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Newsletter June 2010

As the financial year draws to an end, it is important that you give consideration to your year end tax planning. Below is a summary which highlights some key issues together with some of the significant tax changes of the past year.

To obtain a tax deduction for the year ended 30 June 2010, all superannuation contributions must be paid and must reach the complying superannuation fund by 30 June 2010. The age base limits for concessional contributions are;

If the Superannuation Guarantee contribution for the year ended 30 June 2010 is not made by 28 July 2010 then the superannuation needs to be paid to the Australian Taxation Office.

As a final check list prior to 30 June 2010 please consider;

• Salary sacrifice opportunities,
• Maximizing contributions for non working spouses and other working family members,
• Making non tax deductible contributions into superannuation up to $150,000 per year or $450,000 to cover three years.
• Transition to retirement pension strategies, for example maximizing contributions at the same time as receiving concessionally taxed pensions or tax free pensions.

If your total income for co-contribution purposes (the sum of your assessable income plus your reportable fringe benefits amount) is $31,920 or less, the government will contribute $1.00 for every dollar a taxpayer contributes to a complying superannuation fund, up to a maximum co-contribution of $1,000 a year.

The maximum contribution is reduced by 3.33 cents for every dollar you earn over $31,920, phasing out completely once your taxable income reaches $61,920.

Yearly income streams from account-based pensions must be withdrawn from pension funds before 30 June 2010. Pension withdrawals must be within the yearly minimum and maximum limits.

Bad debts must be written off as a bad debt before year end in order to claim a tax deduction. It is important that a minute recording a bad debt write off is created.

Employee Bonuses are generally only deductible if they’re incurred by year end. This means there must be a legal liability to pay the bonus to the employee and the amount must be able to be reasonably estimated.

Depreciating assets that are not used and scrapped by year end can be written off with an immediate tax deduction. These items should be identified prior to year end.

For tax purposes, gains & losses are only bought to account when foreign currency, rights or obligations are realised.

Where there is a sale of a capital asset in which a contract is required, then for capital gains tax purposes, the contract date is the date in which the capital gains tax event occurs, not settlement date.

Should you have derived a capital gain during the year, then you should consider realising any capital losses before year end, which can then be offset against the realised capital gains. Remember capital losses can only be offset against capital gains.

Be careful of “wash sales” as the ATO is cracking down on these arrangements. “Wash sale” arrangements occur when shares are sold in order to realise a loss and then the shares are bought back the next day.

For a company to carry forward its tax losses to the next financial year, it must pass the continuity of ownership tests or the same business test.

Dividends paid during the year can be fully franked provided at the end of the financial year there is sufficient franking credits to cover the dividend. If there are insufficient credits then franking deficit tax needs to be paid.

In NSW from 1 July 2009 to 30 June 2010, where the employer’s Australian wages exceeds $638,000 per annum, payroll tax is charged on payroll in excess of $638,000. From 1 July 2009 to 31 December 2009 the payroll tax rate was 5.75%. From 1 January 2010 to 30 June 2010 the payroll tax rate is 5.65%. Where there are wages paid interstate then the NSW threshold of $638,000 is reduced on a proportional basis.

For payroll tax purposes, wages includes direct wages, superannuation, gross fringe benefits, annual leave, payments to certain contractors etc. If you believe you have a payroll tax liability for the year ended 30 June 2010 please contact your Wearne & Co advisor.

Advance deductions for most prepayments are no longer available except where,

• they are less than $1,000 GST exclusive,
• required to be made by law under a court order,
• under a contract of service, eg. salary & wages,
• prepaid interest expenses incurred from investment loans are allowed,

Income is assessable when it is derived and becomes a legally enforceable debt. Therefore for year end tax planning it is important to assess when income is derived and where possible, defer that income until the following year.

• Employment income is derived when the income is received, so deferring payment can defer the tax payable. This will apply to bonuses, director’s fees and similar payments.
• Interest income is derived when it is received, or credited to the taxpayer, not when it is accrued. Therefore by deferring the receipt of interest, even if it has been accrued, will defer income.
• Rental income is usually derived when it is received, or credited to the taxpayer, so this could be deferred.
• Prepayment for services. Where a taxpayer received a payment for the provision of services in advance of the service, and the amount can be refunded if the service is not provided, the income has not been derived until the service is provided.

Changes to Non-Commercial Loss rules will mean that taxpayers with a taxable income greater than $250,000 (not including the business loss) will not be able to offset the business loss against other assessable income, unless they apply to the ATO for permission.

Taxpayers with assessable income less than $250,000 will only be allowed to offset their business losses against other assessable income if they pass one of the following tests;

• profits test,
• real assets test,
• assessable income test,
• other assets test.

Stock takes should be conducted, and obsolete items that will not sell should be destroyed and written off before the end of the financial year.

Recent court case decisions have forced changes to the rules governing trusts, in particular Discretionary Trusts. Trustees may need to review their trust deeds to recognise the definition of income, and what powers the trustee needs to determine the income that can be distributed.

Further it is now a requirement for all beneficiaries of a trust to formerly notify the Trustees of their tax file number.