2017 Tax Planning Checklist: Deductions

Prepayments - Small Business Entity Taxpayer

There are different treatments for prepayments for a small business taxpayer (i.e. turnover under $10M) to that which relates to a business with turnover in excess of $10M.

A small business taxpayer is entitled to a deduction, where the relevant services will be wholly provided within twelve months of the date of expenditure.  Deductible expenses would normally include items such as:

  • office supplies
  • stationery
  • insurance
  • rent
  • lease payments
  • interest on business/investment loans (make sure your loan agreement allows for interest prepayments)
  • advertising
  • maintenance contracts

Prepayments - Not Defined as Small Business

The Prepayment Rules for other than small businesses apply to business taxpayers with a group turnover of $10M or more.

Prepayments "Excluded Expenditure"

There is an exemption for payments of "excluded expenditure". Any taxpayer who incurs a prepayment of "excluded expenditure" will not be subject to the General Prepayment Rules, or the twelve-month Prepayment Rule.

Excluded expenditure includes:
  • payments of less than $1,000 (therefore all prepayments of less than $1,000 are deductible in the year that the payment is made, subject to the payment being otherwise deductible)
  • required to be incurred by law or a court order
  • under a contract of service (salaries and wages)
  • it is of a capital, private or domestic nature

Deductions Under the General Prepayment Rules

N.B. This section only applies if your business has turnover more than $10M.
The deduction for the prepayment is spread over the period during which the service or benefit will be provided. This is known as the "eligible service period". If this period is for more than ten years, then the prepayment deduction is allocated over ten years.

The deduction that a taxpayer can claim each year is calculated:
 
Number of Days the Payment Covers in The Income Year
Total Number of Days to Which the Prepayment Relates
 
The deduction that is available is calculated:
 
Expenditure x Number of Days the Payment Covers in The Income Year
Total Number of Days to Which the Prepayment Relates
 
Example - Prepayment made by a business that is not a small business taxpayer on 10 June 2017 for rental of premises for the next twelve-month period. The rental amount is $80,000. The amount claimable in the year ending 30 June 2017 will be:
$80,000 x 20 = $4,383
1 365
 
The amount claimable in the year ending 30 June 2018 will be:
 
$80,000 x 345 = $75,617
1 365
 

Bringing Forward Deductions

Bringing forward deductions can be achieved:
  • If you are a small business (turnover under $10M), prepaying deductible expenses such as office supplies, insurance, rent, lease payments, interest, advertising and maintenance contracts where the relevant services will be wholly provided within twelve months of the date of the expenditure. (However, the effect on the business cashflow needs to be considered).
  • If your business' turnover is over $10M, the deduction for any prepayment will only be available in the period(s) to which the expenditure relates - unless it is for less than $1,000, in which case, it will be deductible when paid.
  • Realising assets that will produce a capital loss if assessable gains already exist in the current year. The capital gains may then be offset against the capital losses. However, be careful about “wash sales” (Consideration of Capital Gains Tax Implications).
  • Realising foreign exchange losses. Foreign currency gains and losses are brought to account when the foreign currency transaction is realised.

Interest on Investment Loans

Taxpayers who have borrowed money for business investments (e.g. rental properties) may be able to prepay up to 12 month’s interest, with the lenders approval, to safeguard against any increases in interest rates or some other commercial reason. A tax deduction will be available for that prepaid interest. Prepaying interest is an option for investment loans on rental properties and margin loans on shares or managed funds.

Bad Debts (if taxation return prepared on an accruals basis)

Review Debtors’ Aged Analysis and determine if any debts are bad debts. The debt must be written off as bad prior to 30 June and appropriate minutes prepared authorising the write off.

To claim a bad debt, the debt must have been brought to account as assessable income and you must have given up action for recovery of the debt.

Have a Debtors’ Aged Analysis prepared that reconciles with the total amount of debtors outstanding. Retain the documentation to evidence all attempts that you have made to recover the debt.

