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| General Year and Tax Ending Planning Strategies from Byrons |
It is now time to consider your year end results and to look at any opportunities available – or obligations to be met – prior to 30 June 2016.
The strategies we have highlighted look at both your business and investment structures as well as your individual income tax.
Income Tax Rates – Individuals
Tax-Free Threshold and Tax Rates
The tax free threshold for 2016 for Australian resident individuals remains at $18,200. When combined with the Low Income Tax Offset, residents pay no tax on incomes below $20,542.
Higher tax-free thresholds apply to senior Australians and pensioners.
Non-resident individuals for the whole of 2015/16 are not entitled to a tax-free threshold. Part-year residents receive a partial threshold.
The currently legislated personal tax rates and thresholds (including the 2% temporary budget repair levy, but excluding the 2% Medicare levy) are as follows:
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Individual income tax rates and thresholds
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2015-16
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2016-17
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Threshold
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Rate
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Threshold
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Rate
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1st bracket
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$18,201
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19.0%
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$18,201
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19.0%
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2nd bracket
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$37,001
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32.5%
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$37,001
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32.5%
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3rd bracket
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$80,001
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37%
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$87,001
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37%
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4th bracket
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$180,001
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47%
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$180,001
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47%
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Including the Medicare levy, the top marginal tax rate will remain at 49% until 30 June 2017. It is proposed that the 2% temporary budget repair levy be removed from 1 July 2017.
Seniors and Pensioners (includes self-funded retirees)
You are eligible for seniors and pensioners offset where you meet conditions relating to your income and eligibility to an Australian government pension. Seniors who would qualify for an aged pension, but are excluded due to not meeting the income and /or assets test, would be eligible for this offset.
The offset is as follows:
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Family status (pensioner)
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Maximum tax offset per person
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Lower rebate income threshold
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Upper rebate income threshold
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Single
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$2,230
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$32,279
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$50,119
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Married or de facto
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$1,602
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$57,948*
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$83,580*
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Couple separated due to illness
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$2,040
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$62,558*
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$95,198*
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* Combined
The ‘Maximum Offset’ reduces by 12.5 cents for every dollar of taxable income over the ‘Lower Threshold’ and reduces to nil for taxable income levels at or above the ‘Upper Threshold’.
The Seniors Health Care Card is a benefit available to many self-funded retirees and is available where you have reached Age Pension age but do not qualify for a government pension and where you meet an income test.
You should have an annual adjusted taxable income of less than:
The ‘Maximum Offset’ reduces by 12.5 cents for every dollar of taxable income over the ‘Lower Threshold’ and reduces to nil for taxable income levels at or above the ‘Upper Threshold’.
The Seniors Health Care Card is a benefit available to many self-funded retirees and is available where you have reached Age Pension age but do not qualify for a government pension and where you meet an income test.
You should have an annual adjusted taxable income of less than:
- • $52,273 for singles
- • $83,636 for couples combined, or
- • $104,546 for couples combined, where the couples is separated by illness or respite care, or where one partner is in prison.
Your adjusted taxable income includes:
- • taxable income
- • reportable fringe benefits
- • reportable superannuation contributions
- • total net investment losses
- • tax free pensions and benefits
- • foreign income, and
- • tax exempt foreign income
- • less any child support you pay
Company Tax Rates
General company tax rates remain at 30% with small business companies (annual aggregate turnover less than $2m) being subject to a reduced tax rate of 28.5%. To be considered a small business, a company must actually carry on a business and not be receiving passive income only.
As part of the Government’s proposal to reduce the company tax rate to 25% over 10 years, all businesses with annual aggregate turnover of less than $10m will be subject to a reduced tax rate of 27.5% from 1 July 2016. We emphasise that these tax rates apply only to companies that carry on a business.
The current maximum franking credit rate remains unchanged at 30% for all companies, maintaining the existing arrangement for investors, such as self-funded retirees. The proposed reduction in small business and corporate tax rates makes deferral of income to 2017 and bring forward of deductions to 2016 even more attractive, as per the following strategies.
Small Business Tax Discount
Individual taxpayers with business income from an unincorporated business (sole traders and partnerships) that has aggregated annual turnover of less than $2m will be eligible to a small business tax discount. The discount is 5% of the income tax payable on the business income and will be capped at $1,000. From 1 July 2016, the turnover threshold will be increased to $5m and the discount will be increased to 8% with the existing $1,000 cap.
Business Income and Expenses
Subject to cash flow requirements, consider whether you are able to defer income until after 30 June. Remember that incorporated small businesses with a turnover threshold of up to $5m will have a lower tax rate in 2017, compared to a $2m turnover threshold in 2016.
