Year End Tax Planning
The year-end is rapidly approaching and you may not be aware that, based on changes announced in Budget, your 2015 tax position may change compared to previous years. We have listed on the following the major changes that could affect most taxpayers in 2015 and future financial years.
Matters to Consider
Effective for 2015 Financial Year
- Small businesses (aggregated turnover of less than $2 million) will be able to immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000 (currently, an immediate write-off is generally available for assets costing less than $1,000). This will apply for all (new and second hand) assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017
- Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (‘the pool’) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
Effective from 1 July 2015
- Reduction in company tax rate – The company tax rate will be reduced to 28.5% (i.e., a reduction of 1.5%) for companies with aggregated annual turnover of less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.. Note that, the current maximum franking credit rate for a distribution will remain at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees.
- 5% discount on tax payable for other taxpayers – Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received by an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and will be delivered as a tax offset.
- Modernising the existing car expense claim methods - From the 2015/16 income year, the government will modernise the methods of calculating work-related car expense deductions, as follows:
- The ‘12 per cent of original value method’ and the ‘one-third of actual expenses method’ (which are used by less than 2% of those who claim work-related car expenses) will be removed.
- The ‘cents per kilometre method’ will be modernised by replacing the three current (cents per kilometre) rates based on engine size, with one rate set at 66 cents per kilometre (in respect of all cars). The Commissioner will be responsible for updating the rate in following years.
- Zone Tax Offset (‘ZTO’) will exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ workers (‘FIFO/DIDO workers’) - From 1 July 2015, the government will exclude FIFO/DIDO workers from the ZTO where their normal residence is not within a particular ‘zone’. Furthermore, for those FIFO/DIDO workers whose normal residence is in one zone, but who work in a different zone, they will retain the ZTO entitlement associated with their normal place of residence.
- Immediate deduction for professional expenses on commencing a new business - From 1 July 2015, the government will allow businesses to claim an immediate write-off for a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice (currently deducted over 5 years period).
- Release of superannuation for terminal medical condition - From 1 July 2015, the government will extend access to superannuation for people with a terminal medical condition by extending the certification period (i.e., the period within which the individual is likely to die) to two years. This will give terminally ill patients earlier access to their superannuation entitlements.
Effective from 1 July 2016 and later years
- CGT roll-over relief for changes to entity structure - From 1 July 2016, the government will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability at that point. This measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established.
- Accelerated depreciation for primary producers - For income years commencing on or after 1 July 2016 the government will allow all primary producers to:
- immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills; and
- depreciate all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed over three years.
- Transition period to apply new tax system for managed investment trusts (‘MITs’) - By way of background, the former government announced that a new tax system was to be put in place for MITs. Some features of the proposed system were the introduction of an elective “attribution” system of taxation to replace the present entitlement system and the introduction of a 5% cap to deal with “over or under” distributions so that trusts are not required to reissue statements and investors are not required to revisit tax returns. The 2015/16 Federal Budget confirms the current government’s intention to proceed with the implementation of a new tax system for MITs with a twelve month transition period. The modernised tax rules will now apply from 1 July 2016 (i.e., the 2017 income year), although MITs can choose to apply them from the earlier start date of 1 July 2015.
- Changes to residency rules for temporary working - from 1 July 2016 most people who are temporarily in Australia for a working holiday will be treated as non-residents for tax purposes, regardless of how long they are here. This means they will be taxed at 32.5% from their first dollar of income (up to $80,000). Currently those who in Australia for more than six months and satisfied residency rules, are able to access the tax-free threshold, the low income tax offset and the lower tax rate of 19% for income above the tax-free threshold up to $37,000.
- FBT exemption for work-related electronic devices - From 1 April 2016, the government will allow an FBT exemption for small businesses (with an aggregated annual turnover of less than $2 million) that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions. It appears that, consistent with the current rules, the FBT exemption will only apply if the relevant item is primarily for use in the employee’s employment. Removing the restriction that a tax exemption is only provided for one work-related portable electronic device of each type will remove confusion where there is a function overlap between different products (such as between a tablet and a laptop).
- FBT – Capping threshold for salary sacrificed meal entertainment and entertainment facility leasing expenses (‘EFLEs’) - From 1 April 2016, the government will introduce a separate single grossed-up cap of $5,000 for salary sacrificed meal entertainment and EFLEs (meal entertainment benefits). Where these benefits exceed the separate grossed-up cap of $5,000, they can also be counted in calculating whether an employee exceeds their existing (relevant) cap. Furthermore, all meal entertainment benefits will become reportable.
- Recovery of HELP repayments from overseas debtors - The government will extend the Higher Education Loan Programme (‘HELP’) repayment framework to debtors residing overseas for six months or more if their worldwide income exceeds the minimum repayment threshold at the same repayment rates as debtors in Australia. The new arrangements will apply from 1 January 2016 to new and existing debts. From this date, debtors going overseas for more than six months will be required to register with the ATO, while those already overseas will have until 1 July 2017 to register. Repayment obligations will commence from 1 July 2017.
