R & G CONSULTING
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As we approach year end, it is time to focus on tax planning issues that can potentially save you tax. Issues to consider include the deferral of income, acceleration of tax deductions, capital gains tax and other planning initiatives.
Tax planning may be of extra interest this year given the reduction in the company tax rate from 34% (until 30 June 2001) to 30% (from 1 July 2001). There will therefore be greater incentive for companies to:
defer income (so it can be taxed at the lower rate); and
bring forward any tax deductions (so they utilise the higher tax rate).
Companies might also consider bringing dividends forward to utilise franking credits at the higher tax rate.
Important matters to consider are examined in the following sections.
In relation to the derivation of income, we note the following:
most taxpayers will not be assessable on interest, dividends or rent until received (unless otherwise paid or credited on their behalf) creating an opportunity for deferral;
work-in-progress of professional practices will not be assessable until there is at least an entitlement to bill;
long-term construction contract income may be recognised on either the billings or estimated profits methods;
taxpayers may be able to defer recognition of income received before year end for services not yet performed; and
royalties and insurance proceeds are typically assessable on a cash basis (i.e. when they are received).
Points that may lead to accelerated tax deductions include:
pay superannuation contributions by year end;
write off bad debts before year end;
ensure that audit fees are incurred before year end;
bringing forward the outlay for tax deductible expenses;
consider scrapping stock, plant and equipment of nil value before year end;
valuing stock to a lower replacement price or market value where appropriate;
consider the appropriate-ness of the low value pool for depreciation of plant and equipment; and
consider realising foreign exchange losses and deferring realisation of gains.
Strategies to reduce CGT include:
deferring a disposal (that will result in a capital gain) to a subsequent income year, particularly for companies, given the reducing tax rate;
deferring a disposal to ensure the asset has been held for at least 12 months to (potentially) benefit from the 50% discount, which may be available to individuals and trusts;
match capital gains and losses where possible to avoid carrying forward a capital loss;
consider the availability of rollover relief for disposals to related parties;
utilise the CGT small business and retirement concessions;
consider whether non-deductible costs may be included in an assets cost base, which will reduce a capital gain;
seek liquidators determinations to crystallise a capital loss on valueless shares in a company in liquidation; and
consider whether it is more beneficial to utilise the 50% discount (if it is available), rather than the frozen indexation method.
Other important matters to take into account include:
try to match foreign source income of a particular class with related expenditure, to avoid a quarantined foreign loss;
plan to utilise foreign tax credits (against Australian tax on foreign income of the same class) or transfer the credits to a group company;
avoid paying rebateable dividends to a loss company;
remember that year end trust distributions and income injections may affect a trusts ability to recoup prior year tax losses and bad debt deductions;
the impact of private company loan rules and whether loans can be structured to comply with the provisions to avoid a deemed unfranked dividend and franking debit;
ensure minimum prescribed repayments are made on private company loans as required;
whether the commercial debt forgiveness rules apply, and if so, can grouping rules or other planning initiatives mitigate the impact;
ensure optimum utilisation of franking credits and consider making a family trust election where a trust holds shares acquired post-31 December 1997;
whether the non-commercial loss rules apply;
consider the effective lives of depreciated assets;
where loans have been made by non-resident associates, consider debt and equity levels and the application of the thin capitalisation rules;
consider international related party transactions, whether arms length prices have been charged, and whether there are transfer pricing issues to address;
identify and address other international tax issues, such as permanent establishments and controlled foreign companies;
consider whether a family trust election should be made because of losses or bad debts in trusts or companies owned by trusts;
look at whether the personal services income rules apply, and if a personal services business determination is required; and
consider deferring black hole expenditure until after 30 June, to be entitled to the proposed tax deduction.
A Court has found that interest on money borrowed to fund property renovations was not tax deductible.
The taxpayer borrowed funds to buy a residential property, for the claimed purpose of making a profit on its sale. The Commissioner allowed interest deductions concerning that borrowing.
The Commissioner subsequently denied interest deductions concerning funds borrowed to renovate the property. The Court found that there was insufficient connection between the renovation interest and future income-producing activity.
Whilst it was likely the tax-payer would ultimately make a profit on a sale, due to the low purchase price, the taxpayers plans for the asset at the time of acquisition and renovation were not clear. It seems a more definite intention was required for the interest to be deductible.
It seems unlikely that the original interest deduction would have been allowed, had this issue been before the Court.