Most businesses are taxed on income when it is invoiced. Some small businesses may be taxed only when income is received. Income from construction contracts is generally taxed when progress payments are invoiced or received.
Ensure that you have complied with the requirements to claim deductions in 2015/16:
General company tax rates remain at 30% with small business companies (annual aggregate turnover less than $2m) being subject to a reduced tax rate of 28.5%. To be considered a small business, a company must actually carry on a business and not be receiving passive income only.
As part of the Government’s proposal to reduce the company tax rate to 25% over 10 years, all businesses with annual aggregate turnover of less than $10m will be subject to a reduced tax rate of 27.5% from 1 July 2016. We emphasise that these tax rates apply only to companies that carry on a business.
The current maximum franking credit rate remains unchanged at 30% for all companies, maintaining the existing arrangement for investors, such as self-funded retirees. The proposed reduction in small business and corporate tax rates makes deferral of income to 2017 and bring forward of deductions to 2016 even more attractive, as per the following strategies.
Small Business Tax Discount
Individual taxpayers with business income from an unincorporated business (sole traders and partnerships) that has aggregated annual turnover of less than $2m will be eligible to a small business tax discount. The discount is 5% of the income tax payable on the business income and will be capped at $1,000. From 1 July 2016, the turnover threshold will be increased to $5m and the discount will be increased to 8% with the existing $1,000 cap.
Business Income and Expenses
Subject to cash flow requirements, consider whether you are able to defer income until after 30 June. Remember that incorporated small businesses with a turnover threshold of up to $5m will have a lower tax rate in 2017, compared to a $2m turnover threshold in 2016.
Most businesses are taxed on income when it is invoiced. Some small businesses may be taxed only when income is received. Income from construction contracts is generally taxed when progress payments are invoiced or received.
Ensure that you have complied with the requirements to claim deductions in 2015/16:
- • Bad debts must be written off in your accounts before 30 June
- • Employer and/or self-employed superannuation contributions must be paid to, and received by, the super fund before 30 June
- • Depreciation can be claimed for assets first used, or installed ready for use, before 30 June
- • Small businesses (turnover less than $2 million) can claim expenses prepaid up to 12 months in advance – for larger businesses, this is generally limited to expenses below $1,000
- • Wages paid to family members must be reasonable for the work performed
- • Review valuations of trading stock in the lead up to 30 June. Best practice is generally to value stock at the lower of cost and net realisable value;
- • Detailed stock records at 30 June should be retained and prior to 30 June, scrap obsolete stock so that it is excluded from your stock take.
Small Business asset accelerated depreciation write-off up to $20,000 per year
Small businesses (aggregate annual turnover of less than $2m) will be able to immediately write off assets that it starts to use or have installed ready for use, provided the asset costs less than $20,000 (GST-exclusive if purchaser registered for GST, otherwise GST-inclusive). This applies to assets acquired or installed ready for use during the 2016 and 2017 financial years. From 1 July 2016, it is proposed that businesses with annual aggregate turnover of less than $10m will also be able to access the immediate write-off. If your business’ annual aggregate turnover is between $2m and $10m, you may wish to consider delaying any asset purchases under $20,000 to take advantage of the immediate write-off at year-end.
The $20,000 threshold applies on a per asset value – so several assets each costing less than $20,000 would qualify for the write-off. However – it does not apply to assets costing more than $20,000. Assets costing more than $20,000 can be depreciated in the general small business pool where applicable. If the pool balance is less than $20,000 by the end of the 2017 year, then the entire pool balance can be written-off at that time.
Both new and second hand assets are eligible for this write off. The asset must be used in an income producing activity. It applies to equipment only (including eligible motor vehicles) but does not apply to capital improvements, such as structural improvement to real property.
Primary Producers
From 13 May 2015, all primary producers are able to immediately deduct capital expenditure on fencing and water facilities. An immediate deduction is also available for capital expenditure incurred on landcare operations for land used to carry on a primary production business, such as operations to exterminate pests, construction of levees and construction of drainage works to control salinity. Primary producers are able to depreciate capital expenditure on fodder storage facilities over 3 years.
Trusts
Trustees of family, discretionary or fixed trusts should ensure that all necessary documentation, including resolutions to distribute income, is completed before 30 June to ensure an effective distribution of income for 2016.
Family discretionary trusts may need to make a family trust election if the trust has unrecouped losses, or has beneficiaries whose total franking credits for the year exceed $5,000.
Have you previously distributed income to a corporate beneficiary? Take care that distributions are actually paid in cash or that loan agreements are put into place.
Personal Income, Deductions and Tax Offsets
Prepayment of expenses by individuals of subscriptions, investment property expenses, including repairs and maintenance and interest may be deductible.
