1 Year-end tax planning toolkit Year-ending 30 June 2014 June 2014
2 The contents of this document are for general information only and do not consider your personal circumstances or situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been summarised and simplified. This document is not intended to be used, and should not be used, as professional advice. If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage arising from reliance upon any information contained in this document. Pitcher Partners Advisors Pty Ltd, May All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.
3 Contents 1 Introduction Summary checklist Income Deductions Individuals Trusts Companies Partnerships Capital gains tax Finance issues International tax Super and GST Integrity provisions... 97
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5 5 1 Introduction Welcome to the Pitcher Partners 30 June 2014 year-end tax planning toolkit. 1A Year-end tax planning As the financial year draws to a close, it is time to start thinking about whether your year-end tax planning is in order. Tax planning not only requires consideration of income and deductions for the year, but also requires you to consider whether your compliance requirements have been met. This includes whether appropriate elections are made within the time requirements, the preparation and maintenance of appropriate documentation (such as trust minutes) and forward planning of your tax affairs. Our tax toolkit is here to assist you in this process. 1B What does this document do? This document provides an outline of the tax issues that should be considered before year-end. This document has been updated for new developments and (where relevant) the 2014/15 Budget announcements. This toolkit is specifically tailored to address the taxation concerns of taxpayers in the middle market and includes checklists covering both corporate taxpayers and private groups. 1C What this document doesn t do This toolkit is not intended to be a comprehensive document covering all taxation issues that require consideration. This is because every taxpayer s circumstances are unique. Instead, this document is only intended to provide you with a broad range of issues for consideration before the end of the financial year. 1D Take care about tax planning Tax planning may often result in a taxpayer paying less income tax in a given income year. It is noted that the definition of a tax benefit under the tax anti-avoidance provisions is broad enough to cover a deferral of income tax. Therefore the tax anti-avoidance provisions must always be considered as part of your year-end tax planning. Given that the general anti-avoidance provisions have recently been expanded, taxpayers must always consider these provisions. We have included a number of anti-avoidance or integrity provisions for your consideration in Chapter 13 of this toolkit. 1E How will you find what you are looking for? To assist you in quickly locating the area of tax that is relevant to you, this document has been subdivided into chapters. The chapters either relate to a specific type of taxpayer (e.g. a company or trust) or to a specific tax topic (e.g. capital gains tax). Furthermore, Chapter 2 of this toolkit provides a summary of all of the questions contained in Chapters 3 to 13 of this toolkit. The following diagram provides a simplified outline of how this toolkit is arranged.
6 6 SUMMARISED YEAR-END PLANNING CHECKLIST [Chapter 2] Income [Chapter 3] CORE SECTIONS Deductions [Chapter 4] Individuals Trusts Companies Partnerships [Chapter 5] [Chapter 6] [Chapter 7] [Chapter 8] ENTITY SPECIFIC QUESTIONS Capital gains tax [Chapter 9] Finance issues [Chapter 10] International tax [Chapter 11] Super & GST [Chapter 12] Integrity provisions [Chapter 13] SPECIALIST TOPIC QUESTIONS We trust you will find this document useful when considering your 30 June 2014 tax planning. Please talk to your Pitcher Partners representative if you would like more information or clarification of some of the issues raised in this document. 1F Disclaimer The contents of this document are for general information only and do not consider your personal circumstances or situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been summarised and simplified. This document is not intended to be used, and should not be used, as professional advice. If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage arising from reliance upon any information contained in this document. Pitcher Partners Advisors Pty Ltd, June All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.
