THE REPORT - June 2000

Index



    * Year End Tax Planning
    * Unexpected CGT for Superannuation Funds
    * PAYG Bulletin
    * Prepayment Deductions
    * Commercial Web Sites
    * 2000 Tax Return Checklist
    * Companies, Partnerships, Trust & Other Business Income
    * Additional Information




Tax Planning Initiatives Year End Tax Planning 
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As we approach year-end it is time to focus on tax planning issues, including the deferral of income, acceleration of deductions and other planning initiatives. 

Tax planning may be of extra interest this year give tax rate reductions (that will commence on 1 July 2000).  Important matters to consider are outlined below. 

Deferring Income

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 the bill; Where income is derived under a long term construction contract, taxpayers may choose between the billings and estimated profits methods; 

Applying the Arthur Murray principle, tax payers may not be assessable on income received before year end for services not yet performed. Royalties and insurance proceeds are typically assessable on a cash basis. 

Accelerating Deductions 

Strategies to increase deductions include: Pay superannuation contributions by year end; Write of bad debts before year end; Ensure that audit fees are incurred before year end, based on tax ruling IT 2625; The outlay for deductible expenses may be brought forward; 

Consider scrapping stock of nil value before year end, and revaluing other stock to a lower replacement price where appropriate; 

Consider realising foreign exchange losses. 

Capital Gains Tax Strategies to minimise CGT include: 

Deferring a disposal to ensure the asset has been held for at least 12 months to (potentially) benefit from the 50% discount; Match gains and losses where possible to avoid carrying forward a capital loss; 

Consider the availability of rollover relief; Consider whether non-deductible costs may be included in an asset’s cost base; Seek liquidator’s determinations to crystallise a capital loss on valueless shares in a company liquidation. 

Other Issues Other important matters 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 rebateble dividends to a loss company; 

Remember that year end trust distributions and income injections may affect a trust’s ability to recoup prior year tax losses an bad debt deductions. The impact of private company loan rules and whether loans can be repaid or structured to comply with the provisions to avoid a deemed un-franked dividend and franking debit; 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.   





Unexpected CGT for Superannuation Funds 
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Where self-managed superannuation funds (SMSF) convert from an accumulation to a pension fund, recently introduced legislation deems a disposal for CGT purposes.  Under the current law, there is no CGT disposal concerning assets of a SMSF when it is converted from an accumulation fund to a pension fund. 

As a pension fund is not taxed in its own right, no CGT consequences should ever rise in respect of those assets. The new law essentially taxes unrealised gains at the date of the conversion. 

It applies to the assets converted on or after 1 July 2000 and means that the market value of those assets will need to be established on the day of the conversion to determine the amount of the gain. 





PAYG Bulletin Taxing of Allowances
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The Tax Office has issued a PAYG bulletin concerning the taxing of allowances for the 2000/01 year and subsequent years. The bulletin applies to payer of allowances to employees, company directors or office holders. 

It lists different types of allowances, and specifies those which do not require PAYG holding. 





Prepayment Deductions
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Further legislation has been introduced concerning the prepayment rules. Readers will recall that there is a limit on deductions for prepayments incurred by taxpayers (other than non-business or small business taxpayers) from 21 September 1999. Under new legislation, deductions for prepayments made under tax shelter arrangements by any taxpayer, from 11 November 1999, must be apportioned over the period to which the prepayment relates. 

Certain prepayments which are excluded from the new rules will be deductible when incurred (subject to the 13 month rule). These include: Certain insurance and interest relating to rental properties; Interest concerning publicly listed securities; Some binding contractual obligations existing on 11 November 1999; and Expenditure related to certain Tax Office product rulings.  





Commercial Web Sites 
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The Tax Office has issued a draft ruling concerning the deductibility of expenses associated with a commercial website. It states that the cost of acquiring, developing or constructing a web site is expenditure on software and deductible over 21/2 years, provided there is requisite income earning purpose. 

Alterations to the website will only be the acquisition of additional software where new functions are added. Otherwise, the costs will be deductible outright. Ongoing operating costs will be deductible as recurrent business costs, and hardware will be depreciable, again subject to ordinary deductibility tests.         





2000 Tax Return Client Checklist
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Important Tax Changes  The following important tax changes may impact on your 1999/2000 tax return. 

Capital Gains Tax 

A 50% CGT discount may apply for individuals and trusts. A 33 1/3% discount may apply for complying superannuation funds. Indexation is frozen at 30 September 1999. Small businesses CGT concessions may apply to disposals of CGT assets. 

Depreciation (Small Business Concessions) 

Small business taxpayers will still have access to the various depreciation concessions such as accelerated depreciation for plant and equipment. 

Interest Deductions 

Interest on borrowed funds may still be tax deductible even though: The borrowed funds are used to purchase a capital item; or The income earning activity period is yet to commence or has ceased. 

