Tax Planning Toolkit 2016

Tax Planning Toolkit 2016
Year-end tax
planning toolkit
Year ending 30 June 2016
May 2016
The contents of this document are for general information only and do not consider your personal circumstances or situation.
Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been
summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners
representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage
arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, May 2016. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited
by a scheme approved under Professional Standards Legislation.
Table of contents
Glossary
ACA
Allocable cost amount
AMIT
Attribution managed investment trust
ATO
Australian Taxation Office
BAS
Business activity statement
CFC
Controlled foreign company
CFI
Conduit foreign income
CGT
Capital gains tax
CIV
Collective investment vehicle
ESIC
Early stage investment company
ESS
Employee share scheme
ESVCLP
Early stage venture capital limited partnership
ETP
Eligible termination payment
DTA
Double tax agreement
FAT
Financial acquisitions threshold
FATCA
Foreign Account Compliance Act
FBT
Fringe benefits tax
FITO
Foreign income tax offset
FTDT
Family trust distributions tax
FTE
Family trust election
GST
Goods and services tax
HELP
Higher Education Loan Program
IDS
International Dealings Schedule
IEE
Interposed entity election
IGA
Inter-governmental agreement
IMR
Investment manager regime
LAFH
Living away from home
LISC
Low income superannuation contribution
MIT
Managed investment trust
MLR
Minimum loan repayments
MLS
Medicare levy surcharge
NANE
Non-assessable non-exempt
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Year-end tax planning toolkit – 2015/16
OTE
Ordinary time earnings
PAF
Private ancillary fund
PAYG
Pay-as-you-go
PE
Permanent establishment
Pitcher Partners
Pitcher Partners Advisors Proprietary Limited
PSB
Personal services business
PSI
Personal services income
RSA
Retirement savings account
R&D
Research and development
RITC
Reduced input tax credit
RTP
Reportable tax position
SBE
Small business entity
SG
Superannuation guarantee
TFN
Tax file number
TOFA
Taxation of financial arrangements
TSL
Trade Support Loan
UPE
Unpaid present entitlement
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Introduction
Welcome to the Pitcher Partners
30 June 2016 year-end tax planning toolkit.
Year-end tax planning
As the financial year draws to a close, it is time to start thinking about whether your year-end tax planning is in order.
Tax planning not only requires consideration of income and deductions for the year, but also requires you to consider
whether your compliance requirements have been met. This includes whether appropriate elections are made within
the time requirements, the preparation and maintenance of appropriate documentation (such as trust minutes) and
forward planning of your tax affairs. Our tax toolkit is here to assist you in this process.
Interactive PDF
This document has been created as an interactive PDF. This means you can check boxes, record notes and submit this
back to Pitcher Partners for discussion.
What this document does
This document provides an outline of the tax issues that should be considered before year-end. This document has
been updated for new developments and (where relevant) the 2016/17 Budget announcements. This toolkit is
specifically tailored to address the taxation concerns of taxpayers in the middle market and includes checklists covering
both corporate taxpayers and private groups.
What this document doesn’t do
This toolkit is not intended to be a comprehensive document covering all taxation issues that require consideration.
This is because every taxpayer’s circumstances are unique. Instead, this document is only intended to provide you with
a broad range of issues for consideration before the end of the financial year.
Take care about tax planning
Tax planning may often result in a taxpayer paying less income tax in a given income year. It is noted that the definition
of a tax benefit under the tax anti-avoidance provisions is broad enough to cover a deferral of income tax. Therefore,
the tax anti-avoidance provisions must always be considered as part of your year-end tax planning. We have included a
number of anti-avoidance or integrity provisions for your consideration in Section 13 of this toolkit.
How will you find what you are looking for?
To assist you in quickly locating the area of tax that is relevant to you, this document has been divided into sections.
The sections either relate to a specific type of taxpayer (for example, a company or trust) or to a specific tax topic (for
example, capital gains tax). Furthermore, Section 2 of this toolkit provides a summary of all of the questions contained
in Sections 3 to 13 of this toolkit. The following diagram provides a simplified outline of how this toolkit is arranged.
Year-end tax planning toolkit – 2015/16
7
SUMMARISED YEAR-END PLANNING CHECKLIST
[Section 2]
Income
Deductions
[Section 3]
[Section 4]
CORE SECTIONS
Individuals
Trusts
Companies
Partnerships
[Section 5]
[Section 6]
[Section 7]
[Section 8]
ENTITY SPECIFIC QUESTIONS
Capital gains
tax
[Section 9]
Finance
issues
[Section 10]
International
tax
[Section 11]
Super, GST &
state taxes
[Section 12]
Integrity
provisions
[Section 13]
SPECIALIST TOPIC QUESTIONS
We trust you will find this document useful when considering your 30 June 2016 tax
planning. Please talk to your Pitcher Partners representative if you would like more
information or clarification of some of the issues raised in this document.
Disclaimer
The contents of this document are for general information only and do not consider your personal circumstances or
situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or
explanations have been summarised and simplified. This document is not intended to be used, and should not be used,
as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with
your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners
disclaims all liability for any loss or damage arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, May 2016. All rights reserved. Pitcher Partners is an association of independent
firms. Liability limited by a scheme approved under Professional Standards Legislation.
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Year-end tax planning toolkit – 2015/16
Summary checklist
Enter your details
If you are completing this document as a checklist and wish to submit this back to your Pitcher Partners representative,
please complete your details in the following check boxes.
Enter entity name
Enter contact details
Background
The following simplified checklist contains a high level summary of the planning items that are covered in more detail
in this toolkit. We have provided a reference link to the detailed discussion of each of these tax planning items.
We recommend that you work your way through this summarised checklist at first instance. Where items appear
relevant, those items should be “tagged” using the check boxes. The detailed item can then be reviewed in more detail
to determine whether the planning opportunity is relevant to your circumstances.
Income
This section deals specifically with the treatment of income that you may have received or derived during
the income year and whether such income should be attributed to the 2016 income year or included as
income in the 2017 income year and subsequent years.
d
Business income — If you derive business sales income, you may be able to legitimately defer sales
invoicing or bring forward sales invoicing (in appropriate circumstances). — Section 3B
d
Tax on business income — If you are a small business entity (“SBE”), your income could be taxable at the
lower tax rate (28.5% for a company, and a 5% discount for an individual capped at $1,000) in the 30 June
2016 year. From 1 July 2016, the tax rate will be reduced to 27.5% for SBEs, which will include companies
carrying on business, where their aggregated turnover is less than $10 million. From 1 July 2016, the
discount rate will also be increased to 8% (capped at $1,000), with the turnover threshold also being
increased to $5 million. Businesses need to consider the timing of income, franking credit impacts and
whether there are advantages in moving to a corporate structure post-30 June 2016 — Section 3C — [NEW
ITEMS FOR 2016]
d
Accrued/unearned income — If you record accrued or unearned income in your accounts, you may be able
to defer recognition of that income for tax purposes. — Section 3D
d
Trade incentives — Discounts and other incentives on trading stock or services are typically brought to
account in a different income year for tax as compared to accounting. — Sections 3E and 3F
d
Disputed amounts — It may be possible to defer the recognition of disputed income amounts until you
have settled the dispute. — Section 3G
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This section deals specifically with the treatment of income that you may have received or derived during
the income year and whether such income should be attributed to the 2016 income year or included as
income in the 2017 income year and subsequent years.
d
Construction contracts — Where you enter into construction contracts that are not your trading stock, you
may be able to utilise one of the different methods of income recognition allowed by the Australian
Taxation Office (“ATO”) for tax purposes. — Section 3H
d
Insurance proceeds — If you received insurance proceeds, you should examine whether the proceeds are
in fact assessable and when you need to bring the proceeds to account for tax purposes. — Section 3I
d
Grants, bounties, subsidies — If you receive grants, bounties or subsidies, you should examine whether
they are in fact assessable and when you need to bring the proceeds to account for tax purposes. —
Section 3J
d
Disaster relief money — Exemptions may be available for disaster relief money received. — Section 3K
d
Interest income — For interest received around year-end, examine the timing of interest income closely for
tax purposes as interest is typically assessable on a receipts basis. — Section 3L
d
Dividend income — Dividends accrued may not be assessable at year-end if they are only declared by not
paid. Make sure you also take into account franking credits in your tax planning. — Section 3M
d
Shareholders and their associates/former associates — If you are a shareholder (or an associate or former
associate of a shareholder) in a private company and have received a loan from, had an expense paid by or
undertaken any other transaction with that company or a related trust during the year then you may be
deemed to have received a taxable dividend from this company. — Section 7G
d
Retail premiums — If you received a retail premium as a non-participating shareholder during the year, this
amount may be treated as an unfranked dividend. — Section 3N
d
Trust distributions — Year-end tax planning should take into account the expected tax distribution that you
may receive from trusts (rather than the expected accounting/cash distribution amount). — Section 3O
d
Rental/leasing income — Consider whether your rental income activities are passive (and therefore on a
cash basis) or constitute a business (and therefore possibly on an accruals basis). This can have an effect on
the timing of income brought to account. — Section 3P
d
Foreign taxes — If you received foreign income subject to foreign tax, make sure you claim your foreign tax
offsets and ensure you gross-up the foreign income for planning estimates. — Section 3Q
d
Non-assessable amounts — Consider whether any income you have received this year can be treated as
non-assessable. — Section 3R
d
Personal services income — If you provide services through a trust or company, there is a risk that the
income could be your personal services income (“PSI”) and attributed to you directly. You should consider
the PSI rules appropriately before year-end. — Section 3S
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Year-end tax planning toolkit – 2015/16
This section deals specifically with the treatment of income that you may have received or derived during
the income year and whether such income should be attributed to the 2016 income year or included as
income in the 2017 income year and subsequent years.
d
Extraordinary items — If you have received extraordinary (or significant) receipts during the year, these
items must be examined closely from a tax perspective. — Section 3T
d
Notes — Review notes taken in relation to the section. — Section 3U
Deductions
This section deals specifically with the expenses that you may have incurred during the income year and
whether such expenses can result in a deduction for the 2016 income year or need to be deferred to the
2017 income year and subsequent years.
d
General rules — Consider all material expense items to determine whether there is any risk that certain
items may not be deductible (for example, they are of a capital nature). You should ensure an
appropriate review of all such expenses to determine their deductibility and any opportunities that may
exist for such expenses. — Section 4A
d
Capital expenditure — If you have identified non-deductible capital expenditure, you should consider
your ability to claim a black hole deduction over five years or, alternatively, include the costs in your cost
base of an asset. There is an immediate deduction available for a range of expenses incurred by a startup business from 1 July 2015. — Section 4B — [NEW ITEMS FOR 2016]
d
Bad debt deductions — If you have doubtful debts, you can possibly bring forward deductions if you are
able to write those amounts off as bad debts for tax purposes before 30 June 2016. — Section 4C
d
Trading stock valuation — Where you hold trading stock, you can choose to value trading stock at yearend at cost, market selling value, replacement value or obsolete stock value. This can have the effect of
either bringing forward deductions or shifting the amounts to the following year. — Section 4D
d
Depreciating assets (all entities) — If you have depreciating assets, there are a number of options that
allow you to accelerate depreciation claims for the current year. — Section 4E
d
Depreciating assets (small business entities) — If you have depreciating assets and you are a SBE,
further tax incentives can apply to provide a higher deduction claim for the current year. — Section 4F
d
Project pools — If you have identified non-deductible capital expenditure, you should consider your
ability to claim the capital expenditure as a project pool cost over the life of the project. — Section 4G
d
Internal labour costs — Where you internally construct assets, you may be required to capitalise labour
costs for tax purposes. This may defer deductions claimed (i.e. over the depreciable life of the asset). —
Section 4H
d
Commercial websites — If you have incurred costs with respect to a commercial website that you use in
your business, you may be able to claim deductions, or otherwise, claim capital depreciation costs. —
Section 4I — [NEW ITEMS FOR 2016]
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This section deals specifically with the expenses that you may have incurred during the income year and
whether such expenses can result in a deduction for the 2016 income year or need to be deferred to the
2017 income year and subsequent years.
12
d
Employee bonuses — Consider whether your accrued employee bonus plan for 30 June 2016 can be
treated as deductible for the current year by changing aspects (for example, approval timing) of your
plan. — Section 4J
d
Exempt income deductions — If you derive exempt type income, a number of your expenses are likely to
be non-deductible. This should be reviewed to determine the correct position. — Section 4K
d
Foreign exchange — Consider whether the (tax) foreign exchange provisions will give rise to significant
adjustments at year-end. Consider if there are any opportunities to reduce compliance under the
provisions by making certain elections before year-end. — Section 4L
d
Gifts and donations — Review your deductions (or proposed deductions) for gifts and donations and
their impact on your tax losses. — Section 4M
d
Interest deductibility — If you have significant interest or debt deduction costs during the year, you
should closely consider whether you are precluded from deducting such amounts. — Sections 4N and
10B
d
Prepaid expenditure — There are still some opportunities for some prepayments to be fully deductible
upfront if they: are made by individuals and small businesses; or represent excluded expenditure for all
other taxpayers. — Section 4O
d
Service fees — If there are management fees and service fees charged between your group entities, you
should ensure all paper work or agreements are put into effect before year-end and that the fees are
commercially justifiable. The ATO has been targeting these items in recent years. — Section 4P
d
Capital support payments — The ATO takes the view that capital support payments made by a parent to
its subsidiary will be on capital account and non-deductible. Accordingly, consider whether it is better to
structure the arrangement as an appropriate arm’s length service fee. — Section 4Q
d
Deductions for contributions — You may be able to claim a deduction for superannuation contributions
by paying the amounts to the fund (i.e. received by the super fund) before year-end. — Sections 4R and
12A
d
Trade incentives — If you provide discounts and trade incentives on your sales, these items are generally
deductible at a different time for tax as compared to accounting. — Sections 4S
d
Tax losses for infrastructure projects — If you are involved in large scale infrastructure projects, there
are provisions which may allow certain entities to recoup early stage losses for approved projects. —
Section 4T
d
Notes — Review notes taken in relation to the section. — Section 4U
Year-end tax planning toolkit – 2015/16
Individuals
This section considers specific year-end taxation issues associated with individuals.
d
ATO compliance activity — The ATO are scrutinising claims made by individuals for work-related
expenses, rental property expenses and interest deductions on the private portion of loans. — Section
5A — [NEW ITEMS FOR 2016]
d
Tax rates — The tax rates for 30 June 2016 are the same as 30 June 2015. For an individual resident
taxpayer, $133,920 of taxable income (which equates to a fully franked dividend of $93,744) provides an
average tax rate of 30% for 30 June 2016. — Section 5B
d
Medicare levy — As part of your ordinary tax planning, understand your Medicare levy and consider any
opportunities that may reduce this levy. — Section 5B
d
Private health insurance rebate — Please note that the private health insurance rebate is now adjusted
for on the lodgement of your income tax return. This can either increase or decrease the total amount
payable on lodgement of your individual return. — Section 5C
d
Rebates and offsets — A large number of different rebates and offsets are available to reduce taxable
income. You should consider the availability of these items for the current year. — Section 5D
d
Work expenses and substantiation — Ensure you have documentation to substantiate claims of $300 or
more. You should understand what claims are covered by the substantiation requirements. — Section 5E
d
Work-related car expenses — Ensure that you record your odometer readings for 30 June 2016 and
consider a log-book for your car (to maximise options for car expense deductions). — Section 5F
d
Work-related travel expenses — Examine whether any additional travel (local, interstate, overseas)
expenses are deductible for the 30 June 2016 income year and ensure you have satisfied the
substantiation requirements. — Section 5G
d
Work-related clothing, laundry and cleaning — Consider whether you can claim a deduction for the cost
of buying or cleaning: occupation specific or protective clothes; or unique, distinctive uniforms. —
Section 5H
d