7 7 2 Summary checklist 2A Enter your details If you are completing this document as a checklist and wish to submit this back to your Pitcher Partners representative, please complete your details in the following check boxes. Enter entity name Enter contact details 2B Background The following simplified checklist contains a high level summary of the planning items that are covered in more detail in this toolkit. We have provided a reference link to the detailed discussion of each of these tax planning items. We recommend that you work your way through this summarised checklist at first instance. Where items appear relevant, those items should be tagged using the check boxes. The detailed item can then be reviewed in more detail to determine whether the planning opportunity is relevant to your circumstances. 2C Income This section deals specifically with the treatment of income that you may have received or derived during the income year and whether such income should be attributed to the 2014 income year or deferred to the 2015 income year and subsequent years. Business income If you derive business sales income, you may be able defer sales invoicing or bring forward sales invoicing (in appropriate circumstances). Chapter 3B Accrued / unearned income If you record accrued or unearned income in your accounts, you may be able to defer recognition of that income for tax purposes. Chapter 3C Trade incentives Discounts and other incentives on trading stock or services are typically brought to account in a different income year for tax as compared to accounting. Chapter 3D & 3E Disputed amounts It may be possible to defer the recognition of disputed income amounts until you have settled the dispute. Chapter 3F Construction contracts Where you enter into construction contracts that are not your trading stock, you may be able to utilise one of the different methods of income recognition allowed by the ATO for tax purposes. Chapter 3G Insurance proceeds If you received insurance proceeds, you should examine whether the proceeds are in fact assessable and when you need to bring the proceeds to account for tax purposes. Chapter 3H Grants, bounties, subsidies If you receive grants, bounties or subsidies, you should examine whether they are in fact assessable and when you need to bring the proceeds to account for tax purposes. Chapter 3I Disaster relief money Exemptions may be available for disaster relief money received. Chapter 3J
8 Interest income For interest received around year-end, examine the timing of interest income closely for tax purposes as interest is typically assessable on a receipts basis. Chapter 3K 8 Dividend income Dividends accrued may not be assessable at year-end if they are only declared by not paid. Make sure you also take into account franking credits in your tax planning. Chapter 3L Retail premiums If you received a retail premium as a non-participating shareholder during the year, this amount may be treated as an unfranked dividend. Chapter 3M Trust distributions Year-end tax planning should take into account the expected tax distribution that you may receive from trusts (rather than the expected accounting / cash distribution amount). Chapter 3N Rental / leasing income Consider whether your rental income activities are passive (and therefore on a cash basis) or constitute a business (and therefore possibly on an accruals basis). This can have an effect on the timing of income brought to account. Chapter 3O Foreign taxes If you received foreign income subject to foreign tax, make sure you claim your foreign tax offsets and ensure you gross-up the foreign income for planning estimates. Chapter 3P Non-assessable amounts Consider whether any income you have received this year can be treated as nonassessable. Chapter 3Q Personal services income If you provides services through a trust or company, there is a risk that the income could be your personal services income and attributed to you directly. You should consider the personal services income rules appropriately before year-end. Chapter 3R Extraordinary items If you have received extraordinary (or significant) receipts during the year, these items must be examined closely from a tax perspective. Chapter 3S Notes Review notes taken in relation to the chapter. Chapter 3T 2D Deductions This section deals specifically with the expenses that you may have incurred during the income year and whether such expenses can result in a deduction for the 2014 income year or need to be deferred to the 2015 income year and subsequent years. General rules Consider all material expense items to determine whether there is any risk that certain items may not be deductible (e.g. they are of a capital nature). You should ensure an appropriate review of all such expenses to determine their deductibility and any opportunities that may exist for such expenses. Chapter 4A Capital expenditure If you have identified non-deductible capital expenditure, you should consider your ability to claim a black hole deduction over five years or (alternatively) include the costs in your cost base of an asset. Chapter 4B Bad debt deductions If you have doubtful debts, you can possibly bring forward deductions if you are able to write those amounts off as bad debts for tax purposes before 30 June Chapter 4C Trading stock valuation Where you hold trading stock, you can choose to value trading stock at year-end at cost, market selling value, replacement value or obsolete stock value. This can have the effect of either bringing forward deductions or shifting the amounts to the following year. Chapter 4D
