With the end of the financial year just around the corner, it’s time for businesses to take stock, both to ensure your company is operating tax effectively and to put your business finances in order for the coming financial year.
Review the tax benefits of packaging cars
Employers should review cases where employees have foregone gross salary to obtain a packaged car.
Essentially the fringe benefit tax (FBT) rules changed in respect to new vehicle contracts entered into on or after 10 May 2011. Under complex transitional rules, a 20 per cent flat rate will apply to all new vehicle contracts effective from 1 April 2014, regardless of the total number of kilometres the vehicle travels annually. This means that for those who travel more than 25,000 kilometres a year, the tax savings associated with packaging a car are likely to have significantly reduced.
Employees who travel less than 25,000 kilometres annually may wish to consider packaging a new car, as there are now potential tax savings available since the taxable value of their car fringe benefit has typically decreased following the introduction of the 20 per cent flat FBT rate.
Make trust resolutions by 30 June
A trustee of a discretionary trust is required to make and document a resolution as to how income of the trust estate for the 2012-13 year is to be distributed among beneficiaries on or before 30 June 2013.
Broadly, where a valid resolution is not made before 30 June 2013, any default beneficiaries under the trust deed will become presently entitled to trust income and thus subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed on any taxable income typically at the highest marginal rate of 46.5 per cent.
In practice, a trustee must be able to evidence the making of an effective resolution in draft minutes, file notes or an exchange of correspondence has been documented before year end.
Stream trust capital gains and franked dividends
Very broadly, a trustee of a discretionary trust will be able to stream capital gains and franked dividends among different beneficiaries where the trust deed allows the trustee to make a beneficiary specifically entitled to those amounts and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
The balance of the trust’s taxable income, excluding such gains and dividends, will be proportionally assessed to beneficiaries to the extent to which the trustee has made the beneficiaries presently entitled to a share of trust income.
The trustee will therefore only be assessed on the trust’s taxable income at a rate of 46.5 per cent to the extent to which beneficiaries are neither presently entitled to trust income or specifically entitled to a capital gain or franked dividend.
Comply with private company rules
The Australian Taxation Office is vigilant in cracking down on businesses that use either the funds or assets of a private company for private purposes. Any personal expenses (e.g. school fees) paid by a private company in respect of a shareholder or an associate (e.g. spouse) of the company, or any funds withdrawn from the private company by that shareholder as a loan, may be treated as a deemed dividend to the shareholder.
Where such a payment or loan has not been repaid by 30 June, a deemed dividend can only typically be prevented if a complying loan agreement to repay an amount equal to the payment or loan is put in place before the earlier of the actual or due date of lodgement of the private company’s tax return for the year ended 30 June 2013.
Prevent deemed dividends in respect of unpaid trust distributions
An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2012 will, broadly, be treated as a loan where the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution.
A deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the earlier of the actual or due date of lodgement of the private company’s 2013 income tax return.
Alternatively, a deemed dividend will not arise if the amount of the unpaid distribution is held on a sub-trust for the sole benefit of the private company beneficiary who receives an “agreed return” on the unpaid distribution as well as ultimately a repayment of the principal funds representing the unpaid distribution.
Typically, such a sub-trust will arise where the principal funds representing the unpaid distribution are repaid by the end of a seven- or 10-year term with annual interest payable at stipulated benchmark rates under private company rules.
Write off bad debts
Businesses can only obtain income tax deductions for bad debts where various conditions are met.
Essentially, the deduction will only be available where the debt is still in existence at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available. Moreover, the debt must be effectively irrecoverable and written off in the accounts as bad in the year in which the deduction is claimed.
The amount representing the bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money lending business. Certain additional requirements must be met where the creditor is either a company or trust.
Maximise depreciation deductions
A taxpayer that is an eligible small business entity (SBE) may elect to claim deductions for depreciating assets on a simpler and more concessional basis than other business taxpayers.
An SBE can claim an immediate deduction for a depreciating asset which cost less than A$6500 in the 2012-13 tax year to the extent it is used for income producing purposes where it is used or installed ready for use by year-end.
Depreciating assets costing A$6500 or more which are acquired by an SBE can also be depreciated at a flat rate of 15 per cent in the year of acquisition to the extent the asset is used for income producing purposes and it is used or installed ready for use by 30 June.
Thereafter the adjustable value of such an asset can be depreciated on that basis at 30 per cent in subsequent years.
Claim an immediate deduction for work car purchases
An eligible SBE can claim an immediate deduction for a vehicle if its cost is less than A$6500 where the car is used or installed ready for use to the extent it used for income producing purposes.
Where the car costs A$6500 or more, an immediate deduction of A$5000 plus 15 per cent of the balance of the cost can be claimed in the year of acquisition to the extent the car is used for income-producing purposes and it is used or installed ready for use by 30 June. For subsequent years, the car is depreciated at a rate of 30 per cent to the extent it is proportionally used to derive assessable income in subsequent years.
This concession does not apply to tractors, graders, road rollers, combine harvesters, trailers and earthmoving vehicles.