Other work-related expenses — Consider the deductibility of other work-related expenses including
home office expenses, occupancy expenses, work-related development and support, tools and
equipment and overtime meal allowance expenses. — Section 5I
d
Specific industries — If you work in a specific industry, you should consider the ATO’s guide on workrelated expenses that applies to that industry. — Section 5J
d
Self-education expenses — Review whether education expenses are deductible and apply the nondeductible threshold of $250 to appropriate expenses. — Section 5K
d
Work-related expenses you cannot claim — Review whether there are specific rules that will deny a
deduction for your work-related expenses. — Section 5L
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13
This section considers specific year-end taxation issues associated with individuals.
d
Prepaid expenses — Consider whether you can prepay certain expenses before 30 June 2016 to bring
forward deductions to the current income year. — Section 5M
d
Salary sacrifice — Ensure that you have appropriately considered the requirements for an effective
salary sacrifice arrangement (for example, into superannuation). — Section 5N
d
Employee share schemes — If you have received shares and/or options/rights as an employee, you need
to consider the employee share scheme (“ESS”) provisions and whether an amount will be assessable to
you. — Section 5O
d
Foreign employment income — You will need to review the income tax and FBT consequences where
you have received foreign employment income. — Section 5P
d
Non-commercial losses — If you carry on business in your own name, losses related to the business
activities may not be deductible under the non-commercial loss provisions. — Section 5Q
d
Personal services income — Where you have provided services and you have operated through an
entity, you need to consider the possible application of the PSI rules. — Section 5R
d
Living away from home (“LAFH”) changes — If you have received a LAFH allowance during the 30 June
2016 income year, you should consider a review of these amounts. — Section 5S
d
Overseas repayment of HELP and TSL debts — If you are living or intending to live overseas, and have a
HELP or TSL debt, you need to advise the ATO of your new contact details. — Section 5T
d
Capital raising tax incentives — If you are investing, or planning to invest, in an early stage venture
capital limited partnership (“ESVCLP”) or an early stage investment company (“ESIC”), consider whether
you are eligible to receive a non-refundable carry-forward tax offset in respect of your investment and
whether you will qualify for CGT relief on the investment. — Section 5U – [NEW ITEMS FOR 2016]
d
Notes — Review notes taken in relation to the section. — Section 5V
Trusts
This section considers specific year-end taxation issues associated with trusts.
d
14
ATO compliance activity — The ATO is continuing its trust compliance activities during the current
income year and has received extra funding through its Tax Avoidance Taskforce that will target high
wealth individuals. You should carefully review all of your trust requirements before year-end. — Section
6A — [NEW ITEMS FOR 2016]
Year-end tax planning toolkit – 2015/16
This section considers specific year-end taxation issues associated with trusts.
d
Small business tax rates — Corporate beneficiaries of small businesses operated through trusts may not
be eligible for the reduced rate of tax of 28.5% (for the year ending 30 June 2016) or 27.5% (for the year
ending 30 June 2017), which may otherwise be available to small businesses that operate through
corporate structures. You should consider whether your business structure is appropriate. — Section 7A
— [NEW ITEMS FOR 2016]
d
Trustee tax rate — To avoid a trustee tax rate of 49%, ensure that you make beneficiaries entitled to all
of the income of the trust before 30 June 2016 (or an earlier time if required by the trust deed). —
Section 6B
d
Trustee resolutions — Distribution resolutions or distribution plans should be completed before yearend (or earlier if required by the trust deed) and evidenced. — Section 6C
d
Meaning of income — Review the trust deed to determine how income is defined to ensure the
distribution resolutions are effective in distributing all trust income (to avoid a trustee assessment). You
will also be required to disclose income per your deed in your 30 June 2016 tax return. — Section 6D
d
Distribution of timing differences (general) — The ATO has been focusing compliance activity on
taxpayers taking advantage of timing differences between a trust’s net income for tax purposes and its
income for trust purposes by using a corporate beneficiary to avoid top-up tax in the hands of
individuals. Care needs to be taken if you expect taxable income to exceed accounting profit. — Section
6E
d
Distribution of timing differences (unit trusts) — As beneficiaries of unit trusts can be taxable on a
distribution of timing differences, consider whether it may be possible to align tax and accounting by
defining income as “taxable income” for the current income year. — Section 6F
d
Trust to company distributions — Ensure that you have appropriately considered Division 7A where
your trust distributes (directly or indirectly) to a corporate beneficiary — Sections 6G and 7G
d
Trust streaming — Legislation only specifically allows streaming for capital gains or franked dividends.
You should ensure you comply with these rules if you wish to stream for the current year. — Section 6H
d
Capital gains versus revenue gains — If you have derived substantial capital gains, you need to consider
the ATO’s ruling that may seek to treat those gains on revenue account (and not subject to a 50% discount).
— Section 6I
d
Trust losses and bad debts — Trust losses and bad debt deductions may be denied if a family trust
election (“FTE”) is not made, or if the trust loss provisions are not otherwise satisfied. Consider these
rules if you are expecting to make a tax loss or if you are recouping tax losses. — Section 6J
d
Franking credits — If you receive dividends through the trust, franking credits may not flow through the
trust unless the trust is a fixed trust or the trust makes a FTE. — Section 6K
d
Injection of income — If there is more than one trust in your group, trust-to-trust distributions to take
advantage of losses in a trust may create taxation issues if a FTE is not made. — Section 6L
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15
This section considers specific year-end taxation issues associated with trusts.
d
Interest expenses and distributions — Interest deductions may be denied where finance is used to fund
distributions (of income or capital) to beneficiaries. You may consider alternatives to help protect
interest deductions. — Section 6M
d
Family trust elections — Critically review your FTE requirements for the year to ensure you protect bad
debts, carry forward losses and franking credit flow-through. Make sure all new trusts have made an
election to be within the family group. — Section 6N
d
Tax file number withholding — The trustee must obtain tax file numbers (“TFN”) from beneficiaries
before 30 June 2016, which have not previously been reported, to avoid penalties. This needs to be
reported to the ATO by 31 July 2016. — Section 6O
d
Review trust deeds — Consider reviewing your trust deed before year-end to ensure that the deed is still
appropriate for the type of distribution for 30 June and future years. — Section 6P
d
Superannuation deductions — Consider carefully the deductibility of payments for superannuation
contributions made for directors of a trustee company. — Section 6Q
d
Trust distributions to a superannuation fund — Non-arm’s length income derived by a superannuation
fund (which may include discretionary trust distributions or private company dividends) can be taxed at a
rate of 47% in a superannuation fund. — Section 6R
d
Notes — Review notes taken in relation to the section. — Section 6S
Companies
This section considers specific year-end taxation issues associated with companies.
16
d
ATO compliance activity — The ATO is continuing to scrutinise the taxation affairs of companies and has
indicated numerous areas it will be targeting for 2016 and 2017. The Government has also increased
funding to its Tax Avoidance Taskforce, which will target high wealth individuals. You should consider
whether any of your arrangements are those that have been identified by the ATO, and, if required, you
should consider appropriate action.— Section 7A — [NEW ITEMS FOR 2016]
d
Tax rates — SBE corporate tax entities are subject to tax at a rate of 28.5% for the year ending 30 June
2016. All other corporate tax entities are subject to corporate tax at a rate of 30%. A tax rate of 27.5% is
to apply to SBE corporate tax entities with annual aggregated turnover of less than $10 million for the
year ending 30 June 2017. You should consider whether it is appropriate to transition your business to a
company structure. — Section 7B — [NEW ITEMS FOR 2016]
d
Payment of dividends — If the company has current year losses, or prior year retained losses, a dividend
paid by the company may not be frankable unless you fall within the ATO’s guidelines. — Section 7C
Year-end tax planning toolkit – 2015/16
This section considers specific year-end taxation issues associated with companies.
d
Franking distributions — You should appropriately manage your franking account balance to ensure that
you do not create a franking deficit at year-end (and incur franking deficit tax). Small business corporate
tax entities should ensure that they do not over-frank their distributions where they are subject to the
reduced tax rate of 28.5%. — Section 7D — [NEW ITEMS FOR 2016]
d
Distribution statements — If you have paid (or will pay) dividends for the current year, you need to
ensure compliance with the distribution statement requirements (otherwise the dividend will not be
frankable).
— Section 7E
d
Debt that can be treated like equity — All loans made to companies should be reviewed to ensure that
they are on terms that allow them to be treated as debt for tax purposes and are not inadvertently
treated as equity (and thus interest will be non-deductible). This will typically require a 10 year
repayment period or an appropriate interest rate. — Section 7F
d
Division 7A — You should review Division 7A before year-end to ensure that you do not inadvertently
trigger a deemed unfranked dividend to a shareholder or associate for any loans, payments or debt
forgiveness transactions provided by the company. — Sections 7G, 7H, 7I, 7J and 7K
d
Company losses — If you are utilising prior year tax losses, or have tax losses in the current year, you will
need to consider the carry forward tax loss provisions. — Section 7L
d
Share capital transactions — If your share capital account has moved for the current year, you should
examine those movements very carefully. They may result in an unfranked dividend or untainting tax
liabilities. You may be able to correct these if identified before year-end. — Section 7M
d
Tax consolidation — choice to consolidate — If you are making a choice to consolidate, you need to
keep a separate hand written choice. You will also need to consider whether tax funding and tax sharing
agreements are put in place before (or close to) year-end. — Section 7N
d
Tax consolidation — change in members — If members have joined or left during the income year, you
are required to notify the ATO within 28 days. You are also required to update your tax funding and tax
sharing agreements. — Section 7O
d
Tax consolidation — updating tax costs — If entities have joined a tax consolidated group during the
year, you should ensure that you have recalculated the tax cost base of assets and liabilities, as this could
materially impact your 30 June 2016 tax calculation. — Section 7P
d
Tax consolidation — disposal of entities — If entities have left a tax consolidated group, the cost base of
the shares needs to be recalculated based on the underlying tax cost of assets and liabilities of the
leaving entity. This can have a material impact on any capital gain or loss on sale of the leaving entity. —
Section 7Q — [NEW ITEMS FOR 2016]
d
Tax consolidation — deductible liabilities and new acquisitions — If a tax consolidated group is planning
to acquire new entities with deductible liabilities after 1 July 2016, consider whether the proposed
changes will apply to you. — Section 7R
Year-end tax planning toolkit – 2015/16
17
This section considers specific year-end taxation issues associated with companies.
d
Research and development— Consider the effect of the research and development (“R&D”) tax
incentive provisions on your R&D deductions for 30 June 2016. — Section 7S
d
R&D — ineligible companies — If you carry on R&D activities and you have more than $100 million of
R&D expenditure, legislation has been passed that will restrict an R&D tax incentive claim for 30 June
2016. — Section 7T
d
R&D — feedstock adjustments — If you claim R&D related to feedstock expenditure, you may be
required to include an adjustment in your assessable income. — Section 7U
d
Reportable tax positions — Consider whether you need to prepare the reportable tax position (“RTP”)
schedule in the tax return. To avoid disclosures, you may need to ensure that you have appropriate
opinions on material tax issues. Consider implementing an appropriate tax risk management procedure.
— Section 7V
d
Pay-as-you-go instalments — Determine whether the pay-as-you-go (“PAYG”) instalment for the fourth
quarter for 30 June 2016 can be varied. — Section 7W
d
Director penalty regime — Ensure that you are up to date with super and PAYG payments and consider
implementing control procedures dealing with the director penalty regime. — Section 7X
d
Capital raising tax incentives — If you are investing, or planning to invest, in an ESVCLP or an ESIC,
consider whether you are eligible to receive a non-refundable carry-forward tax offset in respect of your
contributions or investment. — Section 5U — [NEW ITEMS FOR 2016]
d
Tax transparency — The ATO is required to publicly report tax information for certain corporate tax
entities. A private company with $200 million of turnover will be subject to these rules. If you will be
subject to these rules, you should consider whether amounts are disclosed in your tax return correctly.
— Section 7Y — [NEW ITEMS FOR 2016]
d
Notes — Review notes taken in relation to the section. — Section 7Z
Partnerships
This section considers specific year-end taxation issues associated with partnerships.
18
d
Professional practices with trusts as partners — The ATO is reviewing professional practices that report
a trust as a partner in the tax return. There may be ways in which to mitigate this risk by following ATO
administrative guidelines. — Section 8A — [NEW ITEMS FOR 2016]
d
Professional practices (unincorporated and incorporated) — If your professional practice has a
practicing member that is not a natural person, the ATO has indicated that it will not stand by its “no
goodwill” view for incoming and leaving members. There may be ways in which to mitigate this risk. —
Section 8B — [NEW ITEMS FOR 2016]
Year-end tax planning toolkit – 2015/16
This section considers specific year-end taxation issues associated with partnerships.
d
Varying distributions — For common law partnerships, consider the ability to vary distribution
entitlements before 30 June 2016. — Section 8C
d
Equity contributions — You should appropriately consider equity contributions made to a partnership by
a company and the Division 7A treatment of such contributions. — Section 8D
d
Notes — Review notes taken in relation to the section. — Section 8E
Capital gains tax
This section considers a number of year-end considerations for capital gains that may have been derived
during the income year.
d
General — Ensure that you have considered all contracts and capital receipts for the year to determine
whether a capital gain or loss has occurred. — Section 9A
d
Small business capital gains tax concessions — Where you conduct a business (either directly or
indirectly), consider your ability to reduce capital gains tax (“CGT”) under the small business concessions.
— Section 9B
d
CGT discount — Consider whether assets disposed of were held for over 12 months and thus qualify for
the CGT discount. If the amounts are material, you may need to review whether the ATO may treat the
amounts as being on revenue account (and not eligible for the 50% discount). — Section 9C
d
CGT discount (non-residents) — Non-resident individuals no longer qualify for the CGT discount. The
provisions may allow for a full or partial discount in certain cases. Taxpayers should consider obtaining a
market valuation of their taxable Australian property held at 8 May 2012 or assessing the discount
available based on the days on which they were an Australian resident compared to the total period of
ownership of the asset. — Section 9D
d
Earnout arrangements — The capital gain on the sale of a CGT asset can be deferred if you qualify for
the new earnout rules. — Section 9E — [NEW ITEMS FOR 2016]
d
CGT exemptions — Consider the many CGT exemptions that may apply to reduce your capital gain or
loss. — Section 9F
d
CGT rollovers — Consider whether the CGT rollovers may apply to reduce your capital gain or loss. —
Section 9G — [NEW ITEMS FOR 2016]
d
Main residence exemption — Ensure you have applied the main residence exemption correctly for any
sale of residential property and adjacent land. — Section 9H
d
Notes — Review notes taken in relation to the section. — Section 9I
Year-end tax planning toolkit – 2015/16
19
Finance issues
This section considers a number of year-end considerations for financial transactions and financial type
entities for the income year.
d
Loan rationalisation and debt forgiveness — You may wish to consider rationalising inter-entity loans at
year-end, to simplify loan arrangements and Division 7A compliance. However, consider the tax
consequences that may occur on a loan rationalisation or debt forgiveness during the year. — Section 10A
d
Interest deductibility — If you have significant interest or debt deduction costs during the year, you should
closely consider whether you are precluded from deducting such amounts. — Section 10B
d
Capital protected borrowings — Interest deductions may be denied in respect of the funding of capital
protected shares, units or stapled securities. — Section 10C
d
Taxation of financial arrangements — general — On an annual basis, you need to consider whether the
taxation of financial arrangements (“TOFA”) provisions will start to apply to your entity or group of entities.
— Section 10D
d
TOFA — elections — TOFA can provide taxpayers with a number of elections that allow tax to be aligned
with accounting for financial instruments. If such elections are of interest, they need to be made before
year-end. — Section 10E
d
TOFA — consolidated groups — If your group is subject to TOFA, and an entity has joined your tax
consolidated group, make sure that you have applied the special TOFA rule to liabilities of the joining entity
(which treats such amounts as assessable). — Section 0
d
TOFA — compliance issues — If your group is subject to TOFA, the ATO is conducting ongoing compliance
activity. Accordingly, you should ensure you are comfortable with your TOFA positions. — Section 10G
d
FATCA compliance — If you have US investments, have beneficiaries or controllers that are US citizens, or if
you simply have an entity that invests in Australian funds, the Foreign Account Compliance Act (“FATCA”)
provisions could apply. You should carefully consider your FATCA obligations. — Section 10H
d
Financing structures — If you are considering creating a new investment structure, or considering investing
in such a structure, consider whether a number of the new legislative regimes can assist your structure or
will provide an incentive for your structure either before or after 30 June (i.e. including the new AMIT