- Changes to Parental Leave Pay (‘PLP’) - From 1 July 2016, the government will remove the ability for individuals to 'double dip’, by taking payments from both their employer and the government. The government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage).
- Child care (workforce participation stream) - A new single Child Care Subsidy (‘CCS’) will be introduced on 1 July 2017. Families meeting the activity test with annual incomes up to $60,000 (2013/14 dollars) will be eligible for a subsidy of 85% of the actual fee paid, up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.
The CCS will have no annual cap for families with annual incomes below $180,000. For families with annual incomes of $180,000 and above, the CCS will be capped at $10,000 per child per year. Eligibility will be linked to a new activity test.
The CCS will replace the current child care fee assistance provided by the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance payments which will cease on 30 June 2017.
Additional support will be provided to eligible disadvantaged or vulnerable families through the introduction of a ‘Child Care Safety Net’.
Furthermore, the 2015/16 Federal Budget announces the introduction of a new Interim Home Based Carer Subsidy Programme, which is a limited pilot programme to subsidise care provided by a nanny in a child’s home from 1 January 2016.
- Change to the asset test thresholds for the aged pension - The government will increase the asset test thresholds at which pensions are reduced once the threshold is exceeded, as follows:
However, the current ‘taper rate’ at which the age pension begins to phase out will be increased from $1.50 to $3 for every $1,000 of assets over the relevant assets test threshold.
- For a single person – a full pension may be received if the relevant value of included assets (i.e., assets other than excluded assets) is less than $250,000 for a homeowner (currently $202,000).
- For a pensioner couple – a full pension may be received if the relevant combined value of included assets is less than $375,000 for a homeowner (currently $286,500).
- Non-home owner pensioners will also benefit by an increase in their threshold to $200,000 more than homeowner pensioners.
Pensioners who lose pension entitlements on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card for those under Age Pension age.
The families income threshold (i.e., $35,261) will be increased by $3,238 (previously $3,156) for each dependent child or student. For single seniors and pensioners, the threshold will be increased to $33,044 (previously $32,279).
- Income tax relief for Australian Defence Force personnel deployed overseas - The government will provide income tax relief for Australian Defence Force personnel deployed on Operations AUGURY and HAWICK. A full income tax exemption will be provided to personnel on Operation AUGURY and the overseas forces tax offset will be available to personnel on Operation HAWICK.
- Cessation of the Large Family Supplement of Family Tax Benefit (FTB) Part A and reduced portability – The government will cease payment of the additional FTB Part A Large Family Supplement from 1 July 2016. Families will continue to receive a per child rate of FTB Part A for each eligible child in their family. The government will also reduce the amount of time FTB Part A will be paid to recipients who are outside Australia. Currently, FTB Part A recipients who are overseas are able to receive their usual rate of payment for six weeks and then the base rate for a further 50 weeks. From 1 July 2016, families will only be able to receive FTB Part A for six weeks in a 12 month period while they are overseas.
- Medicare levy low income thresholds for 2014/15 - For 2014/15, the Medicare Levy low income thresholds will be as follows:
- Individuals $20,896 (previously $20,542
- Families $35,261 (previously $34,367)
- Research and Development (‘R&D’) tax incentive – introducing a $100 million expenditure cap from 1 July 2014
Currently, under the R&D tax incentive, companies can claim a refundable tax offset of 43.5% if their turnover is less than $20 million, or a non-refundable tax offset of 38.5%.
The government has introduced a cap of $100 million on the amount of eligible R&D expenditure for which companies can claim a tax offset at a concessional rate under the R&D tax incentive. Expenditure beyond the $100 million cap will receive a lower offset at the company tax rate.
These changes apply in relation to assessments for income years commencing on or after 1 July 2014. This measure also includes provisions for the changes to be reviewed five years following Royal Assent and to sunset 10 years following the start date of 1 July 2014.
Year End Tax Planning Strategies
The following year end tax planning strategies may warrant careful consideration:
- Estimate Tax Payable and Timing - Determine your financial position prior to 30 June and determine cash flows available to pay tax.
- Defer Tax – defer the derivation of income to the 2016 year and prepay 2016 year expenses.
- Deemed Dividends - Review director’s loans and unpaid trust distributions and determine possible tax implications.
- Budgets – Review business operations for the last year and forecast impact of future business growths.
- Record Keeping – Review of record keeping and classifications of transactions in accounting systems.
In order for your tax planning to be effective your records must be kept up to date and you should inform us of any known or expected changes that might affect your personal or business tax position, such as a different employment status, expansion of the business or purchase or sale of assets.
We are offering you to consider undertaking 2015 year end tax planning and to discuss potential tax saving options available before the 30 June 2015.
We may be able to identify some tax opportunities in order improve your 2015 tax position and to assist you with the future cash flows regarding the payment of your 2015 tax bill.
If you would like us to undertake such a review would you please respond via email or call us to discuss tax planning options available to you