Welcome to the Davenports Practice Update for June 2017
The Government handed down the 2017/18 Federal Budget on Tuesday 9th May 2017.
The Budget proposes (amongst several other changes) to increase the Medicare Levy by 0.5% to 2.5% from 1 July 2019 (and tax and withholding rates that are linked to the highest marginal income tax (e.g., FBT) will also increase from 1 July 2019).
One of the other more significant Budget announcements is that, from 9 May 2017, the Government proposes to limit plant and equipment depreciation deductions (e.g., for dishwashers and ceiling fans) to outlays actually incurred by investors in residential properties.
- Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into by 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
- Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property (acquisitions of existing plant and equipment items will instead be reflected in the cost base for CGT purposes).
More taxpayers can access the benefits of being an ‘SBE’
Editor: Recent changes to the law have expanded the eligibility criteria for a taxpayer to be considered a ‘Small Business Entity’ (or ‘SBE’), meaning more businesses will be able to utilise the tax concessions that are only available to SBEs.
Broadly speaking, for the year ending 30 June 2017, a business taxpayer will be an SBE if its ‘aggregated turnover’ is less than $10,000,000.
That is, where the business’ ‘aggregated turnover’ (taking into account the turnover of the entity carrying on the business and the turnover of its related parties) is less than $10,000,000, it will be able to access most of the concessions available to SBE taxpayers, including:
- Access to:
- the lower corporate tax rate of 27.5%;
- the SBE simplified depreciation rules, including the ability to claim an immediate deduction for assets costing less than $20,000;
- the simplified trading stock rules;
- the small business restructure rollover relief;
- deductions for certain prepaid business expenditure made in the 2017 income year;
- the simplified method for paying PAYG instalments calculated by the ATO; and
- the FBT car parking exemption;
- Expanded access to the FBT exemption for portable electronic devices;
- Ability to claim an immediate deduction for start-up expenses; and
- The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
Editor: Note that the reduction in the SBE company tax rate to 27.5% for the 2017 income year was accompanied by a limitation on the maximum rate that such companies can frank their dividends also to 27.5%. Consequently, if an SBE company fully franked a distribution before the law changed on 19 May 2017, the amount of the franking credit on the distribution statement provided to shareholders may be incorrect (if the franked distribution was based on the 30% company tax rate).
The ATO has set out a practical compliance approach for such companies to recognise the change and to notify their shareholders. Please contact this office if you would like more information about this.
Who is assessed on interest on bank accounts?
As a general proposition, for income tax purposes, interest income on a bank account is assessable to the account holders in proportion to their beneficial ownership of the money in the account.
The ATO will assume, unless there is evidence to the contrary, that joint account holders beneficially own the money in equal shares.
However, this is a rebuttable presumption, if there is evidence to show that joint account holders hold money in the account on trust for other persons.
Example – Joint signatory (but no beneficial ownership of account)
Adrian’s elderly aunt has a bank account in her name, and Adrian is a joint signatory to that account. Adrian will only operate the account if his aunt is unable to do so due to ill health, but all the funds in the account are hers, and Adrian is not entitled to personally receive any money from the account.
Adrian does not have any beneficial ownership of the money in the account and is therefore not assessable on the interest income.
Children’s bank accounts
In relation to bank accounts operated by a parent on behalf of a child, where the child beneficially owns the money in the account, the parent can show the interest in a tax return lodged for the child, and the lodgment of a trust return will not be necessary.
Example – Child savings account – parent operates as trustee
Raymond, aged 14, has accumulated $7,000 over the years from birthdays and other special occasions. Raymond’s mother has placed the money into a bank account in his name, which she operates on his behalf, but she does not use the money in the account for herself or others.
Raymond earns $490 in interest during an income year and, since he has beneficial ownership of the money in the account, he is therefore assessable on all of the interest income.
However, as Raymond is under 18 years of age, he will be subject to the higher rates of tax that can apply to children. If Raymond shows the interest in his tax return for that income year, his mother will not need to lodge a trust tax return.
Using social media? Be aware of tax scams!
The ATO has advised that, in the lead up to tax time, it’s important to be aware of what taxpayers share on social media.
Note that scammers may also try to impersonate a tax agent (or their practice) and try to trick recipients into providing personal information or to release funds.
The ATO recommends that all taxpayers:
- ensure their computer security systems are up to date and they are protected against cyber attacks;
- keep personal information secure (including user IDs, passwords, AUSkeys, TFNs); and
- do not click on downloads, hyperlinks or open attachments in unsolicited or unfamiliar e-mails, SMS or social media.
Editor: Call our office if you think you’ve received a suspicious e-mail claiming to be from us or the ATO.
FBT: Car parking threshold
The car parking threshold for the FBT year commencing 1 April 2017 is $8.66. This replaces the amount of $8.48 that applied in the previous year commencing 1 April 2016.
2016/17 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 2017
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 2016/17 income year are as follows:
Common 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 2016/17 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 2017.
- Some purchases you may consider include:
- books and trade journals;
- briefcases/luggage or suitcases;
- calculators, electronic organisers;
- electronic tablets;
- stationery; and
- nools 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 2017:
- 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 2017, ensure that any services being paid for are to be provided within a 12 month period that ends before 1 July 2018. 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 your 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.
2016/17 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 most of the SBE concessions for the year ending 30 June 2017 is that the business taxpayer’s annual turnover (including that of some related entities) is less than $10 million.
The following are a number of areas that may be considered for all business taxpayers.
Maximising deductions for non-SBE taxpayers
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.
Note: 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 expenditure on regular, on-going deductible items. 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 2017 (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 2017.
- 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 2017, 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 2017.
- Interest – any accrued interest outstanding on a business loan that has not been paid as at 30 June 2017.
- Commercial bills – the discount applicable to the period up to 30 June 2017, 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 2017 quarter, for example, but not payable until July, it can be accrued and claimed as a tax deduction in the 2017 income year.
- Directors’ fees – where a company is definitively committed to the payment of a director’s fee as at 30 June 2017, it can be claimed as a tax deduction.
Maximising deductions for SBE taxpayers
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
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 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.
Further note, 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.
(*) 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. On 9 May 2017 the Government announced it intends to extend this date to 30 June 2018.
Prepayment strategies – SBE
SBE taxpayers making prepayments before 1 July 2017 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 2018). 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 2017.
- 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.