Consider realising capital losses if you have already realised capital gains on other assets during 2015/16. Conversely, consider realising capital gains if you have unrecouped capital losses, or you expect substantially higher income in 2016/17 compared to 2015/16.
However, exercise caution as you must have a commercial reason for realising assets. The ATO consider the sale of assets, e.g. listed shares, prior to 30 June and then repurchase of the same parcel of shares after 30 June, to be a scheme to avoid tax rather than a tax minimisation strategy.
Should you expect lower income in 2016/17 due to retirement or any other reason, consider deferring income until after 1 July, when you will be in a lower tax bracket. However, you should also consider your overall wealth and the effect this strategy may have on pension entitlements and concession cards.
Deductible donations should be made in the name of the family’s higher income earner. Retain your tax receipt and ensure that the charity is a deductible gift recipient before claiming a deduction.
Division 7A Loans
You should review any loans by private companies to shareholders and/or their associates to ensure all loan documentation is in place and minimum repayments made prior to 30 June. The benchmark interest rate is 5.45% for the 2016 financial year.
Net Medical Expenses Tax Offset (NMETO)
From 1 July 2015 to 30 June 2019, the NMETO claim for all taxpayers will be restricted to out of pocket expenses relating to disability aids, attendant care or aged care which exceed the relevant thresholds.
Entitlement to NMETO
Small businesses (aggregate annual turnover of less than $2m) will be able to immediately write off assets that it starts to use or have installed ready for use, provided the asset costs less than $20,000 (GST-exclusive if purchaser registered for GST, otherwise GST-inclusive). This applies to assets acquired or installed ready for use during the 2016 and 2017 financial years. From 1 July 2016, it is proposed that businesses with annual aggregate turnover of less than $10m will also be able to access the immediate write-off. If your business’ annual aggregate turnover is between $2m and $10m, you may wish to consider delaying any asset purchases under $20,000 to take advantage of the immediate write-off at year-end.
The $20,000 threshold applies on a per asset value – so several assets each costing less than $20,000 would qualify for the write-off. However – it does not apply to assets costing more than $20,000. Assets costing more than $20,000 can be depreciated in the general small business pool where applicable. If the pool balance is less than $20,000 by the end of the 2017 year, then the entire pool balance can be written-off at that time.
Both new and second hand assets are eligible for this write off. The asset must be used in an income producing activity. It applies to equipment only (including eligible motor vehicles) but does not apply to capital improvements, such as structural improvement to real property.
Primary Producers
From 13 May 2015, all primary producers are able to immediately deduct capital expenditure on fencing and water facilities. An immediate deduction is also available for capital expenditure incurred on landcare operations for land used to carry on a primary production business, such as operations to exterminate pests, construction of levees and construction of drainage works to control salinity. Primary producers are able to depreciate capital expenditure on fodder storage facilities over 3 years.
Trusts
Trustees of family, discretionary or fixed trusts should ensure that all necessary documentation, including resolutions to distribute income, is completed before 30 June to ensure an effective distribution of income for 2016.
Family discretionary trusts may need to make a family trust election if the trust has unrecouped losses, or has beneficiaries whose total franking credits for the year exceed $5,000.
Have you previously distributed income to a corporate beneficiary? Take care that distributions are actually paid in cash or that loan agreements are put into place.
Personal Income, Deductions and Tax Offsets
Prepayment of expenses by individuals of subscriptions, investment property expenses, including repairs and maintenance and interest may be deductible.
Consider realising capital losses if you have already realised capital gains on other assets during 2015/16. Conversely, consider realising capital gains if you have unrecouped capital losses, or you expect substantially higher income in 2016/17 compared to 2015/16.
However, exercise caution as you must have a commercial reason for realising assets. The ATO consider the sale of assets, e.g. listed shares, prior to 30 June and then repurchase of the same parcel of shares after 30 June, to be a scheme to avoid tax rather than a tax minimisation strategy.
Should you expect lower income in 2016/17 due to retirement or any other reason, consider deferring income until after 1 July, when you will be in a lower tax bracket. However, you should also consider your overall wealth and the effect this strategy may have on pension entitlements and concession cards.
Deductible donations should be made in the name of the family’s higher income earner. Retain your tax receipt and ensure that the charity is a deductible gift recipient before claiming a deduction.
Division 7A Loans
You should review any loans by private companies to shareholders and/or their associates to ensure all loan documentation is in place and minimum repayments made prior to 30 June. The benchmark interest rate is 5.45% for the 2016 financial year.
Net Medical Expenses Tax Offset (NMETO)
From 1 July 2015 to 30 June 2019, the NMETO claim for all taxpayers will be restricted to out of pocket expenses relating to disability aids, attendant care or aged care which exceed the relevant thresholds.