regime, IMR regime, ESVCLP regime, ESIC regime, crowd-funding regime and the proposed collective
investment vehicle [“CIV”] regime). — Section 10I — [NEW ITEMS FOR 2016]
d
Notes — Review notes taken in relation to the section. — Section 10J
20
Year-end tax planning toolkit – 2015/16
International tax
This section considers a number of year-end considerations where you have international transactions,
or inbound or outbound investments.
d
ATO compliance activity — The ATO is targeting international transactions and has received substantial
funding for its Tax Avoidance Taskforce, targeting both high wealth individuals and multinationals. You
should carefully consider whether your arrangements with international parties are likely to be
scrutinised by the ATO. — Section 11B — [NEW ITEMS FOR 2016]
d
Non-resident individual tax rates — We have outlined the tax rates for individuals for the 30 June 2016
income year. — Section 11C
d
Tax residency and source — You should carefully consider whether the relevant entity is a tax resident
for the current year, and (where non-resident) whether foreign sourced income has been excluded. —
Section 11D
d
Temporary resident concessions — If you are a foreign citizen and an Australian resident, consider
whether you can apply the temporary resident concessions and reduce your taxable income. — Section
11E
d
Change in residence — A change in residence may have significant tax implications and may also require
elections to be made. You should consider your residency status for the income year. — Section 11F
d
Controlled foreign companies — You should consider whether the controlled foreign company (“CFC”)
provisions will result in an accrual of underlying income in your foreign investment, even if your
individual interest is a minority interest. — Section 11G
d
Transfer pricing — Australia’s transfer pricing rules apply to all taxpayers that have international dealings
and can apply to reconstruct those international dealings. The ATO now have wide powers to increase your
Australian taxable income under these measures, which also require documentation to be in place for
penalty protection purposes. A number of simplified record keeping options may be available to smaller
taxpayers. — Sections 11H, 11I and 11J — [NEW ITEMS FOR 2016]
d
International dealings schedule — Completion of the international dealings schedule (“IDS”) for the 30
June 2016 tax return should be consistent with your transfer pricing documentation for the current year.
It is therefore critical to ensure transfer pricing documentation is in place. — Section 11K
d
Conduit foreign income — If the Australian company is a conduit between foreign entities, the conduit
foreign income (“CFI”) provisions may allow unfranked dividends to be paid to non-residents tax free if
you meet certain conditions in the relevant income years. — Section 11L
d
Foreign income tax offsets — Consider your foreign income tax offset (“FITO”) position for 30 June 2016
to determine whether there are any excess FITOs that will be wasted. Strategies can be put in place to
help reduce FITO wastage. — Section 11M
d
Non-resident distributions — Consider whether distributions from non-residents (including capital
reductions) can or have been made to an Australian entity in a tax free manner. This is particularly
important in 2015/16 as the rules for determining the assessability of distributions changed during the
year. — Section 11N
Year-end tax planning toolkit – 2015/16
21
This section considers a number of year-end considerations where you have international transactions,
or inbound or outbound investments.
22
d
Non-residents and asset sales — Non-residents and temporary residents can dispose of certain
Australian assets (for example, certain assets that are not land nor land rich entities) without tax
consequences. However, non-residents and temporary residents are no longer eligible for the 50% CGT
discount. — Section 11O
d
Deductions in earning foreign income — Deductions may be denied where a foreign operation in the
group produces exempt or non-assessable non-exempt (“NANE”) income to the group. This may be
relevant if you carry on a branch (or hold shares in a subsidiary) in a foreign country. — Section 11P
d
Deemed dividends — Related party transactions may result in deemed unfranked dividends where
benefits are provided by a CFC to a shareholder or associate of the shareholder (similar to Division 7A).
— Section 11Q
d
Thin capitalisation — If you are an inbound or outbound entity, the thin capitalisation provisions may
deny interest deductions. Addressing your tax gearing ratios before 30 June 2016 may also place you in a
much better thin capitalisation position for the 30 June 2016 year. — Section 11R
d
Withholding tax and deductions — If you pay interest, royalties or other income subject to withholding
tax, non-compliance with the withholding tax provisions may result in deductions being denied for the
income year. — Section 11S
d
Non-resident beneficiaries — If you stream classes of income to non-residents (for example, interest)
you should consider the ATO’s views on streaming and the risk that the current provisions may not
support streaming such income. — Section 11T
d
Non-resident trusts — If you have an interest in a foreign trust for the 30 June 2016 income year, you
may need to disclose income in your tax return under the accrual provisions. — Section 11U
d
Offshore assets — If you have offshore assets or investments that you have not previously disclosed to
the ATO, you should consider making a voluntary disclosure to minimise steep penalties and the risk of
criminal prosecution for tax avoidance. — Section 11V
d
Investment manager regime — If you are a non-resident investor that invests in certain assets such as
equities or foreign assets, you should consider the application of the new Investment Manager Regime
(“IMR”) regime for the year ending 30 June 2016, which could help to ensure that certain gains are not
taxable in Australia. — Section 11W
d
Managed investment trust fund payments — The withholding tax rate on fund payments to nonresidents during the 2016 income is equal to 15% for EOI countries and 30% for non-EOI countries. A
special rate of 10% applies to certain energy efficient buildings funds. — Section 11X
d
Foreign exchange — Consider whether the (tax) foreign exchange provisions will give rise to significant
adjustments at year-end. Consider if there are any opportunities to reduce compliance under the
provisions by making certain elections before year-end. — Sections 11Y and 4L
d
Notes — Review notes taken in relation to the section. — Section 11Z
Year-end tax planning toolkit – 2015/16
Superannuation, GST and state taxes
This section considers a number of year-end considerations for superannuation, GST and state taxes.
d
Deductions for contributions — You may be able to claim a deduction for superannuation contributions by
paying the amounts to the fund (i.e. received by the super fund) before year-end. — Section 12A
d
Superannuation guarantee — Ensure that you have complied with the superannuation guarantee (“SG”)
requirements, especially for bonuses paid and payments made to contractors, consultants or members of
the board who are not paid via the payroll. — Section 12B
d
Concessional contribution cap — Make sure you have complied with the annual concessional contribution
cap. — Section 12C
d
Non-concessional contribution caps — Please note that the Government has announced that a lifetime
limit of $500,000 for non-concessional contributions will apply from 3 May 2016. — Section 12D — [NEW
ITEMS FOR 2016]
d
Personal superannuation contributions — Consider whether the individual is eligible to make a deductible
concessional contribution before 30 June 2016 and ensure notice requirements are met within time. —
Section 12E
d
Low income superannuation contribution — If you are a low income earner, consider making a
contribution to your superannuation fund before 30 June 2016. — Section 12F
d
Low income spouse superannuation contribution — If you have a spouse with a low income, consider
whether contributions made to their superannuation account will be eligible for the tax offset. — Section
12G
d
Cap on superannuation transfers into retirement products — If you are in retirement phase, or about to
enter retirement phase, consider the impact of the introduction of the $1.6 million transfer balance cap on
your superannuation account balances, and whether you will need to maintain excess amounts in an
accumulation phase account. — Section 12H — [NEW ITEMS FOR 2016]
d
Excess contributions — When reviewing your superannuation strategy for year-end, carefully consider
whether payments are within your contributions cap. — Section 12I
d
Increase in contributions tax for higher income earners — The contributions tax increases from 15% to
30% for individuals who have income of more than $300,000. Individuals should consider this when making
contributions for the 2016 year. — Section 12J – [NEW ITEMS FOR 2016]
d
Employment termination payments — If you have received an ETP during the 30 June 2016 income year,
you should review the concessional taxation treatment of such payments. — Section 12K
d
Legal settlements on employee termination — Consider whether amounts received in respect of legal
costs incurred in disputes concerning the termination of employment can be treated as an eligible
termination payment (“ETP”) (which may be subject to concessional treatment). — Section 12L
Year-end tax planning toolkit – 2015/16
23
This section considers a number of year-end considerations for superannuation, GST and state taxes.
d
GST adjustments for bad debts written off — If you write off a bad debt during the year, you may need to
make a GST adjustment in the relevant BAS. — Section 12M
d
Accounting for GST on a cash or accruals basis — If you currently account for GST on a cash basis you
should consider whether you still satisfy the eligibility requirements for cash basis accounting. — Section
12N
d
Financial acquisitions threshold — If you make financial supplies, you should consider whether you have
exceeded the financial acquisitions threshold (“FAT”) and whether you can claim full input tax credits. —
Section 12O
d
GST adjustments for change in use — If you have changed the extent to which an acquisition or
importation is used for a creditable purpose, you should consider whether a change in use adjustment is
required in the BAS for the period ended 30 June. — Section 12P
d
Reporting requirements for construction — If you are in the building and construction industry, you need
to consider the reporting requirements for payments made to contractors before 30 June. Pitcher Partners
has software that enables direct upload for ATO reporting. — Section 12Q
d
Stamp duty surcharge for foreign purchasers of property — From 1 July 2016, the stamp duty surcharge
that is applicable to foreign purchasers of residential property in Victoria (for post-1 July 2015
arrangements) will more than double from 3% to 7%. The duty surcharge can be triggered on a change in
the proposed use of the property. An opportunity may exist between now and 30 June 2016 to save 4%
duty by bringing forward any change of intention. — Section 12R – [NEW ITEMS FOR 2016]
d
Notes — Review notes taken in relation to the section. — Section 12S
Integrity measures
This section considers a number of integrity measures that should be considered with your year-end
planning.
24
d
Taxpayer alerts — Taxpayer alerts are specific areas that the ATO are targeting. They typically involve
anti-avoidance measures and are high risk items. You should consider whether any of the issues
identified in the recent taxpayer alerts apply to your tax affairs or to any tax planning opportunities that
you or are considering. — Section 13A
d
General anti—avoidance (Part IVA) — You should consider Part IVA in relation to any material tax
planning strategy that may be implemented for the 30 June 2016 income year. — Section 13B
d
Promoted schemes at year-end — Be careful of schemes that are promoted to taxpayers to reduce their
taxable income for the income year. Consider the ATO guidance on what to look out for. — Section 13C
Year-end tax planning toolkit – 2015/16
This section considers a number of integrity measures that should be considered with your year-end
planning.
d
Related party transactions — Where tax planning arrangements involve related party transactions,
consider carefully the application of the anti-avoidance provisions that may deny deductions incurred by
one of the related parties. — Section 13D
d
Wash sales — Consider the ATO’s view on wash sale arrangements where assets are disposed of for a
loss or gain and substantially the same assets are re-acquired. — Section 13E
d
Franking credit trading arrangements — You should review any arrangements that purport to provide a
return that is calculated with reference to franking credits as such arrangements may fall foul of antiavoidance provisions. — Section 13F
d
Trust streaming to exempt entities — Consider the impact of the anti-avoidance rules on distributions
from trusts to exempt entities. — Section 13G
d
Trust distributions — Care needs to be taken where income is distributed to a beneficiary, where it is
unlikely that the beneficiary will ever call on the funds (or be paid those funds). — Section 13H
d
Notes — Review notes taken in relation to the section. — Section 13I
Year-end tax planning toolkit – 2015/16
25
Income
General rules on income
A taxpayer is required to include all income derived for an income year in their assessable income. Generally speaking,
business activity income is typically brought to account on an accruals basis, while passive income and personal
services income are typically brought to account on a cash basis. However, as outlined below, some types of passive
income have their own special timing rules. Furthermore, taxpayers in the business of deriving passive income (for
example, a finance entity) would need to bring such income to account on an accruals basis.
Business income
Generally, the accruals method is adopted to include income that has been derived from the sale of goods,
commodities or from business activities.
Where income is from a professional practice, it is not always clear whether such income is from personal services or
from a business activity1. This issue should be reviewed on an annual basis.
A taxpayer will typically derive business income when an invoice has been raised, or where the taxpayer is legally
entitled to the amount. All trade debtor amounts at year-end are generally included in the assessable income of a
taxpayer deriving business income. Taxpayers should also carefully review accrued income accounts to determine
whether such amounts are assessable income at year-end (see Section 3D).
Year-end planning considerations
d
Determine whether you have brought income to account in the correct year. Some income is brought to
account on a cash basis (for example, interest), while other income is brought to account on an accruals
basis (for example, business income).
d
Consider whether invoices issued in June 2016 and July 2016 are accounted for in the appropriate period.
Tax on business income
It is noted that for the year ending 30 June 2016, SBEs that are operated through a corporate structure with turnover of
less than $2 million can be subject to tax at a rate of 28.5%. From 1 July 2016, a tax rate of 27.5% will apply to SBEs
operating through a corporate structure. Per the Government’s Budget announcement, this is to consist of businesses
with turnover of less than $10 million 2.
To the extent that income is derived by individual taxpayers with business income from an unincorporated business
that is a SBE, a discount of 5% will apply on the income tax payable on the business income derived by the
unincorporated SBE (capped at $1,000 per individual). This discount rate will increase to 8% from 1 July 2016 (with the
current cap being retained), with the turnover threshold also being increased to $5 million.
Businesses that operate through corporate tax entities or are unincorporated businesses, should consider these change
of tax rates and the impact this will have on income that straddles the 30 June 2016 year-end.
1
2
Taxation Ruling TR 98/1.
Budget Paper No.2 – Ten year enterprise tax plan – reducing the company tax rate to 25 per cent – Page 41.
26
Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
Consider whether you are eligible for the reduced rate of tax available to small businesses operating
through a corporate structure for the years ending 30 June 2016 (28.5%: $2M turnover) and 30 June
2017 (27.5%: $10M turnover).
d
Consider whether you are eligible for the 5% discount on income tax payable that is available to
individual taxpayers with business income from an unincorporated business, capped at $1,000
(increasing to an 8% discount from 1 July 2016).
d
Consider the proposed changes to tax rates for companies and unincorporated businesses and its impact
on income that straddles the 30 June 2016 year-end.
Accrued and unearned income
Taxpayers carrying on a business may often record income as either accrued or unearned. You should carefully
consider the tax treatment of those types of income, as the tax treatment will not always follow the accounting
treatment.
Accrued income
It may be possible to defer the recognition of accrued income to the following income year. Special consideration
should be given to such amounts identified for accounting purposes where an invoice has not been issued. Such
income may, or may not, be derived for tax purposes depending on the legal entitlement to the amounts at the time.
For example, work in progress amounts will not generally give rise to assessable income until there is a recoverable
debt. If, under a contract or arrangement, a recoverable debt may be created without the need to bill the client, then
the amount will generally be derived once the work is wholly completed 3. Furthermore, the accounting basis for
accruing income can sometimes be held to be acceptable. The ATO place a lot of emphasis on these two factors and
may seek to tax unbilled income in various cases even if an invoice has not been issued4. As a final note, construction
contract income may be derived on a different basis than on a billings basis (see Section 3H).
Unearned income
An exception to the ordinary derivation rule can occur where amounts are received or are receivable, in advance of
goods or services being supplied or provided (i.e. unearned income amounts).
Generally, if a contract or arrangement requires that the fee be paid in advance, the income is derived in the income
year in which the work is completed (or the part of the work) to which the fee relates (even if invoiced). On the other
hand, if the client simply pays early, the fee income is generally only derived when a recoverable debt arises or would
have arisen if the client had not paid early5. The tax treatment also considers the accounting and commercial treatment
of the relevant income. Accordingly, if you are seeking to defer such income, it is prudent to record the income as
“unearned” in the accounts (subject to limitations imposed by accounting standards).
Not all unearned income qualifies for deferral. There have been many court cases where this principle has been
distinguished. Where the relevant amount is material, you should consider this opportunity further.
3
Taxation Ruling TR 93/11, para 6.
ATO Interpretative Decision ATO ID 2012/15.
5 Taxation Ruling TR 93/11 , para 8 and Arthur Murray (N.S.W.) Pty. Ltd. v Federal Commissioner of Taxation [1965] HCA 58.
See also Taxation Ruling TR 2014/1, para 5.
4
Year-end tax planning toolkit – 2015/16
27
Year-end planning considerations
d
Identify whether an amount of accrued income or unearned income has been recorded in the accounts
in a prior year, or is expected to be recorded in the accounts at 30 June 2016.
d