Staff - Bonuses

Determine whether any bonuses are to be paid and, if so, ensure staff are notified of the bonus prior to 30 June and that PAYG Withholding Tax is remitted in the first BAS or IAS after 30 June.

Staff - Holidays

Where practical, encourage staff to take holidays prior to 30 June.
Provisions for annual leave are not deductible. The deduction is only available when the annual leave is paid.

Superannuation

For the year ending 30 June 2017, maximum concessional superannuation contributions are as follows:
  • Persons aged under 49 years - $30,000
  • Persons aged 49 years to under 59 years - $35,000
  • Persons aged 59 years and over $35,000 (subject to the “work test” from age 65).
Self-employed people can also contribute to superannuation on the same basis as that adopted for employees. However, to obtain a superannuation contribution deduction, employment income must represent less than 10% of assessable income including reportable fringe benefits, reportable superannuation contributions and net investment losses.

Salary sacrifice arrangements may be utilised to maximise superannuation contributions, subject to the overall deduction limits applicable for that person based on their age.

Non-concessional contributions can be made up to $180,000 per annum or, with current bring-forward rules, a total of $540,000 (for those aged under 65) prior to 30 June 2017.

Hint: If an employee has larger than anticipated income through a capital gain or some other event and the employee may enter a salary sacrifice arrangement and contribute more to superannuation. This would offset the capital gain. However, any such superannuation contribution must be paid prior to 30 June 2017.

Hint: If the company has retained earnings and the ability to pay a franked dividend, consider paying a franked dividend to a shareholder, who then uses the franked dividend to make a superannuation contribution (subject to the superannuation contribution limits). Not only would the superannuation contributions contra the earning from the franked dividend, the taxpayer might also receive a refund based on any excess franking credits. This transaction must be completed prior to 30 June 2017.

Contributions to superannuation funds for taxpayers with Adjusted Taxable Income (ATI) less than $300,000 are taxed at 15% of the contribution. For taxpayers with ATI over $300,000 contributions are taxed at 30%. From 1 July 2017, this threshold decreases to $250,000 ATI

Comment: The maximum concessional contribution after 30 June 2017, is $25,000 for all age groups and non-concessional contributions are capped at $100,000 per annum with a bring forward cap of $300,000. Transitional rules apply and you should consult Moore Stephens on this issue.

From 1 July 2017, all individuals up to age 75 years, will be able to claim a personal deduction for superannuation contributions up to the $25,000 cap. This cap includes superannuation guarantee contributions made by your employer. However, taxpayers aged 65- 74 years, must satisfy the work test.

A further concession will apply from 1 July 2017, allowing taxpayers, who have not accessed the full $25,000 cap, to carry forward the amount below the concessional cap which has not been claimed.

Superannuation Minimum Contribution

A superannuation minimum contribution must be paid by all employers on gross wages paid to all eligible employees who are paid at least $450 per month. It is a requirement to pay the superannuation minimum contribution at least every quarter, by the 28th day of the following month and report the payment to the employee in writing.

The prescribed percentage is 9.5%. To obtain an income tax deduction in the current year, the superannuation minimum contribution should be paid and credited to the employees’ superannuation account prior to 30 June.
Penalties apply where employers fail to meet these provisions. 

Superannuation Co-Contribution – for 2016/17

Superannuation co-contribution is targeted at lower to middle income earners -$36,021 to $51,021. The co- contribution gives lower income earners $0.50 for each $1 payment from the Australian Taxation Office for each $1 that the taxpayer contributes to superannuation from their after-tax salary, up to a maximum Australian government co-contribution of $500. If you earn more than $36,021 the co-contribution entitlement reduces for every dollar over $36,021.

Interest on Loan Funds

Interest can be claimed on loans for business purposes or to buy investment properties and shares.
You need to determine the outstanding amount of interest owing on any loan funds and ensure payment prior to 30 June.

Repairs and Maintenance

A deduction for repairs and maintenance is available for work completed by 30 June.
You might consider bringing forward, prior to 30June, major maintenance expenditure that was scheduled for the next financial year.
Where you have recently acquired a building and then undertake repairs and maintenance on that building, the expenditure may be considered a capital item and not deductible.

