It’s June and as we’re rapidly approaching the end of the 2015/16 financial year, it’s a good time for businesses and individuals to take stock of their tax obligations and identify tax planning opportunities for the year ahead.
There are some ‘bare minimum’, basic and standard tax planning considerations that all taxpayers should always be aware of, like income timing, treatment of lump sum amounts, cash versus accruals, prepayments, bad debt write offs, depreciation claims, staff bonuses, stock valuations, donations, and tax losses.
But there are a few considerations that it’s worth paying extra heed to ahead of 30 June; the policy positioning behind the 2016 federal budget has presented some interesting considerations for taxpayers.
The Australian Tax Office has just been given upwards of $670 million to create a new Tax Avoidance Taskforce aimed at enhancing tax compliance for multinationals, large public and private groups and high net worth individuals.
The extra funding for the ATO signals the government’s increased efforts to crack down on tax avoidance. That means it’s critical for businesses – large and small – to have their tax compliance in order, and that legitimate tax planning opportunities are thoroughly explored and documented.
Small businesses will want to watch out for tax rate changes coming into effect between 30 June 2016 and 30 June 2017. A small business, broadly defined as an entity turning over less than $2 million, will be able to access the 28.5% tax rate for the year ending 30 June 2016.
This tax rate is not applicable to entities that operate in a trust structure as opposed to a company structure.
From 1 July 2016, the government is planning to lower the corporate tax rate for small businesses even further to 27.5%, and make this tax rate available to businesses with an aggregated turnover of less than $10 million.
While the outcome of the election is still obviously unknown, given these developments, it’s still an opportune time to consider whether restructuring business operations from a trust into a company is appropriate.
The Tax Avoidance Taskforce will build on the ATO’s existing scrutiny on trusts through the Trust Taskforce. Basic compliance will be critical, especially with regard to trust deeds for distribution of income and capital to beneficiaries, as the ATO takes a very strict view that compliance with these items must be completed before 30 June, if not earlier as required by the trust deed.
The ATO will be paying particular attention to non-compliant trusts and certain trust activity, such as offshore dealings, uncommercial agreements, artificial adjustments to income, the characterisation of gains as capital by property developers, and changes to trust deeds for tax purposes only.
For start-ups, there are a number of additional tax planning considerations. The government has brought in concessions designed to assist start-up entities, including deductions for capital expenses.
For start-ups looking to raise capital, investors can access up to a 20% tax offset and exemptions from capital gains tax, provided the start-up meets the definition of being an early stage investment company (ESIC). Generous tax concessions may also available for start-ups looking to obtain equity finance from an early stage venture capital limited partnership (ESVCLP).
These rules apply predominantly from 1 July 2016, with some limited scope to apply the rules to current year ESVCLP investments. Start-ups and investors alike should be considering these provisions and making sure they are complaint with the ESIC conditions from as early as possible at or after 1 July 2016.
The ATO will be keeping a close eye on individuals as well – they’ll be applying extra scrutiny to people claiming high work-related expenses and rental property deductions, and non-commercial holiday rental income.
There are plenty of other tax compliance issues to think about ahead of 30 June – superannuation, goods and services tax, payroll tax, stamp duty, land tax and reporting obligations are perennial considerations.
But with an election on the horizon and a wealth of tax system change speculation from both parties, this 30 June is an especially opportune time to sit down and consider your tax planning objectives for the year ahead.
Greg Nielsen is a tax consulting partner at Pitcher Partners.