Year-end tax planning checklists have a tendency to look like grocery lists. They can be mildly interesting if they are yours and you are hungry - but otherwise are deadly dull.
It is wise to use the time and effort to conduct a detailed financial review of your affairs. Rather than compiling a shopping list, let’s have a look at a process for a year-end review:
- information gathering
- planning and projections
- review
The first part of the process is to gather critical financial information including last year’s tax return and current year-to-date income and expenses. The next step is to estimate likely taxable income at 30 June 2013. You won’t have all the required information so estimates of numbers like managed fund distributions will be required.
Although it may be harder, it will be useful to project forward to 30 June 2014. There is no point in planning 2013 carefully if it makes the 2014 result worse, but opportunities arise if you expect to be in a different marginal tax bracket from one year to the next.
Finally, it is an opportune time to undertake a general review of your insurance, superannuation and investments and to consider your estate planning. After all, if you don’t do it now, when will you do it, and you can’t do your year-end tax planning in December.
From a tax perspective, the key elements to consider are:
- deferring income or gains until the next financial year
- incurring or maximising expenditure in the current financial year
- attending to any crucial paperwork prior to the year-end such as trust resolutions and minutes or trust deed amendments.
There are some things that simply must be done before 30 June, such as contributions to superannuation, drawdowns of minimum pension amounts or prepayments of interest on an investment loan.
Consider your superannuation contributions carefully. The limits are currently $25,000 per annum on concessional contributions (deductible) and $150,000 per annum non-concessional (non deductible) or $450,000 on a bring forward basis. Failure to comply with the rules could mean that the ATO imposes excess contributions tax.
If you are commencing or paying a pension from your SMSF remember to comply with the pension minimum and maximum rules according to your age before the year-end.
Income and gains
Make sure you understand the rules relating to the time at which income or gains are earned and review any opportunities to defer these until the subsequent financial year:
- dividends and interest income are generally earned when they are paid or credited to a person
- bonuses are earned when they are paid or credited. This may differ from the time at which your employer becomes entitled to a tax deduction
- the contract date is the relevant time for disposal of a capital gains tax (CGT) asset not the settlement date. Accordingly, you may prefer to enter into a sale contract immediately after year-end rather than just before so that the gain will be included in the subsequent financial year. Likewise capital losses are realised at the time the contract is entered into. You need to actually sell assets to crystallise capital losses.
If you have received employee shares at a discount price you may be required to include the discount in your current year’s taxable income.
You may wish to defer disposal of CGT assets until you have held them for greater than 12 months to be able to access the 50% CGT discount.
If you have a family trust you may have beneficiaries turning 18 in the current financial year or perhaps the subsequent financial year. This may impact on your proposed distributions.
For business owners:
- payments received in advance of provision of goods or services may be regarded as unearned income. Even though you have received the cash from your client or customer, you may not be required to pay tax on that amount until you provide the goods or services
- the invoice date is the time at which the income is derived not the time at which you receive payment.
Expenses
Rental property owners may wish to bring forward repairs prior to year end. Remember the difference between repairs and capital expenditure. Repairs are deductible outright but capital expenditure will be eligible for depreciation or capital write off entitlements.
Make donations to your favourite charity, especially if you expect to be in a lower tax bracket next year. Consider giving more if you receive a higher tax deduction.
Although the amounts have now been reduced, collate medical expenses as you may be entitled to a rebate.
For higher income earners (above $250,000 per annum) the non-commercial loss provisions may limit the availability of a deduction for hobby farm losses or other activity unless you obtain a private ruling from the ATO.
For business owners:
- a deduction can be made for warranty claims based on an estimate derived from the history of prior warranty claims
- bonuses can be expensed provided the employee bonus is minuted, even if the bonus is not actually paid to employees until the subsequent financial year
- holders of trading stock (including share traders) are able to value the trading stock at the lower of cost or market value
- a deduction is available for bad debt write-offs provided they have been documented prior to year-end as being bad
- small businesses are entitled to an outright deduction for certain prepayments
- small businesses are entitled to an immediate $6,500 write off for purchases of capital assets.
Action
The essential paperwork which may be needed prior to year-end includes trust deed amendments, dividend declarations, debt write-off documentation, minutes of employee bonuses, trust distribution minutes, pension payments, trading stock valuations and private company loan repayments.
In reviewing your year-end options you should ensure that any action you take will withstand scrutiny from the ATO. This outline has been brief and general in nature, and tax advice should be sought if you are in any doubt about the issues raised.
A final watch out – 29 and 30 June 2013 fall on a weekend so you lose a couple of business days for that last minute panic and for items to hit your bank account. It’s a 28 June deadline this year.
Ray Cummings is Principal of Greenoak Advisory Pty Ltd, and for 15 years was a Tax Partner at Pitcher Partners.