as the expense is considered not to have incurred. Of course there are numerous other basics that need to be attended to but these are just a couple that we often see our clients tripped up on. Then there are those more technical items that generally need a discussion with your tax advisor. For privately owned business, key areas we talk most often to our clients about include, but are not limited to, planning issues associated with family trusts and private companies. The rules for family trusts are quite complex, regardless of whether the trust is for investment purposes or is carrying on a business. If you have a family trust you need to have determined how the trust income will be distributed before year-end. The trustees need to ensure thattheir decision on the income distribution isevidenced before June 30, 2014, usually byway of a signed trustee minute. Most familytrusts are discretionary trusts enabling a degreeof flexibility in who will receive the incomenand what class of income they will receive – however the flexibility comes with a compliance obligation. The trustees should have regard to these different types of income as they make their determination whilst also considering the age of the beneficiaries, impact on Higher Education Loan Program (HELP) debts, Age Pension and other government-related payments. There’s more but these are just a start and proof that more time planning rather than less is best to get everything in order. It’s also important to remember that once a trust distribution is made, the money is actually the beneficiary’s, even if it is sitting in a loan account. This means the money is available to the beneficiary as and when they want it. This also means it is available to creditors, that it forms part of an estate and almost certainly a property settlement in the case of a divorce. Where the trustees propose to make a distribution to a company, ensuring all tax issues have been considered is vital. As a fi nal comment on trusts, it is essential to ensure that whatever the trustees do they comply with the requirements of the trust deed as it provides the governing rules. In the case of a private company there are some important issues to consider. Where the directors wish to declare a dividend in the current financial year it should be minuted before June 30, 2014. Paying a dividend might seem simple but ensuring that the requirements of the Corporations Act are met is fundamental before the dividend is paid. Also, from the recipient’s viewpoint, understanding whether the dividend will be fully or partially franked or unfranked before it is declared will be important as it has a direct bearing on their tax position. Another area that private companies need to be particularly mindful of is whether they have made loans to shareholders or associated persons, or have made assets available to shareholders. If so, they are likely caught by Division 7A of the Income Tax Assessment Act which has very specific requirements including the requirement for loans to have a loan agreement which must cover amongst other things, security position, term, interest obligations and minimum loan repayments. If you have a private company or family trust it is vital that you ensure that you have met your obligations before the end of financial year, as failing to do so may mean you’re exposed to significant and quite onerous taxation consequences. The requirements are not straightforward and as such a discussion with your tax advisor helps to ensure you meet your obligations. On a personal level, don’t forget about getting your house in order. Whilst there are myriad issues to consider there are a couple that we regularly discuss with clients, including where you have loans that you intend to claim the interest as a tax deduction. In this case, the purpose of the loan must be one that meets the requirements of taxation law, for example a loan against a rental property. If the funds are used for a private purpose then the interest is not deductible. The test is focused on how you used the borrowed funds, and not the whether property that secures the loan is used to produce income. Ensuring that gifts and donations are made to charities that are registered as Deductible Gift recipients is the way to ensure that they are deductible. Our tax system is a self-assessment regime, which means the obligation is on the taxpayer to substantiate any claims they make. That means you need to have the relevant receipts and other appropriate evidence to support all your claims not just some. Once you have done your year-end planning, allocate some time to look ahead to next year and plan for changes announced in the Federal Budget that will affect you and your business in the short and long term. Michael Browne is a Partner at PwC pwc.com.au