9 9 Depreciating assets (all entities) If you have depreciating assets, there are a number of options that allow you to accelerate depreciation claims for the current year. Chapter 4E Depreciating assets (small business entities) If you have depreciating assets and you are a small business entity, further tax incentives can apply to provide a higher deduction claim for the current year. Chapter 4F Project pools If you have identified non-deductible capital expenditure, you should consider your ability to claim the capital expenditure as a project pool cost over the life of the project. Chapter 4G Internal labour costs Where you internally construct assets, you may be required to capitalise labour costs for tax purposes. This may defer deductions claimed (i.e. over the depreciable life of the asset). Chapter 4H Employee bonuses Consider whether your accrued employee bonus plan for 30 June 2014 can be treated as deductible for the current year by changing aspects (e.g. approval timing) of your plan. Chapter 4I Exempt income deductions If you derive exempt type income, a number of your expenses are likely to be nondeductible. This should be reviewed to determine the correct position. Chapter 4J Foreign exchange Consider whether the (tax) foreign exchange provisions will give rise to significant adjustments at year-end. Consider if there are any opportunities to reduce compliance under the provisions by making certain elections before year-end. Chapter 4K Gifts and donations Review your deductions (or proposed deductions) for gifts and donations and their impact on your tax losses. Chapter 4L Prepaid expenditure There are still some opportunities for some prepayments to be fully deductible upfront if they: are made by individuals and small businesses; or represent excluded expenditure for all other taxpayers. Chapter 4N Service fees If there are management fees and service fees charged between your group entities, you should ensure all paper work or agreements are put into effect before year-end and that the fees are commercially justifiable. The ATO has been targeting these items in recent years. Chapter 4O Capital support payments The ATO takes the view that capital support payments made by a parent to its subsidiary will be on capital account and non-deductible. Accordingly, consider whether it is better to structure the arrangement as an appropriate arm s length service fee. Chapter 4P Trade incentives if you provide discounts and trade incentives on your sales, these items are generally deductible at a different time for tax as compared to accounting. Chapter 4R & 4S Tax losses for infrastructure projects If you are involved in large scale infrastructure projects, new provisions have been introduced that may allow certain entities to recoup early stage losses for approved projects. Chapter 4T Notes Review notes taken in relation to the chapter. Chapter 4U 2E Individuals This section considers specific year-end taxation issues associated with individuals. Tax rates The overall tax rate for 30 June 2014 will be up to 2.5% lower as compared to 30 June 2015 (due to the increase in the Medicare Levy to fund Disability Care of 0.5% and the Temporary Budget Repair Levy of 2.0% for income over $180,000). For an individual resident taxpayer, $141,800 of taxable income (which equates to a fully franked dividend of $99,260) provides an average tax rate of 30% for 30 June Chapter 5A
10 Medicare levy As part of your ordinary tax planning, understand your Medicare levy and consider any opportunities that may reduce this levy. Chapter 5A Private health insurance rebate Please note that the private health insurance rebate is now adjusted for on the lodgement of your income tax return. This can either increase or decrease the total amount payable on lodgement of your individual return. Chapter 5B Rebates and offsets A large number of different rebates and offsets are available to reduce taxable income. You should consider the availability of these items for the current year. Chapter 5C Work expenses and substantiation Ensure you have documentation to substantiate claims of $300 or more. You should understand what claims are covered by the substantiation requirements. Chapter 5D Specific occupations under ATO target The ATO are targeting work expenses claimed by: (a) those working in the building and construction industry; and (b) sales and marketing managers for 30 June They are also targeting amounts reported under the Taxable Payments Annual Report in the construction industry and internet sales income that is not being disclosed. Chapter 5E Work related car expenses Ensure that you record your odometer readings for 30 June 2014 and consider a logbook for your car (to maximise options for car expense deductions). Chapter 5F Work related travel expenses Examine whether any additional travel (local, interstate, overseas) expenses are deductible for the 30 June 2014 income year and ensure you have satisfied the substantiation requirements. Chapter 5G Work related clothing, laundry and cleaning Consider whether you can claim a deduction for the cost of buying or cleaning: occupation specific or protective clothes; or unique, distinctive uniforms. Chapter 5H Other work related expenses Consider the deductibility of other work related expenses including home office expenses, occupancy expenses, work related development and support, tools and equipment and overtime meal allowance expenses. Chapter 5I Specific industries If you work in a specific industry, you should consider the ATO s guide on work related expenses that applies to that industry. Chapter 5J Self-education expenses Review whether education expenses are deductible and apply the non-deductible threshold of $250 to appropriate expenses. Chapter 5K Work related expenses you cannot claim Review whether there are specific rules that will deny a deduction for your work related expenses. Chapter 5L Prepaid expenses Consider whether you can prepay certain expenses before 30 June 2014 to bring forward deductions to the current income year. Chapter 5M Salary sacrifice Ensure that you have appropriately considered the requirements for an effective salary sacrifice arrangement (e.g. into superannuation). Consider whether salary sacrifice opportunities may exist to apply a lower rate of FBT for the period of 1 July 2014 to 31 March 2015 in lieu of the higher marginal income tax rate due to the Temporary Budget Repair Levy. Chapter 5N Employee share schemes If you have received shares as an employee, you need to consider the employee share scheme provisions and whether an amount will be assessable to you. Chapter 5O Foreign employment income You will need to review the income tax and FBT consequences where you have performed foreign employment. Chapter 5P Non-commercial losses If you carry on business in your own name, losses related to the business activities may not be deductible under the non-commercial loss provisions. Chapter 5Q 10
