This is information recently sent out to clients of WRS.
It is essential to be proactive prior to the end of the financial year. There are a number of strategies available within the scope of the law that can be implemented. We have listed a few to consider but your first step would be to contact your accountant/taxation advisor on taxation matters and your investment advisor on planning matters and any potential strategies that may be available.
Tax rate changes – A minor shift in personal income tax rates from 1st July 2010 may provide incentive for some individuals to, where possible, bring forward income tax deductions and defer assessable income.
Maximise deductions – An expense or cost incurred in gaining or producing your income may be an allowable deduction. Investors and small business operators should consider prepayment of expenses prior to 30 June. An immediate deduction may be available where the period of prepayment is up to 12 months. This may include prepayment of interest on loans used for investment or business purposes or premiums for income protection insurance.
Low-income thresholds – You may consider ways of allocating income to any low income individuals in your family group. Individuals (other than minors) with income below $15,000 do not pay tax.
Capital Gains Tax (CGT)
You may consider deferring the disposal of a profit making asset to the 2010/11 income year, or deferring the disposal of an asset held for less than 12 months to access the CGT 50% discount, where available. If you believe a significant capital gain is anticipated for the current year, you may consider disposing of an unrealized loss making asset in order to offset the gain. Always consult your taxation advisor to see if you can take advantage of rollover relief or the small business CGT concessions which can disregard, reduce or even defer a capital gain.
Small to medium business
Maximising deductions – You should review your debtors to identify and write off (prior to 30 June) any bad debts. Write off as an immediate deduction capital assets costing $1,000 or less. One strategy that is often overlooked is to write off depreciating assets which are no longer being held for use. Another strategy that continues to be missed is the payment of employees’ superannuation contributions on or before 30 June. A deduction can only be obtained if paid and presented prior to 30 June. Review your trading stock for obsolete stock for which a deduction is available and don’t forget the one-off bonus deduction of up to 50% for eligible tangible depreciating assets purchased between 13 December 2008 and 31 December 2009.
Private company loans – Deemed Dividend Rules in Division 7A have been widened to capture the use of company assets by shareholders and associates. You may want to determine whether any company assets are used by shareholders prior to year end to ensure that they are not caught by the new regime. As always, be aware of any loans, payments and debt forgiveness by private companies to their shareholders and associates. This may give rise to unfranked dividends assessable to the shareholders and associates. Such loans or payments should be either repaid, or appropriate loan agreements should be in place, by the earlier of the due date for lodgement of the company’s return for the year or the actual lodgement date.
Trusts – Consider distribution of trust income to low income individuals and avoid retaining income in the trust as it may be taxed at 46.5%. You may need to consider whether a family trust election (FTE) is required in order to ensure losses or bad debts incurred by a related family company will be deductible or to ensure any franking credits attached to dividends flowing through the trust are not wasted. The ATO have changed their stance on unpaid present entitlements to corporate beneficiaries. Trustees considering making unpaid distributions for the current year should discuss the options available to them with their taxation advisor.
Contributions need to be banked by 30th June 2010
Concessional contributions – The concessional contributions cap for people aged under 50 is $25,000 pa and for people aged 50 and over, the transitional cap is $50,000 pa. Couples should consider splitting contributions between spouses to effectively transfer concessional contributions to the spouse who will reach age 60 first.
Co-contribution – Individuals with projected current year income less than $61,920, including self-employed persons, should consider making a personal (after tax) superannuation contribution to qualify for the government co-contribution payment. The government will contribute $1 for every $1 invested up to $1,000. The value of government contribution is phased out for individuals with incomes between $31,920 and $61,920.
Transition to retirement – Taxpayers who have reached their preservation age should consider the benefits of a transition to retirement pension. A transition to retirement pension provides an additional income stream that is concessionally taxed which can augment an individual’s pre retirement income. When combined with a salary sacrificed re-contribution strategy, this may produce immediate tax savings and higher retirement balances, whilst maintaining the same level of income.
Retirement income streams – Individuals receiving a retirement income stream should ensure that they have received their minimum pension benefit prior to 30 June. The government has introduced a temporary measure allowing pensioners the option to draw only half of the year’s minimum required pension amount. Naturally this list is not exhaustive and the best outcomes are achieved by discussing your individual circumstances with your taxation adviser and your financial adviser prior to 30 June.
Contribution Splitting – This strategy is used to maximize your after tax benefits in super for an older spouse who can access super first. The younger spouse splits 85% of their concessional contribution over to the older spouse after 30th June. The younger spouse may have many years before being in a position to take superannuation money out tax free. Also the older spouse may benefit when combining a Transition to Retirement strategy with a higher balance, giving them a greater tax free income.
Income Protection – Individuals are able to insure their income for accident / sickness and claim a tax deduction. If the premium is paid before 30th June 2010 a tax deduction can be claimed. This is one of the best protection polices an individual can have as it pays the family an income when you are sick or injured from 14 days or longer.
Key Person Insurance – If you are in business and have key staff this insurance can be implemented to protect the business should the key person die or become totally and permanent disabled.
Estate Planning – Many estates do not have their assets balanced to their nominated beneficiaries, thus leaving assets to be sold, being divided or business assets left to the wrong siblings. Life insurance can be implemented to ensure the business assets go to the correct beneficiaries and the cash from the life insurance going to the other beneficiaries.
Death / TPD – All families with children and debts need to implement life insurance. We all have loved ones and our role as parents is to protect the family from all sorts of dramas. The death or total and permanent disablement of a parent can be insured against so as not to leave the family in a destitute position. This life insurance cover can be implemented through superannuation or stand alone out side superannuation. Life insurance through superannuation is tax deductible within a person’s age limit, where cover out side superannuation is is not tax deductible. Each has its advantages and disadvantages, please speak with WRS office for clarification on what is appropriate for your needs.