Welcome to the Davenports Practice Update for June 2016
2016/17 Federal Budget
The government handed down the 2016/17 Federal Budget on Tuesday 3rd May.
It included (among many changes) proposed personal income and company tax cuts from 1 July 2016, the extension of GST to all imports (irrespective of value) from 1 July 2017, an increase in the small business entity (‘SBE’) turnover threshold from 1 July 2016, and (as you may have heard) many, many superannuation changes.
Of course, they are all dependent on the Turnbull Government winning the election on 2 July and the legislation then surviving Parliament after that.
Editor: We’ll keep you informed!
SMSFs and Collectables – last opportunity to comply!
From 1 July 2011, SMSF investments in collectables and personal-use assets have been subject to stricter rules than SMSF investments in other assets (such as shares and property).
Editor: Assets considered collectables and personal-use assets include things like artwork, jewellery, antiques, vehicles, boats and wine.
However, SMSFs that already had investments in such assets before 1 July 2011 were given five years to comply with these rules (i.e., until 30 June 2016).
Therefore, any SMSFs with such investments need to consider their situation carefully and take appropriate action (if necessary) before 1 July 2016.
Such action may include (for example):
- reviewing current leasing agreements (items can’t be leased to or used by a related party, including business premises);
- making decisions about storage (items can’t be stored or displayed in a private residence of a related party, and decisions about storage must be documented and the written record kept); and
- arranging insurance cover (items must be insured in the fund’s name).
In addition, if the trustees of the fund are considering disposing of these items, they can be transferred to a related party without a qualified independent valuation, but only if the transfer takes place before 1 July 2016 and the transaction is made on arm’s-length terms.
If these requirements are not met from 1 July 2016, penalties may apply.
ATO’s continuing focus on trust property developers
In recent years, the ATO has focused on trusts developing and selling properties as part of their normal business.
When these developed properties are sold, some trusts incorrectly claim a 50% CGT discount.
The ATO will continue to target arrangements that display the following characteristics:
- clients have experience in either developing or selling property (or experience in the industry) and establish a new trust to acquire property for development and sale;
- circumstances surrounding the arrangement are inconsistent with the stated purpose of developing the property as a long term investment;
- the development is advertised as available to purchase before completion, or is sold soon after completion; and
- the trustee claims the 50% CGT discount on the sale of the property.
The ATO is encouraging taxpayers to review their circumstances with their tax agent/adviser.
Editor: The ATO has also advised that they may contact property developers directly to “help them meet their obligations during development and disposal of the property. However, we may contact your clients at any stage of a development, not just on the sale of the property.”
If you get any such contact – let us know!
New Simpler BAS on the way
The ATO has been working on ways to deliver a simpler business activity statement (BAS) to simplify account set-up, record keeping, BAS preparation and lodgment for agents and their clients, and make it less costly.
To achieve this, several GST labels will be removed from the BAS, with small businesses only required to report:
- GST on sales (1A);
- GST on purchases (1B); and
- Total sales (G1).
They will begin user testing from 1 July 2016 and a simpler BAS should be the standard option for all small business from 1 July 2017.
ATO reminder about 30 June SuperStream deadline
With the 30 June 2016 deadline looming, the ATO strongly encourages small businesses to get on board with SuperStream as soon as possible.
SuperStream is the standardisation of how employers make super contributions on behalf of their employees, and involves employers sending all super payments and employee information electronically in a standard format.
Using it is mandatory.
Editor: Unless the employer and the SMSF are related parties . . .
Options for becoming ‘SuperStream ready’ include using:
- a payroll system that meets the SuperStream standard;
- a super fund’s online system; or
- a messaging portal or a super clearing house like the ATO’s Small Business Super Clearing House (SBSCH).
The SBSCH is a free, optional service for small business with 19 or fewer employees, as well as businesses with an annual aggregated turnover of $2 million or less.
Editor: If you’re worried you won’t be able to use SuperStream as you don’t operate electronically, there is a SuperStream option to suit every business, including using third parties to pay your super using SuperStream on your behalf.
If you have any questions, let us know and we’ll help you out.
ATO warns about iTunes scammers
The ATO is reminding the public to be alert to scammers impersonating the ATO demanding iTunes gift cards as a form of tax debt payment.
Of the 8692 phone scam reports the ATO received in April 2016 in relation to the fake ATO tax debt scam, 58 reports mentioned the scammer demanding payment by iTunes (and apparently 26 people unfortunately payed $174,830 to fraudsters!)
Importantly, the scammers don’t need the actual physical card; they just need the gift card number, which they get victims to read over the phone.
The ATO states: “We will never request the payment of a tax debt via gift or pre-paid cards such as iTunes and Visa cards. Nor will we ask for direct credit to be paid to a personal bank account.
“And if the person calling you is rude and aggressive, threatening police or legal action if you don’t do something immediately – it’s not the ATO”.