11 11 LAFHA changes If you have received a living away from home allowance (LAFHA) during the 30 June 2014 income year, you should consider a review of these amounts (due to the significant changes that occurred on 12 October 2012). Chapter 5S Notes Review notes taken in relation to the chapter. Chapter 5T 2F Trusts This section considers specific year-end taxation issues associated with trusts. ATO compliance activity The ATO is continuing its trust compliance activities during the current income year. You should therefore carefully review all of your trust requirements before year-end. Chapter 6A Trustee tax rate To avoid a trustee tax rate of 46.5%, ensure that you make beneficiaries entitled to all of the income of the trust before 30 June 2014 (or an earlier time if required by the trust deed). Chapter 6B Trustee resolutions Distribution resolutions or distribution plans must be completed before year-end (or earlier if required by the trust deed) and evidenced. Chapter 6C Meaning of income Review the trust deed to determine how income is defined to ensure the distribution resolutions are effective in distributing all trust income (to avoid a trustee assessment). You will also be required to disclose income per your deed in your 30 June 2014 tax return. Chapter 6D Distribution of timing differences (general) The ATO has been focusing compliance activity on taxpayers taking advantage of timing differences between a trust s net income for tax purposes and its income for trust purposes by using a corporate beneficiary to avoid top-up tax in the hands of individuals. Care needs to be taken if you expect taxable income to exceed accounting profit. Chapter 6E Distribution of timing differences (Unit trusts) As beneficiaries of unit trusts can be taxable on a distribution of timing differences, consider whether it may be possible to align tax and accounting by defining income as taxable income for the current income year. Chapter 6F Trust to company distributions Ensure that you have appropriately considered Division 7A where your trust distributes (directly or indirectly) to a corporate beneficiary Chapters 6G and 7E Trust to trust distributions Consider the rule against perpetuities to ensure that trust to trust distributions are not invalidated. Chapter 6H Eligible beneficiaries Make sure that the beneficiaries you have identified are eligible under the trust deed before finalising your trust resolutions. Chapter 6I Trust streaming Legislation only specifically allows streaming for capital gains or franked dividends. You should ensure you comply with these rules if you wish to stream for the current year. Chapter 6J Capital gains versus revenue gains If you have derived substantial capital gains, you need to consider the ATO s ruling that may seek to treat those gains on revenue account (and not subject to a 50% discount). Chapter 6K Trust losses and bad debts Trust losses and bad debt deductions may be denied if a family trust election is not made, or if the trust loss provisions are not otherwise satisfied. Consider these rules if you are expecting to make a tax loss or if you are recouping tax losses. Chapter 6L Franking credits If you receive dividends through the trust, franking credits may not flow through the trust unless the trust makes a family trust election. Chapter 6M
12 Injection of income If there is more than one trust in your group, trust to trust distributions to take advantage of losses in a trust may create taxation issues if a family trust election is not made. Chapter 6N Interest expenses and distributions Interest deductions may be denied where finance is used to fund distributions to beneficiaries. You may consider alternatives to help protect interest deductions. Chapter 6O Family trust elections Critically review your family trust election requirements for the year to ensure you protect bad debts, carry forward losses and franking credit flow-through. Make sure all new trusts have made an election to be within the family group. Chapter 6P TFN withholding The trustee must obtain TFNs from beneficiaries before 30 June 2014, which have not previously been reported, to avoid penalties. This needs to be reported to the ATO by 31 July Chapter 6Q Review trust deeds Consider reviewing your trust deed before year-end to ensure that the deed is still appropriate for the type of distribution resolutions that you now want to make / may want to make in the future. Chapter 6R Superannuation deductions Consider carefully the deductibility of payments for superannuation contributions made for directors of a trustee company. Chapter 6S Trust distributions to a superfund Non-arm s length income derived by a superfund (which may include discretionary trust distributions or private company dividends) can be taxed at 45% in a superfund. Chapter 6T 12 Notes Review notes taken in relation to the chapter. Chapter 6U 2G Companies This section considers specific year-end taxation issues associated with companies. Payment of dividends If the company has current year losses, or prior year retained losses, a dividend paid by the company may not be frankable unless you fall within the ATO s guidelines. Chapter 7A Franking distributions You should appropriately manage your franking account balance to ensure that you do not create a franking deficit at year-end (and incur franking deficits tax). Chapter 7B Distribution statements If you have paid (or will pay) dividends for the current year, you need to ensure compliance with the distribution statement requirements (otherwise the dividend will not be frankable). Chapter 7C Debt that can be treated like equity All loans made to companies should be reviewed to ensure that they are on terms that allow them to be treated as debt for tax purposes and are not inadvertently treated as equity (and thus interest will be non-deductible). Chapter 7D Division 7A You should review Division 7A before year-end to ensure that you do not inadvertently trigger a deemed unfranked dividend to a shareholder or associate for any loans, payments or debt forgiveness transactions provided by the company. Chapter 7E Company losses If you are utilising prior year tax losses, or have tax losses in the current year, you will need to consider the carry forward tax loss provisions. Chapter 7F Loss carry-back provisions The Government intends to repeal the loss carry-back provisions for 30 June However, if you expect to have a tax loss for the current year and you paid tax in the 2012 or 2013 income year, you could be entitled to self-assess a refund of your previous year s tax by carrying back the current tax loss (until the law changes). Chapter 7G