Determine whether such amounts have been derived for tax purposes and whether a tax adjustment
should be made for the 30 June 2016 balance.
Trade incentives (purchase of stock)
Trading stock acquired may be subject to a trade incentive (for example, volume rebate, trade discount, promotional
rebate). This discount amount may either give rise to assessable income to the purchaser, or can reduce the cost of
trading stock6, depending on the nature of the trade incentive.
For unconditional trade incentives (for example, a 10% unconditional rebate for all stock purchased) relating directly to
the purchase of trading stock, the amount is treated as a reduction in the cost of trading stock.
However, other incentives generally do not reduce the purchase price, but are treated as income at the time when the
incentive is provided (for example, conditional incentives, promotional incentives, and volume rebate or trade
discounts). In these cases, the purchase of trading stock is to be recorded at the full (undiscounted) price (see Section
4S). Accordingly, these discounts can be deferred until they are derived by the taxpayer and, therefore, do not need to
be included in the taxpayer’s assessable income at year-end.
Year-end planning considerations
d
Identify whether your business receives conditional discounts or trade incentive discounts from your
suppliers. If so, you may be able to defer recognition of this income for taxation purposes.
Trade incentives (sale of stock)
Where you sell trading stock and offer trade incentives, the treatment of the discount component predominantly
follows the treatment in Section 3E.
That is, for unconditional trade incentives relating directly to the sale of trading stock, the amount is treated as a
reduction in the sales proceeds. This treatment is allowed for tax purposes if the trade incentive is virtually certain,
effectively allowing an upfront deduction for the discount provided.
An incentive that is not directly related to the sale of trading stock or is not virtually certain, such as conditional
incentives and promotional incentives will be treated as a deductible amount when the incentive is actually provided.
Accordingly, the sales income must be recorded as the gross (undiscounted) price for tax purposes.
Year-end planning considerations
d
6
Identify whether your business provides unconditional discounts or trade incentive discounts to your
customers. If so, you may be able to reduce the income recorded for taxation purposes by the discount
component.
Taxation Ruling TR 2009/5.
28
Year-end tax planning toolkit – 2015/16
Customer disputed amounts
When accounting for income on an accruals basis, income that is subject to a dispute with the customer may be
deferred until the dispute is settled7. This treatment should be consistently applied in the accounts of the taxpayer.
Year-end planning considerations
d
If you have an unsettled dispute in relation to an amount of income from a customer that relates to a
sale in the 2016 income year, you may be able to defer recognition of the amount until settlement of the
dispute in the subsequent year.
Construction contracts
The ATO allows taxpayers to account for construction contract income using one of a number of methods where
construction activities are carried on by a taxpayer other than the land-owning taxpayer (i.e. the taxpayer does not
hold trading stock or a revenue asset).
The various methods available include the basic approach (billings method) or the estimated profits basis (the
accounting method)8. While the method chosen must be applied consistently, each method can result in income being
recognised in very different periods. For example, the billings method may allow for deductions to be claimed upfront
whereby income would only be assessable once a recoverable debt is created (for example, on issue of an invoice). On
the other hand, the estimated profits basis may recognise income during the project as it is completed (even where no
amount has been billed).
In this regard, the ATO requires not only consistency of treatment for all years during which a particular contract runs,
but consistency of treatment for all similar contracts entered into by you and by all entities that are part of your
group9.
Year-end planning considerations
d
Where you have entered into a long term construction contract during the year that does not relate to
your trading stock, you should consider the various methods (i.e. basic approach and the estimated
profits basis) to determine the effect each method has on your taxable income for 2016 (subject to the
consistency requirement).
d
If a construction contract does relate to the construction of trading stock for you, consider the possibility
of splitting the construction entity and the stock holding entity going forward.
Insurance proceeds
The treatment of insurance proceeds will depend on the reason for the payment. If insurance proceeds directly
compensate for the loss of income that would otherwise have been assessable (for example, income protection
insurance) or compensate for the loss of revenue assets (for example, trading stock), such proceeds may be regarded
as ordinary income. Where such amounts are not ordinary income, specific statutory provisions may treat these
receipts as income where they relate to trading stock10 or where they relate to a loss of an amount of income 11.
7
BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation [2002] FCAFC 433.
Taxation Ruling No. IT 2450.
9 Taxation Ruling No. IT 2450.
10 Income Tax Assessment Act 1997 (Cth) s70-115.
8
Year-end tax planning toolkit – 2015/16
29
Where these provisions do not apply and insurance proceeds relate to the loss or destruction of a CGT asset or a
depreciating asset, the amount may be taken to constitute proceeds on the disposal of those assets 12. Where the
proceeds do not constitute ordinary income or statutory income, the receipt of insurance proceeds may be treated as
an “assessable recoupment”13.
It is noted that the relevant provisions mentioned above also have their own timing rules for when insurance proceeds
are to be brought to account14. Where the loss event, claim and insurance receipt straddle the year-end, you should
consider the applicable provision closely to determine when the gain must be brought to account for tax purposes.
Year-end planning considerations
d
Where the loss event, claim and insurance receipt straddle the year-end, you should consider the
application of the relevant provision to determine whether the gain must be returned in this year or in a
later income year.
d
Where an asset has been lost or destroyed, you may be able to claim a loss in respect of the asset.
Alternatively, you may be able to claim rollover relief if the proceeds are used to acquire a replacement
asset.
Grants, bounties and subsidies
The treatment of government grants or subsidies is complex and will depend on the nature of the grant 15. An amount
will be treated as ordinary income where the amount is for: (1) the expected reduction in income; (2) to assist with
operating costs; (3) to compensate for a loss of profits; or (4) to evaluate the entity’s current operations.
Where the amount is not ordinary income, but rather a bounty or subsidy in relation to your business that is of a
capital nature, the amount will constitute statutory income when received 16. Amounts received in relation to
commencing a business activity or acquiring new assets may be assessable depending on the circumstances.
The timing of the amount as income will again depend on the nature of the amount, however generally the amounts
are included in assessable income on a receipts basis. Where the grant is conditional, it is possible to defer bringing the
amount to income until the conditions are satisfied. If an amount is repaid, the recipient can also treat the original
receipt as NANE income17.
You should also ensure you have considered the operation of the provisions relating to insurance (Section 3I) and
disaster relief (Section 3K).
11
Income Tax Assessment Act 1997 (Cth) s15-30.
CGT Determination Number 31 TD 31 and ATO Interpretative Decision ID 2011/82.
13 Income Tax Assessment Act 1997 (Cth) s20-20 and s20-30.
14 For example, section 15-30 requires the amount to be received.
15 Taxation Ruling TR 2006/3.
16 Income Tax Assessment Act 1997 (Cth) s15-10.
17 Income Tax Assessment Act 1997 (Cth) s59-30.
12
30
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Year-end planning considerations
d
Where Government grants have been received, determine whether such amounts will be assessable
income or whether an exemption may apply.
d
Examine whether it is possible to defer the recognition of the income amount under a grant, for
example, where the receipt of the grant can be deferred or where there are conditions imposed on
amounts already received.
Disaster relief
Some grants that are provided to individuals, small businesses and primary producers in relation to natural disasters
are not taxable. Furthermore, events can be declared a disaster, to ensure people in communities affected by the
events can receive tax deductible donations.
There are also special rules that may apply where the receipt is disaster relief money (received from charities, to which
local, State or Federal Government or their agencies have made payments). In some cases, such amounts may not
constitute income to the taxpayer18. Furthermore, rollover relief may apply for certain pre-CGT assets replaced after a
natural disaster19.
Finally, the ATO has released guidelines that allow concessions to taxpayers affected by disasters where they are
required to reconstruct records or make reasonable estimates20.
You should also ensure you have considered the operation of the provisions relating to insurance (Section 3I) and
grants, bounties and subsidies (Section 3J).
Year-end planning considerations
d
Consider whether special tax treatment may apply to money that has been received relating to a natural
disaster or assets replaced due to a natural disaster.
d
Consider whether you can access the ATO’s concessions for reconstructing records or making reasonable
estimates for your income or deductions.
Interest income
Interest income is usually included in assessable income on a cash basis. The timing of derivation will typically be when
the interest income is received or applied for the benefit of the taxpayer. However, if the receipt of interest is within
the taxpayer’s ordinary activities (for example, the taxpayer is a financial institution, or the interest is charged on trade
debts), interest income will generally be included in assessable income on an accruals basis. Furthermore, deferred
interest can be accrued under the TOFA provisions, which can apply where accrued interest is not received for 12
months (for example, on a discounted bond — see Section 10D).
You should consider reviewing interest income to determine whether amounts “accrued” can be deferred to the 2017
income year.
18
For example, Taxation Determination TD 2006/22.
Income Tax Assessment Act 1997 (Cth) s124-95(6).
20 Practice Statement Law Administration PS LA 2011/25.
19
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31
From 1 July 2015, interest income earned on a first home owner saver account should be included in your taxable
income.
Year-end planning considerations
d
Review interest income and determine whether any “accrued” interest can be deferred until the 2017
income year.
Dividend income
Dividends are included in assessable income when they are paid (which includes the crediting of the dividend by the
company). This is irrespective of whether the share investment activities of the taxpayer constitute a business or not. If
any part of the dividend is franked, that amount will also constitute assessable income. You should closely consider the
timing of dividends that you receive around year-end — especially where the dividends received are under a dividend
reinvestment plan.
We note that the meaning of dividend is broad and that the taxation provisions can also deem you to have derived
dividends in many other cases (for example, from a share buy-back or in respect of a loan from a private company
under Division 7A — see Section 7G).
Year-end planning considerations
d
Consider the timing of dividends received around year-end. This should include a review of dividends
under dividend reinvestment plans or private company dividends. Depending on the payment date of
the dividend, the amount may either be income of the 2016 or 2017 income year.
d
Consider whether you have participated in a share buy-back plan and whether any amount of the buyback is considered a dividend for taxation purposes.
Retail premiums
Retail premiums are amounts paid to non-participating shareholders that do not take up rights to subscribe for shares
offered by a company. The amount of the premium is the difference between the clearing price (i.e. the price at which
these unexercised rights are offered to institutional investors) and the offer price (i.e. the price at which existing
shareholder can take up these rights). A retail premium to a non-participating shareholder may constitute a dividend or
ordinary income. However, where the payment is treated as a dividend, it will be treated as unfrankable 21.
Year-end planning considerations
d
Consider whether you received a retail premium during the 2016 income year in relation to shares that
you have held during the year. Note that the ATO do not allow franking credits to be utilised in respect of
such amounts.
Trust distributions
A beneficiary is taxable on their share of the underlying taxable income of a trust. Where you have received a trust
distribution for 30 June 2016 (or will be entitled to receive trust distributions by year-end) you should estimate the
21
Taxation Ruling TR 2012/1.
32
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amount of the taxable distribution in your year-end tax planning. Where this amount is uncertain, you should consider
contacting the trustee for an appropriate estimate of this amount.
Year-end planning considerations
d
As part of your tax planning and tax estimation, estimate the amount of taxable trust distributions that
you will receive (or be entitled to receive) at year-end. This may not be the same as the cash amount or
cash entitlement from the trust.
Rental or leasing income
Income from renting or leasing a property will generally be included in assessable income when the rent or leasing
income is actually received (i.e. on a cash basis). However, such income may be treated on an accruals basis if the
taxpayer is considered to be in the business of renting or leasing. You should therefore consider whether “accrued”
rental income needs to be included in your 30 June 2016 taxable income.
Year-end planning considerations
d
Consider whether rental or lease income “accrued” at 30 June 2016 can be deferred for taxation
purposes (for example, where a cash basis is an appropriate method for the taxpayer).
Foreign taxes paid on your behalf
Where foreign taxes have been withheld from an amount of income you have earned, you are required to gross-up
your income for tax purposes. You may then be able to claim a FITO for the amount of foreign taxes paid22. Refer to
Section 11M for considerations relating to FITOs.
Year-end planning considerations
d
In considering your budgeted 30 June 2016 taxable position, you should consider any foreign income
that you may derive (grossed up for foreign taxes paid on your behalf).
Income that is not otherwise assessable
A number of provisions treat receipts as not being assessable income. Examples include non-portfolio foreign dividends
and distributions derived by companies, mutual receipts received from members, income derived by temporary
residents, certain windfall amounts, subsequent unfranked dividends to offset a Division 7A dividend, certain income
derived by foreign residents subject to withholding tax (see Section 11N) and amounts remitted as GST.
Year-end planning considerations
d
22
Consider whether any income you have derived during the income year should be excluded being either
exempt or not assessable.
This amount is ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (Cth).
Year-end tax planning toolkit – 2015/16
33
Personal services income
PSI is income that is mainly a reward for an individual’s personal efforts or skills for doing work or producing a result.
For example, this may include income from professional services.
If an individual operates through a trust, company or partnership, the PSI regime may apply to attribute such income to
the individual. Furthermore, deductions claimed in respect of PSI may also be limited. The results test, unrelated clients
test and business premises test are common tests used to determine whether a taxpayer is conducting a personal
services business (“PSB”). A taxpayer that conducts a PSB does not fall foul of the PSI rules.
However, even if the PSI rules do not apply, the ATO has indicated that it could still seek to apply Part IVA where
services income is not derived personally (for example, where the amounts are derived through a trust or company and
are not “distributed” to the individual during the year of income). In particular, the ATO are actively considering this
issue with respect to professional service firms where it believes insufficient income is being distributed to the principal
or included in their assessable income.
Year-end planning considerations
d
Where you have provided services and you have operated through an entity (i.e. a trust or company),
you need to consider the possible application of the PSI rules before 30 June. These provisions could
have a material impact on your assessable income and deductions claimed.
d
If you operate a professional services business through a trust or company, you need to consider the
extent to which income should be distributed to you for 30 June 2016.
d
You should consider whether it is worthwhile obtaining a private ruling from the ATO on the application
of the PSI rules or Part IVA to your arrangements.
Extraordinary items
Where extraordinary or abnormal amounts have been received during the income year, you should consider whether
such amounts are assessable and, if so, the timing of the assessment (for example, the sale of a business/asset or the
settlement of a legal dispute). Due to the size and nature of such amounts, these will typically come within ATO
scrutiny. You should consider whether the amounts represent ordinary income, statutory income, capital gains or
exempt amounts.
Year-end planning considerations
d
Where you have received extraordinary and abnormal receipts during the income year, you should
ensure that such amounts have been appropriately reviewed for tax purposes.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
34
Year-end tax planning toolkit – 2015/16
Deductions
General rules of deductibility
A taxpayer can deduct a loss or outgoing from their assessable income to the extent that it is incurred in gaining or
producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing
assessable income23.
No deduction is available for expenses that are of a capital nature, are of a private nature, or are incurred in earning
exempt type income. A taxpayer will incur expenses in the 2016 income year if an amount is actually paid or where the
taxpayer becomes definitively committed to pay the amount. This is subject to other special provisions applying (for
example, limits imposed by the prepayment rules).
Where the general deduction rule is not satisfied, a deduction may be available under a specific provision that allows
the deduction.
A taxpayer must keep all relevant documentation and evidence to prove that the expense has been incurred 24. It is
noted that only the taxpayer actually incurring the expense can claim a deduction.
Year-end planning considerations
d
Review all your expenses and payments during the year to determine whether you may be able to claim
a deduction for the expense.
d
Determine whether the expense can be claimed in the current year (for example, whether you have