2015/16 Individual Tax Return Checklist
- Claims for deductions
- Receipts for deductions
- Car claims and log books
Please review the information below and contact our office if you need assistance.
Tax saving strategies prior to 1 July 2016
A good strategy to reduce tax payable is normally to accelerate any income tax deductions into the current income year, which will reduce overall taxable income in the current year.
The tax rates for resident (adult) individual taxpayers for the 2015/16 income year are as follows:
|Taxable Income threshold||Tax payable|
|0 – $18,200||Nil|
|$18,201 – $37,000||19% of excess over $18,200|
|$37,001 – $80,000||$3,572 + 32.5% of excess over $37,000|
|$80,001 – $180,000||$17,547 + 37% of excess over $80,000|
|$180,001 and over||$54,547 + 47%2 of excess over $180,000|
- The Medicare levy of 2% generally applies in addition to these rates.
- This rate includes the 2% ‘Temporary Budget Repair Levy’ which applies from 1 July 2014 to 30 June 2017 on that part of a person’s taxable income that exceeds $180,000.
Common work-related claims
made by individuals
The following outlines common types of deductible expenses claimed by individual taxpayers, such as employees and rental property owners, plus some strategies that can be adopted to increase deductions for the 2015/16 income year.
1. Depreciable plant, etc, costing $300 or less
Salary and wage earners and rental property owners will generally be entitled to an immediate deduction if certain income-producing assets costing $300 or less are purchased before 1 July 2016.
Some purchases you may consider include:
- books and trade journals;
- briefcases/luggage or suitcases;
- calculators, electronic organisers;
- electronic tablets;
- tools of trade.
2. Clothing expenses
Purchase or pay for work-related clothing expenses prior to the end of the income year, such as:
- compulsory (or non-compulsory and registered) uniforms, and occupation specific and protective clothing;
- other expenses associated with such work-related clothing, such as dry cleaning, laundry and repair expenses.
3. Self education expenses
Consider prepaying the following self education items before the end of the income year:
- course fees (but not HECS-HELP fees), student union fees, and tutorial fees;
- interest on borrowings used to pay for any deductible self education expenses.
Also bring forward purchases of stationery and text books (i.e., those which are not required to be depreciated).
4. Other work-related expenses
Employees can prepay any of the following expenses prior to 1 July 2016:
- union fees;
- subscriptions to trade, professional or business associations;
- magazine and newspaper subscriptions;
- seminars and conferences;
- income protection insurance (excluding death and total/permanent disability).
Note: When prepaying any of the expenses above before 1 July 2016, ensure that any services being paid for are to be provided within a 12 month period that ends before 1 July 2017. Otherwise, the deductions must generally be claimed proportionately over the period of the prepayment.
We will need you to bring information to assist us in preparing your income tax return.
Please check the following and bring along payment summaries, statements, accounts, receipts, etc., to help us prepare the return.
- payment summaries for salary and wages;
- lump sum and termination payments;
- government pensions and allowances;
- other pensions and/or annuities;
- allowances (e.g., entertainment, car, tools);
- interest, rent and dividends;
- distributions from partnerships or trusts;
- details of any assets sold that were either used for income earning purposes or which may be caught by capital gains tax (CGT).
Expenses/Deductions (in addition to those mentioned above):
- award transport allowance claims;
- bank and government charges on deposits of income, and deductible expenditure;
- bridge/road tolls (travelling on business);
- car parking (when travelling on business);
- conventions, conferences and seminars;
- depreciation of library, tools, business equipment (incl. portion of home computer);
- gifts or donations;
- home office running expenses:
- cooling and heating
- depreciation of office furniture
- telephone and internet;
- interest and dividend deductions:
- account keeping fees
- ongoing management fees
- interest on borrowings to acquire shares
- advice relating to changing investments (but not setting them up);
- interest on loans to purchase equipment or income-earning investments;
- motor vehicle expenses (business/work related);
- overtime meal allowances;
- rental property expenses – including:
- advertising expenses
- council/water rates
- land tax
- legal expenses/management fees
- genuine repairs and maintenance
- telephone expenses
- travelling to inspect property;
- superannuation contributions by sole traders or substantially unsupported taxpayers;
- sun protection items;
- tax agent fees;
- telephone expenses (business);
- tools of trade.
2015/16 Year-end Checklist for Business
Many of our business clients like to review their tax position at the end of the income year and evaluate any year-end strategies that may be available to legitimately reduce their tax. Traditionally, year-end tax planning for small businesses is based around two simple concepts – i.e., accelerating business deductions and deferring income.
However, Small Business Entities (‘SBEs’) have greater access to year-end tax planning due to particular concessions that only apply to them (the SBE system replaced the previous Simplified Tax System (‘STS’) on 1 July 2007). Taxpayers that qualify as an SBE can generally pick and choose which of the concessions they wish to use each year (although see below regarding the simplified depreciation rules). The basic requirement to be eligible for the SBE concessions is that the business taxpayer’s annual turnover (including that of some related entities) is less than $2 million.