13 13 Share capital transactions If your share capital account has moved for the current year, you should examine those movements very carefully. They may result in an unfranked dividend or untainting tax liabilities. You may be able to correct these if identified before year-end. Chapter 7H Tax consolidation choice to consolidate If you are making a choice to consolidate, you need to keep a separate hand written choice. You will also need to consider whether tax funding and tax sharing agreements are put in place before (or close to) year-end. Chapter 7I Tax consolidation change in members If members have joined or left during the income year, you are required to notify the ATO within 28 days. You are also required to update your tax funding and tax sharing agreements. Chapter 7J Tax consolidation updating tax costs If entities have joined a tax consolidated group during the year, you should ensure that you have recalculated the tax cost base of assets and liabilities, as this could materially impact your 30 June 2014 tax calculation. Chapter 7K Tax consolidation disposal of entities If entities have left a tax consolidated group, the cost base of the shares needs to be recalculated based on the underlying tax cost of assets and liabilities of the leaving entity. This can have a material impact on any capital gain or loss on sale of the leaving entity Chapter 7L Research and development (R&D) Consider the effect of the R&D tax incentive provisions on your R&D deductions for 30 June Chapter 7M R&D ineligible companies If you carry on R&D activities and you have aggregated assessable income of $20 billion or more, legislation has been introduced that will deny an R&D tax incentive claim for 30 June Chapter 7N R&D feedstock adjustments If you claim R&D related to feedstock expenditure, you may be required to include an adjustment in your assessable income. Chapter 7O Reportable tax positions Consider whether you need to prepare the reportable tax position schedule in the tax return. To avoid disclosures, you may need to ensure that you have appropriate opinions on material tax issues. Consider implementing an appropriate tax risk management procedure. Chapter 7P PAYG instalments Determine whether the PAYG instalment for the fourth quarter for 30 June 2014 can be varied. Chapter 7Q Director penalty regime Ensure that you are up to date with super and PAYG payments and consider implementing control procedures dealing with the director penalty regime. Chapter 7R Notes Review notes taken in relation to the chapter. Chapter 7S 2H Partnerships This section considers specific year-end taxation issues associated with partnerships. Professional practices with trusts as partners The ATO is reviewing professional practices that report a trust as a partner in the tax return. There may be ways in which to mitigate this risk. Chapter 8A Professional practices (unincorporated and incorporated) If your professional practice has a practicing member that is not a natural person, the ATO has indicated that it will not stand by its no goodwill view for incoming and leaving members. There may be ways in which to mitigate this risk. Chapter 8B Varying distributions For common law partnerships, consider the ability to vary distribution entitlements before 30 June Chapter 8C
14 Equity contributions You should appropriately consider equity contributions made to a partnership by a company and the Division 7A treatment of such contributions. Chapter 8D 14 Notes Review notes taken in relation to the chapter. Chapter 8E 2I Capital gains tax This section considers a number of year-end considerations for capital gains that may have been derived during the income year. General Ensure that you have considered all contracts and capital receipts for the year to determine whether a capital gain or loss has occurred. Chapter 9A Small business CGT concessions Where you conduct a business (either directly or indirectly), consider your ability to reduce capital gains under the small business concessions. Chapter 9B CGT discount Consider whether assets disposed of were held for over 12 months and thus qualify for the CGT discount. If the amounts are material, you may need to review whether the ATO may treat the amounts as being on revenue account (and not eligible for the 50% discount). Chapter 9C CGT discount (non-residents) Non-residents individuals no longer qualify for the CGT discount. The provisions may allow for a full or partial discount in certain cases. Taxpayers should consider obtaining a market valuation of their taxable Australian property held at 8 May 2012 or assessing the discount available based on the days on which they were an Australian resident compared to the total period of ownership of the asset. Chapter 9C Earnout arrangements The capital gain on the sale of a CGT asset can be deferred if you qualify for the earnout rules. Chapter 9E CGT exemptions and rollovers Consider the many CGT exemptions and rollovers that may apply to reduce your capital gain or loss. Chapter 9F Main residence exemption Ensure you have applied the main residence exemption correctly for any sale of residential property and adjacent land. Chapter 9G Notes Review notes taken in relation to the chapter. Chapter 9H 2J Finance issues This section considers a number of year-end considerations for financial transactions and financial type entities for the income year. Loan rationalisation and debt forgiveness You may wish to consider rationalising inter-entity loans at year-end, to simplify loan arrangements and Division 7A compliance. However, consider the tax consequences that may occur on a loan rationalisation or debt forgiveness during the year. Chapter 10A Interest deductibility If you have significant interest or debt deduction costs during the year, you should closely consider whether you are precluded from deducting such amounts. Chapter 10B Capital protected borrowings Interest deductions may be denied in respect of the funding of capital protected shares, units or stapled securities. Chapter 10C TOFA general On an annual basis, you need to consider whether the TOFA provisions will start to apply to your entity or group of entities. Chapter 10D