Directors’ Fees

A company paying directors’ fees, should conduct a shareholders' meetings before 30 June to approve directors’ fees and ensure payment for directors’ fees are drawn prior to 30 June and that PAYG Withholding Tax is deducted from the amount paid to the directors.

Travel Deductions

To claim for travel expenses, make sure that:
  • Overseas Travel - You prepare a full itinerary and diary of the overseas trip with full substantiation of expenditure incurred and a dissection between business and private purposes.
  • Local Travel - If you are away on continuous travel for more than six nights you are required to maintain a diary with full details of the activities conducted on the trip. (However, it is a good idea to keep a diary to support claims for all travel expenditure, irrespective of the duration of the travel).

Expense Substantiation

Ensure that you can justify all employment related expense amounts incurred and the reason for the expenditure being incurred (for individual items costing less than $10 which total less than $200 for a year, you can claim these expenses so long as you have diary records to support the claim rather than receipts).

Depreciation

Review capital expenditure incurred during the year to ensure that full details are available for the dissection of expenditure into the asset categories that the expenditure relates to claim depreciation at the highest allowable amount.

Your asset register should be reviewed and any obsolete assets scrapped prior to 30 June.
 
Note Following the recent budget, depreciation is only available for depreciable assets purchased by the taxpayer. This measure applies in respect to property purchased after 9 May 2017. A deduction for depreciation on assets included in a property purchase will still apply for properties purchased or contracted for purchase prior to 9 May 2017.

Negative Gearing

Negative gearing of an investment property or share investment occurs when interest on funds borrowed to acquire an income producing asset and other expenses exceeds the net income from that asset.

The net loss which may include interest, borrowing costs, investment advice, accounting fees, rates, insurance on the property and land tax, may be deductible.

Building Allowance

The construction costs of income producing buildings may be able to be written off at 2.5% or 4%, depending on the date of the construction. A review should be made to ensure that all deductible building write-offs are being claimed. If a building has been acquired during the year, details of the original costs of the building and the date of acquisition should be recorded so that the correct amount of building write-off can be claimed.

Borrowing Costs

Review loan documents to ascertain the total borrowing costs on business loans. Borrowing costs can be claimed over the shorter of five years or the term of the loan.

Entertainment

Entertainment is not deductible unless it is provided as a fringe benefit and Fringe Benefits Tax has been paid.

Research and Development

Special conditions exist for businesses that incur expenses on research and development. This incentive is only available for corporate taxpayers and expenditure on research and development must exceed $20,000.
There are two types of research and development expenditure that can create a more beneficial income tax treatment:

a) companies with turnover of under $20M; and
b) companies with turnover over $20M.

Turnover under $20M
The company will receive the benefit of a research and development refundable tax offset calculated at 43.5% of the eligible research and development expenditure. The rebate can be paid to the company by the Australian Taxation Office within thirty days of lodgement of tax return if the company elects to receive this payment in the company’s income tax return.

Turnover over $20M
The company will receive a 38.5% non-refundable tax offset

To claim the research and development expenditure in respect of the year ending 30 June 2017, the company must register with AusIndustry by 30 April 2018 or the date of lodgement of the company’s income tax return, whichever is the earlier.

A detailed application including costings must also be submitted and approved in support of research and development claims.

Property Owner's Deductions

Property owners can claim expenses against rental income including:
  • advertising for tenants
  • agents’ fees and commissions
  • repairs and maintenance
  • travel and accommodation for inspection, maintaining or rent collection. However, this deduction will not be available from 1 July 2017.
  • stationery and postage
  • depreciation on plant and equipment within the rental property purchased by the taxpayer
  • bank charges
  • body corporate fees
  • council rates
  • cleaning
  • electricity and gas
  • gardening and lawn maintenance
  • insurance
  • interest on loans borrowed for the property acquisition, renovations or extensions
  • land tax
  • legal expenses relative to dealing with tenants but not initial costs for the purchase of the property
  • lease costs relative to preparation of documents for the rental
  • pest control
The claim for expenses for property should be closely monitored because the Australian Taxation Office is checking these claims. If you have recently acquired a property it will be very difficult to claim repairs as an income tax deduction in the first year as the Australian Taxation Office will undoubtedly take the view that the expenditure is for improvements. If you use the property as a week-ender it will be difficult to claim expenses as income tax deductions. You should ensure that the interest on loans claimed as a tax deduction relates to the rented property.