Entitlement to NMETO
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Single
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Adjusted Taxable Income
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$88,000 or less
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20% of net medical expenses over $2,162
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Above $88,000
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10% of net medical expenses over $5,100
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Family
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$176,000 or less plus $1,500 for each dependent child after first
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20% of net medical expenses over $2,162
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Above $176,000 plus $1,500 for each dependent child after first
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10% of net medical expenses over $5,100
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Superannuation
Contributions
The concessional contribution cap of $30,000 remains until 30 June 2017, when it will be reduced to $25,000 for all individuals. For the 2016 and 2017 financial years, the concessional cap remains at $35,000 for those aged 49 years or over on 30 June 2015.
From 3 May 2016, the Government introduced a new lifetime non-concessional contribution cap of $500,000. The new cap will take into account all non-concessional contributions made on or after 1 July 2007 and will be indexed to average weekly ordinary time earnings. Consequently, before making any non-concessional contributions going forward, you will need to consider the amount of non-concessional contributions that you have made since 1 July 2007. The new cap has yet to be passed into legislation, however, we recommend that you arrange your affairs on the basis that it will be passed in due course. Please contact us if you are considering making a non-concessional contribution.
To obtain a deduction for employer and/or personal super contributions, you must ensure your contribution is paid PRIOR TO 30 JUNE.
Please contact us to ensure that you are eligible for a personal super fund contribution deduction. Personal contributions must be supported by a notification from your super fund.
EXTRA 15% tax on concessional contributions for high-income earners
Where an individual’s adjusted taxable income exceeds $300,000, an additional tax of 15% applies to superannuation concessional contributions. From 1 July 2017, this threshold will be reduced to $250,000. The Australia Taxation Office will issue an additional assessment to these taxpayers.
Superannuation Pension
To ensure your SMSF is subject to an exempt pension deduction, a minimum pension must be drawn by members in account pension phase. The table below shows the minimum pension to be withdrawn as a percentage of the balance in the members account as at 30 June 2015.
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Age at 1st July
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Minimum % Withdrawal
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Under 65
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4%
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65-74
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5%
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75-79
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6%
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80-84
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7%
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85-89
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9%
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90-94
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11%
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95 or more
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14%
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The maximum withdrawal for transition to retirement pensions remains at 10% of the member’s balance.
From 1 July 2017, a $1.6m transfer balance cap will be introduced on the total amount that an individual can transfer into the pension accounts. For individuals that currently have more than $1.6m in pension accounts, these amounts will need to be reduced to $1.6m by 1 July 2017 by either transferring excess amounts to accumulation accounts or withdrawing excess amounts from the superannuation fund. Any income earnt on the pension account after 1 July 2017 will not be subject to the cap. The cap will be indexed in line with inflation.
Additionally, income within your superannuation fund to support a transition-to-retirement pension will no longer be tax-free. From 1 July 2017, the income will be taxed at 15% in the same manner as accumulation accounts. The actual pension drawn will continue to be tax-free if the recipient is aged 60 or over.
These rules have yet to be passed into legislation, however, we recommend that you arrange your affairs on the basis that they will be passed in due course. Please contact us if you are considering transferring amounts to a pension account or commencing a transition-to-retirement pension.
Super Co-Contribution
You may be eligible for a government co- contribution when you make a personal (after tax) super contribution to a complying super fund. To be eligible you must pass two income tests:
- • Your total income for the 2016 year is less than $50,454 (higher threshold). The lower threshold is $35,454
- • 10% or more of your total income is derived from employment and/or carrying on a business
You must also be less than 71 years of age at 30 June.
Where your income is $35,454 or less, the government pays 50c for every dollar you contribute in after tax dollars, to a maximum of $500.
The co-contribution reduces by 3.33c for every dollar you earn over $35,454 until it cuts out at an income of $50,454.
Spouse super contributions
You may be able to claim an 18% tax offset on super contributions up to $3,000 you make on behalf of your low-income earning spouse. Your spouse’s income, including reportable fringe benefits and RESC, must be $10,800 or less for the maximum rebate, phasing out an income of $13,800.
from Byrons Accountants
Where your income is $35,454 or less, the government pays 50c for every dollar you contribute in after tax dollars, to a maximum of $500.
The co-contribution reduces by 3.33c for every dollar you earn over $35,454 until it cuts out at an income of $50,454.
Spouse super contributions
You may be able to claim an 18% tax offset on super contributions up to $3,000 you make on behalf of your low-income earning spouse. Your spouse’s income, including reportable fringe benefits and RESC, must be $10,800 or less for the maximum rebate, phasing out an income of $13,800.
from Byrons Accountants