15 15 TOFA elections TOFA can provide taxpayers with a number of elections that allow tax to be aligned with accounting for financial instruments. If such elections are of interest, they need to be made before year-end. Chapter 10E TOFA consolidated groups If your group is subject to TOFA, and an entity has joined your tax consolidated group, make sure that you have applied the special TOFA rule to liabilities of the joining entity (which treats such amounts as assessable). Chapter 10F TOFA compliance issues If your group is subject to TOFA, the ATO is conducting compliance activity for the current income year. Accordingly, you should ensure you are comfortable with your TOFA positions. Chapter 10G Notes Review notes taken in relation to the chapter. Chapter 10H 2K International tax This section considers a number of year-end considerations where you have international transactions, or inbound or outbound investments. Non-resident individual tax rates We have outlined the tax rates for individuals for the 30 June 2014 income year. Chapter 11B Tax residency and source You should carefully consider whether the relevant entity is a tax resident for the current year, and (where non-resident) whether foreign sourced income should be excluded. Chapter 11C Temporary resident exemption If you are a foreign citizen and an Australian resident, consider whether you can apply the temporary resident exemption and reduce your taxable income. Chapter 11D Change in residence A change in residence may have significant tax implications and may also require elections to be made. You should consider your residency status for the income year. Chapter 11E Foreign accumulation funds If you own any non-controlling interests in foreign companies or trusts, you should consider how you will be taxed on those investments. Chapter 11F Controlled foreign companies You should consider whether the controlled foreign company provisions will result in an accrual of underlying income in your foreign investment, even if your individual interest is a minority interest. Chapter 11G Transfer pricing New transfer pricing provisions apply from 1 July 2013, which can apply to reprice all of your international dealings. The provisions also require documentation to be in place by lodging your tax return. It is therefore critical to ensure that you review your transfer pricing policies and documentation. Chapter 11H International dealings schedule Completion of the international dealings schedule for the 30 June 2014 tax return should be consistent with your transfer pricing documentation for the current year. It is therefore critical to ensure transfer pricing documentation is in place. Chapter 11I Conduit foreign income If the Australian company is a conduit between foreign entities, the conduit foreign income provisions may allow unfranked dividends to be paid to non-residents tax free if you meet certain conditions in the relevant income years. Chapter 11J Foreign income tax offsets Consider your FITO position for 30 June 2014 to determine whether there are any excess FITOs that will be wasted. Strategies can be put in place to help reduce FITO wastage. Chapter 11K Non-resident distributions Consider whether distributions from non-residents (including capital reductions) can or have been made to an Australian entity in a tax-free manner. Chapter 11L
16 Non-residents and asset sales Non-residents and temporary residents can dispose of certain (e.g. non-land rich) Australian assets without tax consequences. However, non-residents and temporary residents are no longer eligible for the 50% CGT discount. Chapter 11M Deductions in earning foreign income Deductions may be denied where a foreign operation in the group produces exempt or non-assessable non-exempt income to the group. This may be relevant if you carry on a branch (or hold shares in a subsidiary) in a foreign country. Chapter 11N Deemed dividends Related party transactions may result in deemed unfranked dividends where benefits are provided by a CFC to a shareholder or associate of the shareholder (similar to Division 7A). Chapter 11O Thin capitalisation If you are an inbound or outbound entity, the thin capitalisation provisions may deny interest deductions. You should consider reviewing your thin cap position before year-end. You should also start to consider the significant changes that will apply from 1 July 2014 to the thin capitalisation provisions which (in most cases) will make it harder to claim interest deductions. Addressing your tax gearing ratios before 30 June 2014 may place you in a much better thin capitalisation position for the 30 June 2015 year. Chapter 11P Withholding tax and deductions If you pay interest, royalties or other income subject to withholding tax, noncompliance with the withholding tax provisions may result in deductions being denied for the income year. Chapter 11Q Non-resident beneficiaries If you stream classes of income to non-residents (e.g. interest) you should consider the ATO s views on streaming and the risk that the current provisions may not support streaming such income. Chapter 11R Non-resident trusts If you have an interest in a foreign trust for the 30 June 2014 income year, you may need to disclose income in your tax return under the accrual provisions. Chapter 11S Offshore assets and ATO disclosure opportunity (Project DO IT) If you have offshore assets or investments that you have not previously disclosed to the ATO, you should consider taking advantage of the current ATO offshore asset voluntary