2000 Individual Tax Returns 

Income Gross salary, wages, allowances, benefits, earnings tips and directors’ fees.  Income from business activities. PPS and RPS payment summaries. 

Details of any non-cash benefits received. 

Lump sum & termination payments. 

All documentation should be provided including ETP Group Certificate from the employer or fund.  Government social security payments, including pensions and unemployment and sickness benefits. 

Details of any CGT asset sales (e.g. shares and real estate) including dates of acquisition and disposal. Particularly watch out for CGT assets acquired after 19 September 1985, detailing costs and dates thereof. Annuities including allocated pensions. 

Income from trusts and partnerships. Statements of distribution should be provided where appropriate. 

Rental income. Interest and dividends received and any tax deducted. Include details of franked dividends. 

Foreign source (employment & pension) income & details of any foreign tax credits attached to that income. 

Deductions 

Investment and property income expenses (carefully detail interest claims). 

Subscriptions (not including sporting or social clubs). Expenditure records related to a taxpayer’s employment, such as work-related motor vehicles, self-education, protective clothing and uniform expenses. 

Donations of $2 and over depending on the recipient. 

For self-employed persons and those without employer superannuation support, details of superannuation contributions made. 

Tax agent’s fees and other accounting and tax audit fees. 

Special deductions (Australian films, investment shelters and forestry-type schemes). 

Bank fees and FID (where the credit or deposit represents the assessable income). 

Rebates Details of private health insurance. 

Details of superannuation contributions where no tax deduction can be claimed. 

Any changes in dependant (income of spouse should be provided). Details of any income received in a lump sum which was accrued in earlier income years (e.g. assessable pensions). 

Net medical expenses if they exceed $1,250 in total. 

Superannuation contributions made by employees with employer superannuation support, and whose assessable income is less than $31,000. 

Note: Taxpayers with a spouse (married or de facto) and dependant children should check to see if they are eligible for Family Tax Assistance. 





Companies, Partnerships, Trusts & Other Businesses Income
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Trading income. Other income (e.g. rent, interest royalties). 

Stock on hand (and basis of valuation) – note any obsolete stock. Work in progress. 

Primary producer subsidies (if assessable). 

Details of CGT assets (e.g. stock and real estate) sold including dates of acquisition and disposal with particular attention paid to CGT assets acquired after 19 September 1985. 

Dividends including details of franking credits. Income from foreign sources, including details of foreign taxes paid. 

Deductions

Repairs, and maintenance. Salaries including fringe benefits. Fringe benefits tax paid. Rates, land taxes and insurance premiums. Advertising expenses. Interest on borrowed monies. Prepaid expenses. Retirement payments, and golden handshakes. 

Bad-debts actually written off during the year. Donations of $2 and over, depending on the recipient. Commissions. Legal expenses. Lease documents for motor vehicles, premises and equipment. Losses of previous years (or intra-group transfers) Superannuation contributions. Subscriptions. Car expenses (remember to include petrol, repairs, parking and maintain log books). Tax agent’s fees and other accounting and tax audit fees. Royalties paid. 

Details of the purpose and destination of any interstate or overseas trip. Expenses must be full documented where travel involves at least one night away from home. Travel diaries should be included where travel exceeds five nights. 

Research and development expenditure. Bank fees and FID (where the credit or deposit represents assessable income).   Liabilities New loans taken out during the year and their purpose, including any new lease or hire purchase agreements. Statements from the lending authority detailing the opening and closing balances of existing loans during the financial year. Provisions for long service leave and annual leave. Creditors on hand at the end of the financial year. Details of loan accounts to directors, shareholders, beneficiaries and partners. Accrued expenses (e.g. audit fees, interest payments). 

Commercial debts forgiven. Assets Detail of depreciable assets acquired and/or disposed of during this income year, including: type of assets; date of acquisition/disposal; and consideration received/paid. Lease commitments. Debtors on hand at the end of the financial year. Commercial debts forgiven. 





Additional Information Required
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Franking account details/movements (includes class of any dividends paid). Overseas transactions, exchange gains/losses. Private companies – remuneration or loans to directors, shareholders and their relatives. Changes to the capital of their company.     Note: To ensure that you obtain the maximum deductions to which you are entitled and in consideration of the penalty provisions, 

FULL DETAILS of any claim should be provided and supporting documentation made available. For employee taxpayers and for travel and motor vehicle claims by self-employed taxpayers, documentation must be a receipt, invoice or similar document which contains certain details. For other taxpayers, documentation may comprise receipts, dockets, diary notations or reasonable and supportable estimates.





Important: This is not advice. Clients should not act solely on the basis of the material contained in this Report. Items herein are general comments only and do no constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of these areas. The Report is issued as a helpful guide to clients and for their private information. Therefore is should be regarded as confidential and not be made available to any person without our prior approval.