The following are a number of areas that may be considered for all business taxpayers.
Maximising deductions for
Non-SBE business taxpayers should endeavour to maximise deductions by adopting one or more of the following strategies:
- Prepayment strategies;
- Accelerating expenditure; and
- Accrued expenditure.
Prepayment strategies – non-SBE
Any part of an expense prepayment relating to the period up to 30 June is generally deductible.
In addition, non-SBE taxpayers may generally claim the following prepayments in full:
- expenditure under $1,000;
- expenditure made under a ‘contract of service’ (e.g., salary and wages); or
- expenditure required to be incurred under law.
Editor: Prepayments can be a little confusing, so before you commit to making a payment please feel free to call us with any queries or assistance if required.
Accelerating expenditure – non-SBE
This is where a business taxpayer brings forward the expenditure on regular, on-going deductible items. However, business taxpayers are generally entitled to deductions on an ‘incurred basis’.
Therefore, there is generally no requirement for the expense to be paid by 30 June 2016. As long as the expense has genuinely been ‘incurred’, it will generally be deductible.
The following may act as a checklist of possible accelerated expenditure:
- Depreciating assets costing $100 or less can be written off in the year of purchase.
Depreciating assets costing less than $1,000 can be allocated to a low value pool and depreciated at 18.75% (which is half of the full rate of 37.5%) in their first year regardless of the date of purchase.
- Repairs – repairs to office premises, equipment, cars or other business items.
- Consumables/spare parts.
- Client gifts.
- Fringe benefits – any benefits to be provided, such as property benefits, could be purchased and provided prior to 1 July 2016.
- Superannuation – contributions to a complying superannuation fund, to the extent contributions are actually made (i.e., they cannot be accrued but must be paid by 30 June).
Accrued expenditure – non-SBE
Non-SBE taxpayers (and some SBE taxpayers) are entitled to a deduction for expenses incurred as at 30 June 2016, even if they have not yet been paid.
The following expenses may be accrued:
- Salary or wages and bonuses – the accrued expense for the days that employees have worked but have not been paid as at 30 June 2016.
- Interest – any accrued interest outstanding on a business loan that has not been paid as at 30 June 2016.
- Commercial bills – the discount applicable to the period up to 30 June 2016, where the term of the bill extends past 30 June.
- Commissions – where employees or other external parties are owed commission payments.
- Fringe benefits tax (FBT) – if an FBT instalment is due for the June 2016 quarter, for example, but not payable until July, it can be accrued and claimed as a tax deduction in the 2016 income year.
- Directors’ fees – where a company is definitively committed to the payment of a director’s fee as at 30 June 2016, it can be claimed as a tax deduction.
Maximising deductions for
Deductions can be maximised for SBE business taxpayers by accelerating expenditure and prepaying deductible business expenses. Former STS taxpayers who have continued to use the STS cash method since before 1 July 2005 cannot accrue expenses, but other SBE taxpayers on an accruals basis can accrue expenses (see above regarding accruing expenditure).
Accelerating expenditure – SBE
Former STS taxpayers who have continued to use the STS cash method since before 1 July 2005 and who qualify as an SBE are generally only entitled to deductions if they have paid the amount by 30 June.
All SBE taxpayers can choose to write-off depreciable assets costing less than $20,000 in the year of purchase*. Also, assets costing $20,000 or more are allocated to an SBE general pool and depreciated at 15% (which is half the full rate of 30%) in their first year. Therefore, where appropriate, SBE business taxpayers should consider purchasing/installing these items by 30 June 2016.
(*) The small instant asset write-off threshold has been temporarily increased to ‘less than $20,000’, for assets acquired and installed ready for use between 7.30 pm (AEST) 12 May 2015 and 30 June 2017.
It should be noted that SBE taxpayers choosing to use the SBE depreciation rules are effectively ‘locked in’ to using those rules for all of their depreciable assets.
Prepayment strategies – SBE
SBE taxpayers making prepayments before 1 July 2016 can choose to claim a full deduction in the year of payment where they cover a period of no more than 12 months (ending before 1 July 2017). Otherwise, the prepayment rules are the same as for non-SBE taxpayers.
The kinds of expenses that may be prepaid include:
- Rent on business premises or equipment.
- Lease payments on business items such as cars and office equipment.
- Interest – check with your financier to determine if it’s possible to prepay up to 12 months interest in advance.
- Business trips.
- Training courses that run on or after 1 July 2016.
- Business subscriptions.
This is some of the information we will need you to bring to help us prepare your income tax return:
- Stocktake details as at 30 June.
- Debtors listing (including a list of bad debts written off) as at 30 June. Note: In order to claim a deduction, the debt must be written off on or before 30 June.
- Creditors listing as at 30 June.