disclosure initiative to avoid steep penalties and the risk of criminal prosecution for tax avoidance. Chapter 11T Investment manager regime If you are a non-resident widely held fund or an Australian investment manager, broker or custodian, you should consider the possible application of the new IMR regime which can exempt certain Australian passive income from Australian tax. Chapter 11U Managed investment trust fund payments The withholding tax rate on fund payments to non-residents during the 2014 income is equal to 15% for EOI countries and 30% for non-eoi countries. A special rate of 10% applies to certain energy efficient buildings funds. Chapter 11V 16 Notes Review notes taken in relation to the chapter. Chapter 11W 2L Super and GST This section considers a number of year-end considerations for Superannuation and GST. Deductions for contributions You may be able to claim a deduction for superannuation contributions by paying the amounts to the fund (i.e. received by the super fund) before year-end. Chapter 12A Super guarantee Ensure that you have complied with the superannuation guarantee requirements, especially for bonuses paid and payments made to contractors, consultants or members of the board who are not paid via the payroll. Chapter 12B
17 17 Contribution caps Make sure you have complied with the annual concessional and non-concessional contribution caps. New rules apply to related party asset transfers to super from 1 July Chapter 12C Non-concessional contribution caps Please note that the non-concessional contribution limit increases to $180,000 p.a. and $540,000 over a fixed three year period from 1 July 2014 for individuals under the age of 65. Consider whether you should defer making such contributions until after 1 July Chapter 12C Personal contributions Consider whether the individual is eligible to make a deductible concessional contribution before 30 June 2014 and ensure notice requirements are met within time. Chapter 12D Excess contributions When reviewing your superannuation strategy for year-end, carefully consider whether payments are within your contributions cap. Chapter 12E Increase in contributions tax for higher income earners The contributions tax increases from 15% to 30% for individuals who have income of more than $300,000. Individuals should consider this when making contributions for the 2014 year. Chapter 12F Employment termination payments If you have received an ETP during the 30 June 2014 income year, you should review changes to the concessional taxation treatment of such payments. Chapter 12G Legal settlements on employee termination Consider whether amounts received in respect of legal costs incurred in disputes concerning the termination of employment can be treated as an eligible termination payment (which may be subject to concessional treatment). Chapter 12H GST adjustments for bad debts written off If you write off a bad debt during the year, you may need to make a GST adjustment in the relevant BAS. Chapter 12I Accounting for GST on a cash or accruals basis If you currently account for GST on a cash basis you should consider whether you still satisfy the eligibility requirements for cash basis accounting. Chapter 12J Financial acquisitions threshold If you make financial supplies, you should consider whether you have exceeded the financial acquisitions threshold and whether you can claim full input tax credits. Chapter 12K GST adjustments for change in use If you have changed the extent to which an acquisition or importation is used for a creditable purpose, you should consider whether a change in use adjustment is required in the BAS for the period ended 30 June. Chapter 12L Reporting requirements for construction If you are in the building and construction industry, you need to consider the reporting requirements for payments made to contractors before 30 June. Pitcher Partners has software that enables direct upload for ATO reporting. Chapter 12M Notes Review notes taken in relation to the chapter. Chapter 12N 2M Integrity measures This section considers a number of integrity measures that should be considered with your year-end planning. General anti-avoidance (Part IVA) You should consider Part IVA in relation to any material tax planning strategy that may be implemented for the 30 June 2014 income year, including the new changes which extend the scope of Part IVA from 16 November Chapter 13A Promoted schemes at year-end Be careful of schemes that are promoted to taxpayers to reduce their taxable income for the income year. Consider the ATO guidance on what to look out for. Chapter 13B
18 Related party transactions Where tax planning arrangements involve related party transactions, consider carefully the application of the anti-avoidance provisions that may deny deductions incurred by one of the related parties. Chapter 13C Wash sales Consider the ATO s view on wash sale arrangements where assets are disposed of for a loss or gain and substantially the same assets are re-acquired. Chapter 13D Franking credit trading arrangements You should review any arrangements that purport to provide a return that is calculated with reference to franking credits as such arrangements may fall foul of the franking credit benefit provisions. The ATO has released a ruling where it will seek to apply the anti-avoidance provisions to such arrangements. The Government has also announced changes from 1 July 2013 dealing with double benefits on franking credit arrangements. Chapter 13E Trust streaming to exempt entities Consider the impact of the anti-avoidance rules on distributions from trusts to exempt entities. Chapter 13F Trust distributions The ATO is soon to release a fact sheet that could indicate that it may apply the trust stripping provisions more broadly to family trust arrangements. Care needs to be taken where income is distributed to a beneficiary, where it is unlikely that the beneficiary will ever call on the funds (or be paid those funds). Chapter 13G 18 Notes Review notes taken in relation to the chapter. Chapter 13H
