June 2011 Year End Tax Strategies
Following is a checklist of some of the income tax planning strategies that may be relevant as the tax year draws to a close. Note that, as in all tax planning situations, other considerations must also be taken into account ? for example, personal factors, asset protection, commercial considerations, common sense, the general economic climate and the potential impact of other taxes.
- Consider bunching or deferring discretionary medical expenses to this year or next year, so as to increase the possibility of being able to claim the offset in that year (threshold is $2,000 in 2010/11),.
- Consider making deductible gifts before year?s end.
- A minor will be able to avoid being taxed at the penal rates applicable to minors? income if they are in a full-time occupation as at 30 June
- To qualify for the government superannuation co-contribution in the current year, a contribution must be made by 30 June.
- A taxpayer who is considering retiring near year end may find it worthwhile to defer discretionary income until after 30 June.
- Consider deferring income to the following year, particularly if: (1) income for that year is likely to be lower; or (2) tax rates for that year are expected to be lower (as is the case for 2010/11 personal tax rates).
- Consider acquiring income-producing assets in the hands of a low income taxpayer rather than a high income taxpayer.
- If seeking to avoid having a private company loan treated as a dividend under Division 7A, there needs to be compliance with the requirements relating to minimum interest, repayments and maximum term of the loan.
Capital gains and losses
- Consider realising a capital gain in a low income year rather than a high income year. However, as a capital gain accrues on disposal (ie contract date), simply deferring the derivation of the sale proceeds to a later year may not be effective.
- Consider realising capital losses by year?s end so that they may be offset against realised capital gains of that year.
- Consider realising capital gains by year?s end so that they may be reduced by current year capital losses (or unused capital losses from previous years).
Deductions and losses
- In general, deductions are not allowed where there is merely an accounting provision or reserve set up for estimated costs ? the actual expense must be incurred.
- Small business entities may be able to take advantage of special prepayment rules.
- Subject to cash flow considerations and prepayment rules, consider making deductible purchases by year?s end in order to accelerate deductions. This applies particularly if tax rates for the following year ? and therefore the tax benefit of the deduction ? are expected to be lower than in the current year.
- For taxpayers wishing to claim deductions for concessional superannuation contributions, ensure the payment is made (and received by the fund) by year?s end. Bear in mind the annual caps that apply, and consider whether any excess contribution over the cap should be deferred.
- To be deductible, a bad debt may need to be actually written off by year?s end.
- To claim a current year deduction for directors? fees, the company should have definitively committed itself to the payment, eg by passing a properly authorised resolution.
- To claim a current year deduction for annual or long service leave, it is not sufficient for the employer merely to have made a provision in its accounts to cover the employees? entitlements.
- Be aware that capital allowances are not available for a year unless the asset has been used or installed ready for use, and the taxpayer?s income-producing operations have commenced.
- To claim the investment allowance for pre-1 January 2010 purchases in 2009/10, the asset must have been first used or installed ready for use by 30 June 2010. For businesses other than small business entities, failure to do so not only means deferral of the deduction, but also a lower rate of deduction. No deduction applies in any event if the first use or installation is post-31 December 2010.
- Consider whether a family trust election needs to be made where the trust has made losses.
- Where a company is seeking to carry forward a prior year loss, pay attention to the requirements for the continuity of ownership test to be satisfied up to the end of the claim year.
- Tax agent fees are not deductible until they have been incurred, irrespective of the year of the tax return to which they may relate.
Depreciation and trading stock
- Consider whether a change of stock valuation method is appropriate.
- Trading stock in transit at year?s end may have to be taken into account in calculating the value of stock on hand at the end of the year.
- For obsolete stock, or in other special circumstances, consider whether to adopt a special lower valuation.
- Business deductions for trading stock will generally not be available until the stock is actually on hand.
- If expecting a refund, lodge early electronically.
- When selling land, the timing of the settlement before or after year?s end may affect land tax liabilities.
- Be wary of year end investment schemes with supposed spectacular tax advantages. Tax should never be the dominant reason for making an investment, ie tax benefits will never compensate for a poor commercial outcome. If it looks too good to be true, it probably is!