Donations and Gifts

If you intend to make a gift or donation and wish to claim an income tax deduction for the gift, then you should ensure that the payment is made to a tax-deductible charity on or before 30 June.

You should check that the charity is an Australian Taxation Office endorsed deductible gift recipient.

No deduction is allowable if the donor receives some benefit unless given at an “eligible fund raising event”.

Audit Fees

Audit fee accrual is not deductible unless there is a contract that creates a presently existing liability before the 30 June.

Salary Packages

Ensure that salary packages for 2017/18 that include fringe benefits and/or employer’s superannuation contributions are negotiated and documented prior to payment of the salary.

Working from Home Expenses

If you work from home (as distinct from having a home office), it is possible to depreciate the assets you are using in your business and, if your turnover is under $10M, you can utilise the Small Business Entity Rules relating to depreciation.

You can claim interest payments on a house mortgage as a tax deduction. The amount claimed should relate to the floor space of the premises utilised for the work premises as compared to the total floor space in the building.

However, utilising your home as business premises can also create capital gains tax issues when the house is sold.
 
The sale of a family home is usually capital gains tax-free. Claiming interest and other deductions related to working from home will mean that, when the home is sold, it is no longer totally capital gains tax-free. Also, taxpayers can be liable for the capital gains tax for the proportion of the home that is being used for a business, even if the taxpayer had not claimed interest on the mortgage or other direct expenses relative to the space used for business purposes.

The Australian Taxation Office has issued a ruling.

 “Part of a dwelling is taken for use for income producing purposes only if it has the character of a place of business (Taxation Ruling IT2673). Whether a part of a dwelling has the character of a place of business is a question of fact, but the broad test is whether a part of the dwelling:
  • is set aside exclusively as a place of business;
  • is clearly identifiable as a place of business; and
  • is not suitable or adaptable for use as private or domestic purposes in association with the dwelling generally.
Existence of any of the factors, or a combination of them will not necessarily be conclusive in asserting the character of an area used as a place of business. The decision in each case will depend on whether, on a balanced consideration, of:
  • the essential character of the area;
  • the nature of the taxpayers’ business; and
  • any other relevant factors.
The area constitutes a "place of business" in the ordinary and common sense meaning of that term.”
The Taxation Ruling states “that as a rule of thumb, it can be expected that where an area of a home is a place of business, the capital gains tax provisions will apply.”

If you are using your home as a principal place of business, it would be a good idea to calculate the floor space that is being used as the principal place of business and the dates during which it was used as a principal place of business and calculate the floor space of the total building so that this information can be taken into account in calculating a future capital gains tax liability resulting from the future sale of the house.

If you are using your home as the principal place of business, you should be able to claim additional travelling expenses because your home is your place of business.

Expenses for Shareholding Investments

Expenses incurred in gaining income from shares are a tax deduction.  Items would include:

  • interest on loans borrowed to purchase shares;
  • fees paid to a financial adviser for ongoing advice and not an initial investment plan;
  • travel expenses in attending meetings with advisors and companies that you invested in;
  • fees for receiving investment advice;
  • accountancy fees 

Taxation Advice

Fees payable to an accountant or registered tax agent for taxation advice are tax deductible.

Motor Vehicle Expenses

There are two methods available to calculate tax deductions for work related motor vehicle expenses. These are:

  • cents per kilometre method - 66 cents per kilometre
    • logbook method – which means you claim your actual business kilometres as a percentage of the total kilometres that the motor vehicle has travelled to determine a percentage which can then be utilised with the total motor vehicle expenses to determine the claim for motor vehicle expenses