19 19 3 Income 3A General rules on income A taxpayer is required to include all income derived for an income year in their assessable income. Generally speaking, business activity income is typically brought to account on an accruals basis, while passive income and personal services income are typically brought to account on a cash basis. However, as outlined below, some types of passive income have their own special timing rules. Furthermore, taxpayers in the business of deriving passive income (e.g. a finance entity) would need to bring such income to account on an accruals basis. 3B Business income The accruals method is generally used to include income that has been derived from the sale of goods, commodities or from business activities. Where income is from a professional practice, it is not always clear whether such income is from personal services or from a business activity 1. This issue should be reviewed on an annual basis. A taxpayer will typically derive business income when an invoice has been raised, or where the taxpayer is legally entitled to the amount. All trade debtor amounts at year-end are generally included in the assessable income of a taxpayer deriving business income. Taxpayers should also carefully consider accrued income accounts to determine whether such amounts are assessable income at year-end (see Chapter 3C). Determine whether you have brought income to account in the correct year. Some income is brought to account on a cash basis (e.g. interest), while other income is brought to account on an accruals basis (e.g. business income). Consider whether you issue invoices in June 2014 that relate to work that is completed in the 2015 income year. 3C Accrued and unearned income Taxpayers carrying on a business may often record income as either accrued or unearned. You should carefully consider the tax treatment of those types of income, as the tax treatment will not always follow the accounting treatment. Accrued income It may be possible to defer the recognition of accrued income to the following income year. Special consideration should be given to such amounts identified for accounting purposes where an invoice has not been issued. Such income may, or may not, be derived for tax purposes depending on the legal entitlement to the amounts at the time. For example, work in progress amounts will not generally give rise to assessable income until there is a recoverable debt. If, under a contract or arrangement, a recoverable debt may be created without the need to bill the client, then the amount will generally be derived once the work is wholly completed 2. Furthermore, the accounting basis for accruing income can sometimes be held to be acceptable. The ATO place a lot of emphasis on these two factors and may seek to tax unbilled income in various cases even if an invoice has not been issued 3. As a final note, construction contract income may be derived on a different basis than on a billings basis (see Chapter 3G). 1 TR 98/1: Income tax: determination of income; receipts versus earnings 2 TR 93/11, para 6 3 See ATO ID 2012/15
20 Unearned income 20 An exception to the ordinary derivation rule can occur where amounts are received or receivable in advance of goods or services being supplied or provided (i.e. unearned income amounts). Generally, if a contract or arrangement requires that the fee be paid in advance, the income is derived in the income year in which the work is completed (or the part of the work) to which the fee relates (even if invoiced). On the other hand, if the client simply pays early, the fee income is generally only derived when a recoverable debt arises or would have arisen if the client had not paid early 4. The tax treatment also considers the accounting and commercial treatment of the relevant income. Accordingly, if one is seeking to defer such income, it is prudent to record such income as unearned in the accounts (subject to limitations imposed by accounting standards). Note that not all unearned income will qualify for deferral. There have been many cases where the principle has been distinguished. Where this amount is material, you should consider this opportunity further. Identify whether an amount of accrued income or unearned income has been recorded in the accounts in a prior year, or is expected to be recorded, in the accounts at 30 June Determine whether such amounts have been derived for tax purposes and whether a tax adjustment should be made for the 30 June 2014 balance. 3D Trade incentives (purchase of stock) Trading stock acquired may be subject to a trade incentive (e.g. volume rebate, trade discount, promotional rebate etc.). This discount amount may either give rise to assessable income to the purchaser, or can reduce the cost of trading stock 5, depending on the nature of the trade incentive. For unconditional trade incentives (e.g. a 10% unconditional rebate for all stock purchased) relating directly to the purchase of trading stock, the amount is treated as a reduction in the cost of trading stock. However, other incentives generally do not reduce the purchase price, but are treated as income at the time when the incentive is provided. For example, conditional incentives, promotional incentives, and volume rebate or trade discounts. In this case, the purchase of trading stock is to be recorded at the full (undiscounted) price (see Chapter 4R). Accordingly, these discounts can be deferred until derived by the taxpayer and do not have to be included in income at year-end. Identify whether your business receives conditional discounts or trade incentive discounts from your suppliers. If so, you may be able to defer recognition of this income for taxation purposes. 3E Trade incentives (sale of stock) Where you sell trading stock and offer trade incentives, the treatment of the discount component predominantly follows the treatment in Chapter 3D. That is, for unconditional trade incentives relating directly to the sale of trading stock, the amount is treated as a reduction in the sales proceeds. This treatment is allowed for tax purposes if the trade incentive is virtually certain, effectively allowing an upfront deduction for the discount provided. 4 TR 93/11, para 8 and Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314. See also TR 2014/1, para 5. 5 TR 2009/5