made a payment, incurred an obligation, or prepaid amounts).
d
Keep documentation so that you can prove that you have in fact incurred the expenses before year-end.
Capital expenditure
Expenses should be reviewed annually to determine whether the amounts are capital in nature and therefore nondeductible. This may include a review of legal expenses, repairs and maintenance expenditure, restructuring costs,
equity raising costs and the cost of acquiring or developing capital assets.
Where capital expenditure costs are non-deductible, you should consider whether the cost can be included in the cost
base of a CGT asset or can be deducted under the business black hole expenditure provisions25.
From 1 July 2015, small business taxpayers (or certain entities not yet carrying on a business) may be able to
immediately deduct certain capital expenses. These can include advisory expenses or service costs associated with a
proposed structure or proposed operations, or payments to an Australian government agency of fees, taxes or charges
relating to establishing the business or its operating structure.
23
Income Tax Assessment Act 1997 (Cth) s8-1.
See for example Sobel Investments Pty Ltd and Commissioner of Taxation [2012] AATA 180 and The Applicant and the
Commissioner of Taxation [2012] AATA 174.
25 Income Tax Assessment Act 1997 (Cth) s40-880 and Taxation Ruling TR 2011/6.
24
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35
Year-end planning considerations
d
Review expenditure incurred during the year to determine whether capital amounts are included (for
example, repairs and maintenance, legal costs, or restructuring expenditure incurred during the year).
d
Where costs are capital (and otherwise non-deductible) consider whether the amount can be included in
the cost base of an asset or alternatively deducted under the black hole expenditure provisions either
immediately (if the taxpayer is a small business) or over five years in other cases.
Bad debt deductions
A taxpayer can only claim a deduction for bad debts if the debts: (1) are written off as bad before year-end; and (2)
have previously been included in the taxpayer’s assessable income. A taxpayer must keep written records to prove that
such debts have been written off as bad before year-end. However, it is not necessary to physically post any journal
entries before year-end. Care needs to be taken to ensure that the original debt is being written off (for example,
issues may arise if you have capitalised the debt or interest into another loan).
It is important to note that the ATO holds the preliminary view that an unpaid present entitlement (“UPE”) cannot be
deducted under the bad debt provisions 26. This is on the basis that the amount of the UPE is not included in the
beneficiary’s assessable income, rather the entitlement is used to determine the amount of the net income of the trust
included in the beneficiary’s assessable income.
Taxpayers that carry on finance activities may wish to consider opting into the TOFA provisions, which can also provide
an appropriate treatment for bad debts for financing arrangements.
Year-end planning considerations
d
Before year-end, review the debtor’s ledger and write off any bad debts to ensure that the amounts can
be deducted for the 2016 income year. Keep written records approving the write-off.
d
Be careful in capitalising doubtful debts (including interest) into other loan accounts, as this may give rise
to a new debt and may jeopardise a bad debt deduction.
d
If there are doubts on claiming the bad debt, consider whether the TOFA provisions may provide a more
appropriate outcome.
d
The ATO do not believe that a bad debt deduction can be claimed by a beneficiary that has not received
their trust distribution entitlement.
Trading stock valuation
Trading stock can be valued using different methods for taxation purposes, being cost, market selling value or
replacement value. The only requirement regarding changing methods is that the closing stock value at the end of one
tax year must become the opening trading stock value for the next year. The provisions allow a choice to be made for
each individual item of trading stock.
26
Draft Taxation Determination TD 2015/D5.
36
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Changing the valuation method at year-end for tax purposes can either bring forward or defer an amount of your
taxable income. Furthermore, a lower value can be used where stock is obsolete 27, giving rise to tax deductions for the
taxpayer.
Year-end planning considerations
d
Consider the possibility of valuing trading stock at either market selling value, replacement value or
identifying obsolete stock at year-end.
d
Where the entity holds foreign investments as trading stock, consider whether the market selling value
method can be used on an investment-by-investment basis to bring forward unrealised losses on such
investments.
Depreciating assets (all entities)
A taxpayer can claim a deduction for the decline in value of an asset it holds if that asset is a depreciating asset that is
installed ready for use or already used for any taxable purpose over the effective life of the asset 28. For assets acquired
during the 2016 income year, the effective lives are set out in Taxation Ruling TR 2015/2 (applicable from 1 July
2015)29.
When a taxpayer eventually disposes of such an asset, a balancing adjustment occurs to determine if the asset has
been over-depreciated (in which case the extra depreciation is included in assessable income) or under-depreciated (in
which case you can deduct the shortfall depreciation from assessable income).
In reviewing your year-end deductions, there are a number of concessions that may bring forward deductions. A
number of these are identified in the following checklist questions. In addition, if you are a small business, you should
consider whether you are eligible to access the depreciation concessions available to SBEs (refer to Section 4F).
Year-end planning considerations
d
Ensure that you review your depreciation schedules and consider writing off obsolete and scrapped
items by 30 June 2016 (in order to claim the remaining written down value).
d
Consider self-assessing the effective life of depreciating assets, but note that this must be disclosed in
your income tax returns.
d
Note that you are able to use a 200% multiple of the straight line depreciation rate for assets by electing
to use the diminishing value rate for assets acquired after 10 May 2006.
d
An outright deduction can be claimed for depreciable assets costing less than $300 where they are not
used in a business.
d
Depreciable assets costing less than $1,000 can be allocated to a low value pool. The depreciation rates
applicable to the pool are 18.75% in the first year and 37.5% in following years. The choice to use a pool
is irrevocable.
27
Taxation Ruling TR 93/23.
The amount of the deduction is reduced if the asset is held for a non-business purpose.
29 Taxation Ruling TR 2015/2.
28
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37
Year-end planning considerations
d
Note the ability to allocate the cost of developing in-house computer software (for example, website
expenditure) to a software development pool and depreciate such expenditure at a rate of 40% in the
subsequent
Depreciating assets (small business entities)
Special depreciation concessions apply to an entity that is considered a SBE. Generally, this is defined as a business with
aggregated turnover of less than $2 million. The turnover test includes the turnover of connected entities and affiliated
entities. If you are not a SBE (but meet the eligibility criteria), you should consider the application of the following
concessions in order to determine whether you should make an election for the 2016 income year.
SBEs are eligible to claim an immediate tax deduction for depreciable assets costing less than $20,000 which are
acquired and installed ready for use between 7.30pm [Australian Eastern Standard Time] on 12 May 2015 and
30 June 2017. Depreciable assets that cost more than $20,000 can be depreciated at a rate of 15% initially and 30% in
following years using the pooling method. It is expected that the threshold will reduce from $20,000 to $1,000 on 1 July
2017.
A small range of depreciable assets are not eligible for the immediate tax deduction (for example, horticultural plants
and in-house software) where specific depreciation rules already apply to these assets.
The Government announced in the 2016/17 Budget that they would extend access to the small business depreciation
concessions from 1 July 2016 by increasing the annual turnover threshold from $2 million to $10 million. If you are a
potential SBE (under the $10 million test), consider whether it would be better to defer expenditure for depreciable
assets until after 1 July 2016.
Year-end planning considerations
38
d
Consider the application of the simplified depreciation concessions where you are a SBE or where you
meet the eligibility criteria to be treated as a SBE.
d
Assets costing less than $20,000 can be written off immediately if they are installed ready for use
between 7.30pm [Australian Eastern Standard Time] on 12 May 2015 and 30 June 2017
d
For depreciating assets installed ready for use between 7.30pm [Australian Eastern Standard Time] on 12
May 2015 and 30 June 2017 that cost more than $20,000, small businesses will be able to depreciate
these assets at a rate of 15% initially and 30% in following years using the pooling method.
d
Prior year long-life assets can be pooled and depreciated at a rate of 30%. Where the balance in the pool
is less than $20,000 between 1 July 2015 and 30 June 2017, the SBE can immediately deduct the
remaining balance.
d
Businesses with an annual turnover of between $2 million and $10 million should consider whether it is
better to delay expenditure for depreciable assets that cost less than $20,000 until after 1 July 2016 to
access the immediate tax deduction available for small businesses.
Year-end tax planning toolkit – 2015/16
Project pools
Where expenditure is of a capital nature and is not incurred to acquire a depreciable asset, it may be possible to
depreciate the capital cost over the life of the project under the project pool provisions 30.
Costs that may be deducted under this provision include community infrastructure costs, certain site preparation costs
for depreciating assets, project feasibility costs, environmental assessment costs, costs pertaining to obtaining
information for projects, costs incurred in seeking to obtain intellectual property rights, costs incurred in relation to
ornamental trees or shrubs, mining expenditure31, and transport capital expenditure (including costs associated with
transport facilities, earthworks, bridges and tunnels that are necessary for that facility).
Year-end planning considerations
d
Consider whether you have incurred capital expenditure that will be considered a “project pool” amount.
Such costs may be deductible under the project pool provisions over the life of the project.
Capitalised internal labour costs
Where a taxpayer internally constructs assets and incurs direct labour costs, the ATO holds the view that such costs
should be capitalised in a consistent manner as required under AASB 116 Property, plant and equipment32.
Year-end planning considerations
d
If you construct depreciating assets and would be required to capitalise such costs under AASB 116, you
should consider whether such costs need to be capitalised for tax purposes.
Commercial websites
The ATO recently released draft guidance concerning the deductibility of expenditure on a commercial website. 33 A
commercial website is considered an intangible asset that a taxpayer uses for the purposes of conducting its business.
The ATO highlights that periodic operating fees, maintenance expenditure, and outgoings which relate to minor
modifications to website functionality can potentially be deductible under the general deduction provisions.
Conversely, enhanced and significant upgrades to a commercial website may be considered by the ATO to be capital in
nature because they relate to the profit-yielding structure of the business. Expenditure on acquiring or developing a
new or existing business, or a payment for the right to secure and use a domain name, may also fall under this
category.
It is noted that expenditure which is not deductible under the general rules of deductibility may alternatively be
deductible under the capital allowance regime because the deductions relate to “in house software.”
If you have incurred expenditure on a commercial website during the 2016 income year, you should consider the
deductibility of such expenses closely.
30
Income Tax Assessment Act 1997 (Cth) s40-830.
ATO Interpretative Decision ATO ID 2012/17.
32 ATO Interpretative Decision ATO ID 2011/43.
33 Draft Taxation Ruling TR 2016/D1.
31
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39
Year-end planning considerations
d
If you are considering deducting expenditure associated with a commercial website, please consider
whether your position is consistent the ATO’s views.
Employee bonuses
A taxpayer can only claim a deduction for employee bonuses in the 2016 income tax year if the taxpayer incurred such
expenses before year-end. The bonus will be incurred if the company has definitively committed itself to the payment
(for example by passing a properly authorised resolution 34) or by incurring a quantifiable legal liability to pay a bonus35.
Therefore, if a taxpayer does not determine and authorise a bonus to be paid until after the end of the income year,
such amounts may not be considered incurred and deductible in the 2016 income year. Accordingly, a properly
executed bonus plan may bring forward deductions to the 2016 income year. You should also consider the related
party deduction provisions where the bonus is not paid until the subsequent year (see Section 13D).
Year-end planning considerations
d
If you pay employee bonuses, you should review the relevant plan and approval process to determine
whether you qualify for a deduction for the accrual in the 30 June 2016 income year.
Earning exempt-type income
Expenditure incurred to earn exempt or NANE income is generally not deductible, except where the amount incurred is
interest in relation to certain foreign NANE dividend income36 or where the expense relates to the earning of
attributable CFC income37.
Where the expenditure is an indirect expense (for example, it is an overhead cost), you should consider whether a
portion of such expenditure should be treated as non-deductible38.
Year-end planning considerations
d
Where exempt or NANE income is earned by an entity, ensure that you have reviewed the deductibility
of all expenses as such costs will generally not be deductible.
d
If you incur general overhead costs, you may be required to apportion those between assessable income
and your activities that produce NANE income.
Foreign exchange gains and losses
Where TOFA does not apply to an arrangement (see Section 10D), foreign exchange gains and losses are taken into
account for tax purposes when rights or obligations are realised (called forex realisation events). In calculating the
34
Taxation Ruling No. IT 2534.
Merrill Lynch International (Australia) Limited v Commissioner of Taxation [2001] FCA 1127.
36 Income Tax Assessment Act 1997 (Cth) s25-90 and Commissioner of Taxation v Noza Holdings Pty Ltd [2012] FCAFC 43.
37 Income Tax Assessment Act 1936 (Cth) s23AI(2).
38 Kidston Goldmines Ltd v Commissioner of Taxation [1991] FCA 351.
35
40
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foreign exchange gains and losses, generally spot exchange rates are required to be used. Due to the prescriptive
nature of these rules, this may not align with accounting rates used.
Compliance saving elections may be available to help reduce compliance issues. For example, regulations have been
introduced to allow taxpayers to make a choice to use realisation spot rates that are more in line with the accounting
rates used at the time of realisation (for example, average rates).
Furthermore, a taxpayer may make elections to minimise compliance costs. These include: (1) a functional currency
election (which allows taxable income to be calculated in the foreign currency); (2) a forex retranslation election (which
allows the accounting method to be used); and (3) a limited balance election (which allows foreign currency gains and
losses to be ignored on qualifying bank accounts that do not have a balance in excess of $A250,000).
These elections require conditions to be satisfied and need to be made by the relevant taxpayer within certain
timeframes.
Year-end planning considerations
d
Ensure that your 30 June tax calculations include adjustments for unrealised foreign exchange gains and
losses.
d
Consider whether elections should be made to simplify the calculation of realised foreign currency gains
and losses for the year.
d
As TOFA applies in precedence, you should consider the TOFA implications for foreign currency
transactions (see Section 10D).
Gifts and donations
A taxpayer is entitled to a tax deduction if a gift or donation of money or property is made (where it is valued at $2 or
more) to a deductible gift recipient, provided appropriate documentary evidence has been obtained.
A gift or donation cannot increase a taxable loss for the income year. However, a taxpayer may be able to elect to
amortise the gift or donation over a period of five years (for gifts of money or gifts of property of over $5,000 39). Such
an election must be made before you lodge your income tax return for the income year in which the gift or donation
was made.
Consider whether you wish to establish your own charitable structure such as a Private Ancillary Fund (“PAF”) to which
tax deductible donations can be made.
Year-end planning considerations
39
d
Retain all receipts in relation to gifts and donations in order to claim your deductions. Ensure that such
gifts and donations have been made to deductible gift recipients.
d
Where a deduction for a gift or donation may create a loss, consider whether it is possible to spread the
deduction over a period of up to five years.
d
Consider whether you wish to establish your own charitable structure such as a PAF to which tax
deductible donations can be made.
Income Tax Assessment Act 1997 (Cth) sub-div 30-DB.
Year-end tax planning toolkit – 2015/16
41
Interest deductions
Refer to Section 10B under Finance Issues for consideration of the deductibility of interest costs.
Prepayments
Where a taxpayer prepays expenditure, such expenditure is generally not deductible upfront (unless the amount is
regarded as “excluded expenditure”). Instead, prepaid expenditure is apportioned over the shorter of the eligible
service period or 10 years. Special rules apply to individuals and small business taxpayers that may allow an upfront
deduction (see Section 5M).
Excluded expenditure includes: (1) expenditure that is less than $1,000 (GST exclusive); (2) payments that are required
to be made pursuant to a law or court order; and (3) payments that are for salary or wages under a contract of
service40.
The Government announced in the 2016/17 Budget that it would extend access to a number of the small business
concessions by increasing the annual turnover threshold from $2 million to $10 million from 1 July 2016. As the
concession is generally only provided to prepaid expenses that have a period of less than 12 months, there would be
limited cases where deferring expenditure until after 1 July 2016 would provide a better tax outcome.
Year-end planning considerations
d
Unless you are an individual or a SBE, prepayments of expenditure will generally be amortised over the
lower of the eligible service period or 10 years — unless the amounts are excluded expenditure.
Service and management fees to associated entities
Service and management fees paid to associated service entities may not always be deductible because 41:

The fees may be considered excessive;

The service entity has not performed the services independently of the taxpayer;

The arrangements may make no commercial business sense;

The services may not have been actually delivered;

There is no documentation of a management or service agreement; and

The documents or arrangements are put in place after year-end.
The ATO has set out detailed guidelines in relation to the deductibility of service fees in the medical profession and in
legal and accounting firms. You should closely consider the deductibility of service and management fees paid or
incurred to related party entities prior to year-end. Furthermore, where there is a timing difference between the
assessability of the income and deduction of the amount, integrity provisions may apply (see Section 13).
Year-end planning considerations
d
40
41
Before year-end, you should review all inter-group service and management fees. You should ensure that
appropriate arrangements and documentation are in place and that they are commercially justifiable.
Income Tax Assessment Act 1936 (Cth) s82KZL.
Taxation Ruling TR 2006/2.
42
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Capital support payments
Where a parent entity makes payments to a subsidiary entity that has incurred a loss, these payments may constitute
“capital support payments” as defined by the ATO. The ATO has issued a taxation determination42 indicating that these
costs may be on capital account and thus non-deductible to the parent entity. This can be compared to an appropriate
service charge fee (which would otherwise be deductible). Accordingly, care needs to be taken to the extent that
payments made by a parent entity to a subsidiary relate to providing support to the subsidiary entity for losses
incurred, rather than services provided by the subsidiary.
Year-end planning considerations
d
The ATO takes the view that capital support payments made by a parent to its subsidiary may be on
capital account and non-deductible. Accordingly, consider whether it is better to structure the
arrangement as an appropriate arm’s length service fee.
Superannuation expenses
Refer to Section 12A for the superannuation issues to be considered before year-end. Also refer to Section 6Q for yearend tax planning issues relating to superannuation payments from trusts.
Trade incentives (purchase of stock)
Refer to Section 3E of this document. An incentive that is not directly related to acquiring trading stock does not reduce
the purchase price. In this case, the purchase of trading stock is to be recorded at the full (undiscounted) price. This
may give rise to a larger upfront deduction.
Year-end planning considerations
d
Review incentives on the acquisition of trading stock and determine whether the purchase price of
trading stock should be reduced for incentives provided during the income year.
Tax loss incentive for designated infrastructure projects
The tax loss incentive for designated infrastructure projects aims to encourage private investment in nationally
significant infrastructure by providing eligible entities the benefits of: (1) uplifting the value of carry forward losses by
the 10 year Government bond rate; and (2) exempting the carry forward losses and bad debt deductions from the
continuity of ownership and the same business tests.
As there is a global expenditure cap of $25 billion, projects will need to be approved by a decision maker. Accordingly,
taxpayers will need to be able to identify potential qualifying projects and apply for this concession as soon as possible.
For taxpayers in the middle market, it is expected that it will be difficult to obtain approval for this incentive.
Year-end planning considerations
d
42
If your entity is involved in large scale infrastructure projects, tax loss incentive legislation for designated
infrastructure projects may allow the entity to recoup early stage losses for approved projects.
Taxation Determination TD 2014/14.
Year-end tax planning toolkit – 2015/16
43
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
44
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Individuals
ATO compliance activity
The ATO’s “Building Confidence” publication indicates that the following activities will attract the ATO’s attention:

Claims for work-related expenses that are unusually high relative to others across comparable industries and
occupations;

Excessive rental property expenses;

Non-commercial rental income received for holiday homes; and

Interest deductions claimed for the private proportion of loans.
Individual taxpayers should pay particular attention to these types of issues and ensure that they are compliant.
Year-end planning considerations
d
The ATO will scrutinise high work-related expenses by all individuals. You should ensure your workrelated expenses can be validly claimed and that you have appropriate documentation.
d
If you own a rental property, the ATO will be closely scrutinising your 30 June 2016 expenses and
deductions.
d
If you are claiming interest deductions, ensure you are not claiming a deduction for any part of the loan
that is funding private expenditure or assets used for private purposes.
Tax rates for the year ending 30 June 2016
The following table outlines the tax rates that apply to resident individuals and non-resident individuals for the 30 June
2016 income year (excluding the Temporary Budget Repair [“TBR”] Levy and the Medicare Levy — see below).
Residents
Taxable Income
Tax Payable
0 — $18,200
Nil
$18,201 — $37,000
19% of excess over $18,200
$37,001 — $80,000
$3,572 + 32.5% of excess over $37,000
$80,001 — $180,000
$17,547 + 37% of excess over $80,000
$180,001+
$54,547 + 45% of excess over $180,000
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45
Non-residents
Taxable Income
Tax Payable
0 — $80,000
32.5%
$80,000 — $180,000
$26,000 + 37% of excess over $80,000
$180,001+
$63,000 + 45% of excess over $180,000
Minors (other income)
Other income
Tax payable
0 — $416
Nil
$417 — $1,307
Nil + 66% of the excess over $416
$1,307+
45% of the total amount of income that is not excepted income
Medicare levy
A Medicare levy of 2% is payable by resident individuals on taxable income for the year-ending 30 June 2016. If a
resident individual does not have appropriate private health insurance, then a Medicare levy surcharge (“MLS”) of up
to 1.5% may apply depending on the resident individual’s taxable income. Non-resident individuals are not required to
pay the Medicare levy or the MLS.
The following table applies for the year ending 30 June 2016:
Base tier
Tier 1
Tier 2
Tier 3
Singles
$90,000 or less
$90,001—105,000
$105,001—140,000
$140,001 or more
Families
$180,000 or less
$180,001— 210,000
$210,001— 280,000
$280,001 or more
0.0%
1.0%
1.25%
1.5%
Surcharge rate
In addition, you may be exempt from paying the Medicare levy if: (1) you are a resident of Norfolk Island; (2) not
entitled to Medicare benefits; or (3) you meet certain medical requirements.
The Medicare levy can be reduced for a number of reasons. These include: (1) where your income is below certain
thresholds; (2) you had a spouse (married or de facto); (3) you had a spouse that died during the year and you did not
have another spouse before the end of the year; (4) you are entitled to a child housekeeper or housekeeper tax offset;
or (5) were a sole parent at any time during the income year and you had sole care of one or more dependent children.
Temporary budget repair levy
A TBR levy of 2% will apply for the three-year period between 1 July 2014 and 30 June 2017. The levy applies to income
in excess of: (1) $180,000 for resident individuals and non-resident individuals; and (2) $416 for minors.
It is further noted that the Fringe Benefits Tax (“FBT”) rate has increased to 49% from 1 April 2015, to align with the
highest marginal tax rate.
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Year-end planning considerations
d
The tax-free threshold for minors that earn taxable income (that is not excepted income) is $416.
d
As a part of your ordinary tax planning, you should consider your position in relation to the Medicare
levy and whether you are entitled to any reductions or exemptions for the year.
Private health insurance rebate
If you have private health insurance, the amount of private health insurance rebate you are entitled to receive (as a
reduction of your private health insurance premium) is reduced if your income is more than a certain amount. The
following table can be used to determine your premium reduction entitlement for 2015/16.
Status
Income thresholds
Base tier
Tier 1
Tier 2
Tier 3
Single
$90,000 or less
$90,001 — $105,000
$105,001 — 140,000
$140,001 or more
Family
$180,000 or less
$180,001 — 210,000
$210,001 — 280,000
$280,001 or more
Age
Rebate for premiums paid from 1 July 2015 — 31 March 2016
Under 65 yrs
27.820%
18.547%
9.273%
0%
65–69 yrs
32.457%
23.184%
13.910%
0%
70 yrs or over
37.094%
27.820%
18.547%
0%
Age
Rebate for premiums paid from 1 April 2016 — 30 June 2016
Under 65 yrs
26.791%
17.861%
8.930%
0%
65–69 yrs
31.256%
22.326%
13.395%
0%
70 yrs or over
35.722%
26.791%
17.861%
0%
The family income threshold is increased by $1,500 for each MLS dependent child after the first child.
Year-end planning considerations
d
The private health insurance rebate is adjusted for on the lodgement of your income tax return. This may
increase or decrease the total amount payable.
Year-end tax planning toolkit – 2015/16
47
Rebates and offsets
A number of rebates and tax offsets are available to taxpayers to reduce their taxable income. You should consider
whether any of the following offsets may have application to you for the 2016 income year.
Year-end planning considerations
d
Low income tax offset — the low income tax offset will remain at $445 for the 2015/16 income year.
d
Income received in arrears — the rebate may be available if you receive income in a lump sum payment
containing an amount that accrued in an earlier income year.
d
Spouse superannuation contribution rebate — you may be entitled to a tax offset if contributions are
made to a complying superannuation fund or retirement savings account (“RSA”) for the purpose of
providing superannuation benefits for your spouse who is a low income earner or is not working.
d
Net medical expenses tax offset — taxpayers with an adjusted taxable income below certain thresholds
can claim an offset for disability aids, attendant care or aged care expenses for the year ending 30 June
2016.
d
Recipients of social security benefits and allowances — the rebate may be available if you receive
certain Australian social security payments.
d
UN forces and defence force rebate — this rebate is available to certain civilian personnel contributed
by Australia to an armed force of the United Nations overseas and for those that serve in a qualifying
overseas locality as a member of the Australian Defence Forces (i.e. ADF).
d
Dependents rebate — available only to taxpayers who meet certain thresholds and maintain a
dependent spouse (born before 1 July 1952), have a child—housekeeper, or had a housekeeper.
d
Franked dividend tax offset — a refundable tax offset where you receive a franked distribution.
d
The Australian superannuation income stream tax offset — may be available if you receive an income
stream from your superannuation fund.
d
Unused leave payments — a tax offset may be available to limit the tax payable on certain unused leave
payments to 30%.
d
Zone rebates — you may be entitled to a rebate of tax where you reside in specified remote areas.
Work expenses and substantiation
For the 2016 income year, individuals can claim an amount for work expenses. However, where the claim totals $300
or more, the claims must be substantiated. The $300 does not include claims for car expenses, meal allowances, award
transport payments allowance and travel allowance expenses. The ATO accept a wide range of documents as written
records of your claim, including paper or electronic copies of documents (such as invoices, receipts or delivery notes),
statements from financial institutions (such as credit card statements), BPAY receipt numbers, PAYG payment
summaries and warranty documents.
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Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
Ensure that you have kept appropriate records to substantiate your work expenses claim for 30 June
2016.
Work-related car expenses
Where you use a motor vehicle that is owned or leased by you for income producing purposes, you may be able to
claim car expenses as a tax deduction. Car expenses are defined as expenses related to the operating of a car, such as
fuel/oil, registration, insurance and repairs/maintenance and depreciation expenses.
From 1 July 2015, the one-third actual expenses method and 12% of original value method have been abolished. As
such, the two methods available for the year ending 30 June 2016 are: the cents per km method (business use of up to
5,000 km at a rate of 66c per km) and the logbook method.
For the cents per km method, no substantiation is required. However you need to show how you have calculated the
business km. Full substantiation is required of all expenses for the logbook method, including odometer readings.
Note that appropriate estimates can be used for fuel rather than receipts. This can be done by estimating the fuel used
for the year based on the engine type and litres used per 100km43. The average fuel price can be obtained from a
number of sources44.
Year-end planning considerations
d
To leave your options open make sure that you have kept odometer readings for your car for the 30 June
2016 year.
d
Ensure that you also keep receipts for the running costs of your motor vehicle. Note that you can
estimate fuel costs based on your business travel.
d
If using the log-book method, ensure that you have appropriately completed a valid log-book that can be
used for the 30 June 2016 income year.
Work-related travel expenses
Work-related travel expenses can include meals, accommodation and incidental expenses you incurred while away
overnight for work (for example, going to an interstate work conference). Generally, if your travel did not involve an
overnight stay, you cannot claim for meals. The ATO has published reasonable travel and overtime meal allowance
expense amounts that can be used for the 30 June 2016 income year45. Other travel expenses you may be able to claim
include work-related expenses for (but not limited to): air, bus, train, tram and taxi fares; car-hire fees; and the costs
you actually incur (such as fuel costs) when using a borrowed car.
You may be required to keep travel records if your travel involves being away from your ordinary residence for six or
more nights in a row. Travel expenses should be reduced to exclude any private portion of your trip. Costs incurred in
travelling from your home to your workplace are generally not deductible other than in limited circumstances (such as
if you need to carry bulky tools or equipment that you used for work and can't leave it at your workplace). However,
you can claim travel between two separate places of employment.
43
This information can be obtained from https://greenvehicleguide.gov.au/ for most vehicles.
See http://www.aip.com.au/pricing/pdf/AIP_Annual_Retail_Price_Data.xls for annual average prices.
45 Taxation Determination TD 2015/14.
44
Year-end tax planning toolkit – 2015/16
49
Year-end planning considerations
d
Review whether you have incurred any costs during the year for work-related travel expenses.
d
Ensure that you have kept travel records where you are away for six or more nights in a row.
Work-related clothing, laundry and cleaning expenses
You can claim a deduction for the cost of buying or cleaning: occupation-specific or protective clothing; or unique,
distinctive uniforms. More specifically, you can claim deductions for (but not limited to):

Clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your income
earning activities or the environment in which you are required to carry them out;

A uniform, either compulsory or non-compulsory, that is unique and distinctive to the organisation you work for;

Clothing that is specific to your occupation, is not every day in nature and would allow the public to easily
recognise your occupation; and

Costs of washing, drying and ironing eligible work clothes, or having them dry cleaned.
However, you cannot claim the cost of purchasing or cleaning a plain uniform, ordinary clothes you wear for work that
may also protect you (for example, everyday shoes), and clothes you bought to wear for work that are not specific to
your occupation. The ATO publish industry guidelines to help assist you with your claims for work-related clothing
deductions46.
Year-end planning considerations
d
Examine whether you can claim deductions for work-related clothing, laundry and dry cleaning expenses
for 30 June 2016.
d
Ensure you have reviewed your industry guidelines published by the ATO.
Other work-related expenses
There are a number of other common additional work-related expenses that individuals claim including the following
types of expenses.
Home office expenses
Home office running expenses (heating, cooling, and lighting), depreciation of computers, phones and desks, workrelated phone calls, internet usage, the costs of repairs to your home office furniture and fittings and cleaning
expenses. The ATO allow you to claim actual amounts or use a rate of 45 cents per hour47.
46
47
ATO website: Deductions for specific industries and occupations.
Practice Statement Law Administration PS LA 2001/6.
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Occupancy expenses
Occupancy expenses include rent or mortgage interest, council rates and house insurance premiums. You can only
claim occupancy expenses where your home office is considered to be a place of business.
Work-related registration, development and support
This category of expenses includes union fees and subscriptions to associations, seminars, conferences and education
workshops, books, memory sticks and insurance against the loss of your income.
Tools, equipment and stationery
This category of expenses may include depreciation on tools of your trade, protective items, computers and software.
This category may also include items of stationery purchased to complete your ordinary work activities.
Overtime meal allowance expenses
If you get paid an overtime meal allowance, you can claim a reasonable allowance amount. The reasonable allowance
amounts are provided yearly in an ATO taxation determination 48.
Year-end planning considerations
d
You should consider whether you can claim other work-related expenses such as home office expenses,
occupancy expenses, work-related registration, development and support amounts, tool, equipment and
stationery and overtime meal allowance expenses.
Work-related specific deductions for industries
The ATO publish industry guidelines49 to help assist you with your claims for work-related deductions. You should
consider the specific industry guidelines for your profession.
Year-end planning considerations
d
Examine the ATO’s industry guidelines for your occupation to ensure that you are maximising your claim
for deductions for 30 June 2016.
Self-education expenses
Work-related self-education expenses are expenses that you incur when you undertake a work-related course to
obtain a formal qualification from a school, college, university or other place of education. The course must have a
sufficient connection to your current employment. If you are a part-time or full-time student, you may be able to claim
the costs of self-education if there is a direct connection between your self-education and your work activities at the
time the expense was incurred. It is important to note that there are limitations on the deductions for self-education
expenses incurred in relation to certain government support higher education placements.
Self-education expenses incurred in connection with a course of education provided by an educational institution to
gain qualifications for use in a profession, business, trade or employment may need to be reduced by up to $250 in
some circumstances.
48
49
Taxation Determination TD 2015/14.
ATO website: Deductions for specific industries and occupations.
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51
Year-end planning considerations
d
Determine if you have self-education costs that relate to your current employment.
d
You should quantify your self-education expenses and determine whether you need to reduce those
costs by $250.
Work-related expenses you cannot claim
There are a number of expenses that you cannot claim that may be associated with your work. Typically, these include
the following types of expenses:

Travel between your home and your workplace;

Expenses for a uniform consisting of conventional clothing;

Self-education expenses where the course does not have sufficient connection to your current employment;

Entertainment (for example, buying a meal for a client or colleague);

Fines or penalties;

Child care expenses; and

Fees paid to social clubs.
Year-end planning considerations
d
Review your work-related expenses to ensure that they do not include non-deductible expenses for 30
June 2016.
Prepaying expenses
Prepaying expenses can be an effective way of reducing taxable income for an income year. Where amounts are
incurred by an individual or SBE, such amounts may still be deductible upfront if the eligible service period is essentially
less than 12 months50 and does not end later than 12 months after year-end.
However, where the amount is incurred under an agreement 51, and exceeds income for the relevant year, such
expenditure will be required to be apportioned. Limited exceptions apply to this provision, including exemptions for
investments in certain negatively geared listed or widely held stocks, infrastructure borrowing related prepayments
and excluded expenditure.
Year-end planning considerations
d
50
51
Consider whether a prepayment of the next 12 months of expenses, such as interest, before year-end
will help to effectively reduce your taxable income for the current year.
Income Tax Assessment Act 1936 (Cth) s82KZM.
Income Tax Assessment Act 1936 (Cth) s82KZME.
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Salary sacrifice arrangements
A salary sacrifice arrangement occurs where an employee agrees to forego part of their future remuneration in return
for the employer or someone associated with the employer providing benefits of a similar value. Examples may include
superannuation contributions, the provision of motor vehicles and expense payment fringe benefits — such as
payment of school fees, childcare costs or loan repayments.
A valid salary sacrifice agreement must be entered into before the services have been performed and everything has
been done by the employee in earning the entitlement to the salary or wages. Where the salary sacrifice agreement is
invalid, this will mean that the original income will be that of the employee and the employer will have a PAYG
obligation, as well as other associated obligations (for example, SG charges).
While recent cases have cast doubt on the efficacy of salary sacrifice arrangements, it is noted that the ATO has not
withdrawn its long-standing public ruling allowing personal service providers (for example, employees) to enter into
salary sacrifice arrangements.
Year-end planning considerations
d
Where you are considering a salary sacrifice arrangement before year-end, ensure that the arrangement
is effective for tax purposes.
Employee share schemes
The discount on shares, stapled securities and right/options acquired under an ESS is subject to tax to the individual.
New rules apply to ESS interests (such as shares, stapled securities and rights to acquire them) issued by companies
from 1 July 2015 making it easier to obtain access to the rules. The main changes include: (1) improvements to the
timing of the deferred taxing point for ESS interests acquired under tax-deferred schemes; (2) the removal of the
significant ownership and voting rights limitations; and (3) the ability to claim a tax refund where ESS options lapse.
The timing of the taxation of the discount (i.e. upfront or deferred taxation) depends on the structure of the scheme —
and not on a choice made by the employee.
The inclusion of the discount will be deferred if the shares/rights/stapled securities are subject to a real risk of
forfeiture. A risk will be real if the employee will lose their shares if he/she does not satisfy a meaningful performance
hurdle, such as completing at least a minimum term of employment.
In addition, from 1 July 2015, there are new rules for the tax treatment of ESS’s, including tax concessions for start-up
companies. These rules apply to ESS interests such as shares, stapled securities and rights to acquire them.
Pitcher Partners can assist you with the design of an ESS and can also help you with any valuation issues you might
have when trying to value the options granted under an ESS.
Year-end planning considerations
d
Consider whether employee options and/or shares qualify for deferral under the ESS provisions.
d
Consider whether you can access a number of the improvements to the ESS regime for 30 June 2016.
d
Consider whether your business qualifies for the ESS start-up concessions for 30 June 2016.
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53
Foreign employment income
From 1 July 2009, only the foreign employment income of Australian resident individuals engaged on foreign aid
projects or military service overseas, are exempt from Australian tax. This means that fringe benefits provided in
respect of non-exempt overseas employment can now be subject to FBT in certain circumstances (alternatively, the
value will be taxable to the individual).
Year-end planning considerations
d
Consider whether you are taxable on income (or whether FBT applies to fringe benefits provided to you)
in respect of overseas employment.
Non-commercial losses
A non-commercial loss refers to a loss generated from a business conducted by an individual. Where activities are a
hobby or relate to generating passive income, the non-commercial loss rules do not apply.
An individual will only be able to offset their losses from non-commercial business activities against income from other
sources in the 2016 income tax year if they satisfy one or more of the following exceptions:

Assessable income from the non-commercial business activity is more than $20,000;

There has been a profit for at least three of the last five years from this business activity;

Land worth more than $500,000 is used in this business activity; or

Plant and equipment of more than $100,000 is used in this business activity.
These exceptions do not apply to high income earners who have adjusted taxable income of more than $250,000. For
such individuals, the non-commercial losses can only be offset against the taxpayer’s other income if the ATO exercises
its discretion52 that the non-commercial business activities are commercially viable.
Year-end planning considerations
d
If you carry on a business in your own name, you should consider whether deductions and losses are
required to be quarantined under the non-commercial loss provisions.
d
If your adjusted taxable income is equal to or less than $250,000, you can only offset your loss made in
the 2016 income year from the non-commercial activity if you can satisfy one of the four tests
mentioned above, or alternatively, the ATO exercises its discretion to allow you to offset the loss.
Personal services income
PSI is income that is mainly a reward for an individual’s personal efforts or skills for doing work or producing a result. If
you are an individual and you operate through a trust, company or partnership, the PSI regime may apply to attribute
such income to you. You therefore need to consider the application of these provisions. See Section 3S for details.
52
Applicant 1761 of 2011 and Commissioner of Taxation [2011] AATA 779.
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Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
Where you have provided services and you have operated through an entity (i.e. a trust or company),
you need to consider the possible application of the PSI rules.
Living away from home
The main condition that must be satisfied in order for food and accommodation benefits to be eligible to claim the
LAFH concession is that an employee must maintain a home in Australia for their own use, and then live away from
that home for the purposes of their employment. The home must be available to the employee for the duration of
their time away (i.e. it cannot be rented out). The employee must also have a sufficient interest in the home (i.e. they
or their spouse must own or lease the property).
Importantly, the ability to reduce the taxable value of LAFH food and accommodation costs to nil is limited to a
maximum period of 12 months for an employee at any work location. Finally, all accommodation expenses must be
substantiated or they will be subject to FBT.
Other concessional living away from home benefits (for example, relocation transport and removal and storage of
household goods) are still available even if the employee does not meet the ‘maintaining a home’ criteria.
Year-end planning considerations
d
If you are in receipt of a LAFH allowance, you need to review the conditions to be eligible to claim the
living away from home concession.
Overseas repayments of HELP and TSL debts
From 1 July 2017, if you are living overseas, have a Higher Education Loan Program (“HELP”) or Trade Support Loan
(“TSL”) debt, and earn over the minimum repayment threshold, you will incur the same repayment obligations as if you
continued to live in Australia.
From 1 January 2016, if you meet the above requirements and are living or intend to live overseas for more than 183
days in a 12-month period, you are required to notify the ATO of your new contact details through the myGov portal.
This update must be made within seven days of leaving Australia 53.
Year-end planning considerations
d
If you are living or intending to live overseas, and have a HELP or TSL debt, you will need to advise the
ATO of your new contact details through the myGov portal.
Capital raising tax incentives
In May 2016, new legislation was passed by Parliament to improve access to venture capital investment and make the
venture capital regimes more attractive to investors. The changes are intended to encourage and support innovation,
risk-taking and an entrepreneurial culture in Australia.
Broadly, the new rules provide a non-refundable carry-forward tax offset for limited partners in an ESVCLP equal to
10% of the contributions made by the partner to the ESVCLP during an income year. The amendments will apply from 1
53
ATO website: Building confidence.
Year-end tax planning toolkit – 2015/16
55
July 2016, however, the offset will be available for any qualifying contributions made to ESVCLPs that become
unconditionally registered on or after 7 December 2015.
Also from 1 July 2016, new rules will encourage investment in Australian ESICs by providing investors with a tax offset
and a capital gains tax exemption for their investments.
Broadly, an investor acquiring newly issued shares in an Australian ESIC may receive a non-refundable carry-forward
tax offset of 20% of the value of their investment, subject to a maximum offset cap amount of $200,000. The provisions
are aimed at sophisticated investors (however certain non-founding non-sophisticated investors may be able to access
the concessions where the investment is less than $50,000). Investors may also be able to disregard capital gains
realised on shares in qualifying ESICs that have been held between one and ten years, but investors must disregard any
capital losses realised on these shares held for less than ten years.
It is noted that where a trust is used to invest into the ESVCLP or ESIC, the trust can allocate the tax offset to investors
on a discretionary basis.
Year-end planning considerations
d
If you are investing, or planning to invest, in an ESVCLP, consider whether you will be eligible to receive
the 10% non-refundable carry-forward tax offset for investments made.
d
If you are investing, or planning to invest, in an Australian ESIC, consider whether you are eligible to
receive a non-refundable carry-forward tax offset of 20% of the value of your investment for investments
in shares made after 1 July 2016. In addition, you may be eligible to disregard capital gains realised on
shares in the ESIC.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Trusts
ATO compliance activity
The ATO, through its Trust Taskforce, continues to monitor trust arrangements, particularly those involving wealthy
individuals. The ATO notes that the following arrangements will attract scrutiny 54:

Unregistered trusts or their beneficiaries who have received substantial income, or have not lodged tax returns or
activity statements;

Offshore dealings involving secrecy jurisdictions;

Agreements with no apparent commercial basis that direct income entitlements to a low-tax beneficiary while the
benefits are enjoyed by others;

Artificial adjustments to trust income, so that tax outcomes do not reflect the economic substance (for example,
where parties receive substantial benefits from a trust while the tax liabilities corresponding to the benefit are
attributed elsewhere or where the full tax liability is passed to entities without any capacity or intention to pay);

Revenue activities mischaracterised to achieve concessional capital gains tax treatment — for example, by using
special purpose trusts in an attempt to re-characterise mining or property development income as discountable
capital gains55;

Changes to trust deeds or other constituent documents to achieve a tax planning benefit, with such changes not
credibly explicable for other reasons;

Transactions with excessively complex features or sham characteristics, such as round robin circulation of income
among trusts; and

New trust arrangements which have materialised and that involve taxpayers or promoters linked to previous noncompliance — for example, people connected to liquidated entities that had unpaid tax debts.
Accordingly, if your activities are operated through a trust, you should carefully review the planning considerations
contained in this section and ensure that you strictly comply with the law and the requirements of your trust deed.
Year-end planning considerations
d
As the ATO will continue its trust compliance activities for 30 June 2016, you should carefully review all
of the 30 June 2016 planning considerations contained in this section.
Trustee tax rate
Where no beneficiary is presently entitled to a share of the income of the trust estate, trustees will generally be liable
to pay tax on that proportionate share of the net (i.e. taxable) income of the trust at the rate of 49%. Accordingly, care
needs to be taken to ensure that appropriate resolutions are created by the required time under the trust deed so that
the trustee is not taxed at the top marginal rate of tax.
54
55
ATO website: Trusts Taskforce.
Taxpayer Alert TA 2014/1.
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57
Year-end planning considerations
d
To avoid a trustee assessment at 49%, you should ensure that beneficiaries are made presently entitled
to all of the income of the trust estate by either 30 June 2016 or an earlier time (if required by the trust
deed).
Trustee resolutions
For the 30 June 2016 income year, trustees must make income distribution resolutions by the end of an income year
(i.e. 30 June) or earlier if required by the trust deed. This is to ensure that the desired beneficiaries are presently
entitled to trust income for income tax purposes and to avoid trustee assessments at 49%.
In completing resolutions, you are not required to have fully documented the trustee resolution by 30 June. However,
the ATO will expect that you are able to evidence your decisions made. This can be done by way of rough notes, or
other documents prepared (such as budgets, spreadsheets, mapping documents etc.).
In preparing your resolutions for 30 June 2016, it is prudent to consider prior year distribution patterns and anticipated
income and losses of other entities within the group. This can often involve reviewing draft financial statements and
typically requires an appropriate “mapping” of projected distributions through the group. Your Pitcher Partners
representative can assist you in this process by helping you to implement a distribution plan and distribution
resolutions before year-end.
Year-end planning considerations
d
Ensure that you have made distribution resolutions before year-end (or earlier if required by the trust
deed) and that these can be evidenced.
d
Consider implementing a distribution plan where there are a number of trusts and other entities in the
group.
Meaning of income of the trust estate
The taxable income of a trust is allocated to beneficiaries based on their respective entitlements to the income of the
trust estate for trust purposes. The way in which a trust deed defines income, as well as the accounting treatment of
the trust income, can be critical in determining how taxable income is allocated to beneficiaries.
All trust deeds are unique. However, typically trust deeds define trust income as being one of the following: (1) income
according to ordinary concepts; (2) the taxable income of the trust; or (3) a combination of the above. Many trust
deeds also contain discretions to treat income or expenditure as either capital or income of the trust.
The ATO released a draft taxation ruling56 in 2012 which provided its initial views on the meaning of income of a trust
estate where the trust deed equates the amount to taxable income. Although this ruling is yet to be finalised, the ATO
hold the view that notional (or fictional) tax amounts (for example, franking credits, Division 7A dividends57), cannot
form part of the income of the trust estate and should be excluded unless there is trust property that can support the
amount. Although currently on appeal to the Full Federal Court, the Federal Court has endorsed this ATO view with
56
57
Draft Taxation Ruling TR 2012/D1.
Colonial First State Investments Ltd v FC of T [2011] FCA 16.
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respect to notional tax amounts58. Taxpayers should continue to be careful where their trust deed attempts to define
income as equating to taxable income and such types of fictional tax income exist for the trust.
Finally, it is noted that in practice, issues may arise where trustee distribution resolutions are based on distributing
“fixed” amounts of income of the trust (for example, where the trust deed defines income under ordinary concepts or
as accounting income). Where the trustee resolves to distribute a percentage of income of the trust estate, the same
proportion of taxable income will always flow through to the beneficiary.
Year-end planning considerations
d
Ensure that you review your trust deed and understand the meaning of income under the relevant trust
deed before determining your distribution from the trust.
d
Note that you will need to disclose the income of your trust estate for trust purposes in the 30 June 2016
tax return.
d
If you derive notional tax amounts (such as franking credits) you should consider how your deed defines
income and how it deals with such amounts.
d
The accounting profit of the trust will not necessarily equate to the “income of the trust”. You need to
consider whether accounting amounts should be included or excluded from your calculation (for
example, revaluation or devaluation amounts) by having regard to your resolutions and trust deed.
d
Compare the amount booked in your accounts (as distributions of income) to the resolutions to
distribute income. Where income under the trust deed is not “accounting income” but is (instead)
taxable income, this can impact on the net assets of the trust.
d
Consider using percentages in your distribution resolutions to avoid a dispute with the ATO as to the
meaning of income of your trust estate.
d
Complexities can occur if your trust deed defines income as being equal to taxable income (as outlined in
TR 2012/D1). You should consider whether “notional amounts” such as franking credits will result in
complexities for your trust.
Distribution of timing differences
The ATO is focusing some of its compliance activity on timing differences in trusts. In particular, the ATO is examining
cases where the income of the trust estate is lower than the taxable income and such amounts have been distributed
to a corporate beneficiary.59 The ATO have expressed concern that this strategy eliminates top-up tax and have
commenced reviews of taxpayers through the Trust Taskforce.
Year-end planning considerations
d
58
59
Care needs to be taken where there are significant timing differences, especially where taxable income
exceeds accounting profit and the distribution is made to a corporate entity.
Thomas v Commissioner of Taxation [2015] FCA 968.
Taxpayer Alert TA 2013/1.
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59
Unit trust — distribution of timing differences
If a unitholder receives a distribution of trust income for an income year and the distribution exceeds the trust's
(taxable) net income for that year, the cost base of the unit is required to be reduced by that difference. If the cost
base has been exhausted, a capital gain may arise as a result of such distribution (under CGT event E4).
The ATO has released ATO ID 2012/6360 which confirms this result, even if the difference between the trust income and
the net income is merely as a result of a timing difference. For example, this adjustment can occur where an expense is
deductible for trust accounting purposes in year 1 and deductible for tax purposes in year 2.
One possible way to avoid this problem is to define income in the trust deed as being equal to “taxable income”. This
helps to ensure that the trust only distributes taxable amounts (and that there are no timing differences). However, in
considering this option, have regard to the items discussed at Section 6D above.
Year-end planning considerations
d
As beneficiaries of unit trusts can be taxable on a distribution of timing differences, consider whether it
may be possible to align tax and accounting by defining income as “taxable income” for the current
income year.
Trust to company distributions
The Division 7A implications of a trust making distributions to a corporate beneficiary and leaving those trust
distributions unpaid (i.e. as unpaid present entitlements) must not be ignored. See Section 7G for a more detailed
description of Division 7A.
Year-end planning considerations
d
Ensure that you have considered Division 7A when making trust to company distributions for the current
year.
d
Ensure you have complied with Division 7A in relation to prior year unpaid trust distributions to
corporate beneficiaries.
Trust streaming
Specific provisions allow capital gains and franked distributions to be streamed to beneficiaries of a trust estate. In
order for this to be effective, the trust deed must allow for streaming. Where a deed does not contain specific
streaming powers, you may need to consider amending the trust deed before year-end.
The streaming measures require that beneficiaries must be made “specifically entitled” to either franked distributions
or capital gains in order for those amounts to be streamed to the beneficiaries. In creating the specific entitlement,
there is a requirement that written documentation be in place by 30 June. The legislation also requires for the full
amount of the financial (economic) benefits to be allocated to beneficiaries (including any discounted amounts).
Notably, it is the ATO’s view that streaming of other forms of income (for example, interest, unfranked dividends,
rental income, royalties, and foreign income) is ineffective for tax purposes.
Pitcher Partners has developed standard documentation to help your trust satisfy the record keeping requirements for
30 June 2016.
60
ATO Interpretative Decision ATO ID 2012/63.
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Year-end planning considerations
d
Where your trust derives capital gains and/or franked distributions, determine whether such gains can
be streamed to various beneficiaries of the trust under the relevant trust deed.
d
If your deed does not explicitly allow for streaming, consider whether the trust deed should be amended
before year-end.
d
Complete a written record on or before 30 June (or earlier if required by the deed) that evidences the
specific entitlement for franked distributions from the trust. Consider utilising the Pitcher Partners
standard documentation.
Capital gains versus revenue gains
Capital gains concessions (such as the 50% CGT discount) are often available when a trustee flows through a capital
gain to certain beneficiaries of the trust. Such concessions are not available where the gains are on revenue account. In
this respect, the ATO has released a taxation determination indicating that, in its view, not all gains made by an
investment trust are to be treated on capital account61.
The ATO holds the view that criteria that supports a capital account treatment includes the trustee adopting a “buy and
hold” style of investment, where annual turnover is less than 10% of the portfolio of investments and where there is a
low level of sale transactions compared with the number of stocks in the portfolio. Alternatively, the gain or loss may
be treated on revenue account if it is a business or profit making type transaction. If the trust has a policy of measuring
returns by virtue of including both the annual return and the profit from sale, then prima facie the ATO will treat the
portfolio as being on revenue account. A number of additional factors are taken into consideration in determining
whether the gain is on revenue account or capital account.
Recently, the ATO has been successful in arguing62 that the disposal of commercial properties (in this case the sale of
shopping centres and other like properties) was on revenue account, even though they had been leased for a
substantial period of time. Accordingly, care needs to be taken where gains derived are material.
It should be noted that the ATO are closely scrutinising the receipts of property developers 63 to determine whether
receipts should be on revenue account rather than capital account.
Year-end planning considerations
d
Where substantial (or a significant volume of) gains are derived by a trust, consider reviewing the
position of whether the gains are on capital account or revenue account.
d
Ensure that you consider the ATO’s guidelines for determining whether a gain is on revenue or capital
account and update your investment strategies and documentation appropriately.
Trust losses and bad debts
Where a trust incurs a revenue loss or seeks to deduct a bad debt, the trust loss provisions must be satisfied. These
rules require testing the trust for changes in ownership and control which vary depending on whether the trust is fixed
61
Taxation Determination TD 2011/21.
August v Commissioner of Taxation [2013] FCAFC 85..
63 Taxpayer Alert TA 2014/1.
62
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61
or non-fixed. Given that, as a general rule, the trust loss provisions do not contain a same business test fall-back, they
should always be considered whenever a trust seeks to utilise a loss or a deduction — especially if income is injected
into the trust (see Section 6L).
However, a trust may satisfy the trust loss provisions if the trust makes a FTE for the applicable years. The consequence
of making a FTE is that the trust can only distribute to members of the family group (as defined). Significant penalties
are imposed if this rule is breached (see Section 6N).
Year-end planning considerations
d
If the trust has not made a FTE, consider whether such an election should be made if the trust is likely to
incur losses in the current income year or bad debt deductions from debts arising in the current income
year.
d
If a FTE has not been made, and is unlikely to be made, consider the application of the trust loss
provisions.
Flowing franking credits through a trust
Where a trust holds shares that were acquired after 31 December 1997, franking credits can only be passed through to
a beneficiary of the trust if the beneficiary is a qualified person. This generally requires the strict application of the 45day holding period test, together with the trust being a fixed trust. It is noted that it is practically difficult (if not
impossible) to satisfy the fixed trust test without requesting the ATO to exercise its discretion64.
Exceptions from the need to pass the 45-day holding period test include: a small individual exclusion (i.e. if the
beneficiary is an individual and the total franking credit tax offsets claimed by that person do not exceed $5,000 for the
income year); an exception for trusts that have made a FTE where the beneficiary is part of the family group; and
certain deceased estates.
Year-end planning considerations
d
If the trust has not made a FTE, consider whether such an election is required if the trust has derived
franked distributions for the year.
d
If the trust is not a fixed trust, consider whether either: (i) an application should be made to the ATO to
treat the relevant trust as a fixed trust for the purpose of these provisions; or (ii) amendments can or
should be made to the trust deed to try and ensure that the trust is a fixed trust for tax purposes.
Injection of income into a trust
A trust may not be able to apply its losses or deductions to income that is injected into the trust by an outsider to the
trust. An injection may involve another trust distributing income to the relevant trust.
Where a trust has not made a FTE, all entities (other than the trustee and persons with fixed entitlements in the trust)
are considered outsiders to the trust. However, where a trust has made a FTE, the definition of an outsider is narrowed
to exclude: the individual specified in the family election; that individual’s family; any other trust that has also made a
FTE with the same individual specified; entities that have made interposed entity elections with the trust; and certain
wholly owned fixed trusts, companies or partnerships.
64
Colonial First State Investments Ltd v FC of T [2011] FCA 16.
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Where there are multiple trusts in the group, it is very easy to breach the income injection test. For example, it has
been held that not charging interest on an UPE is sufficient to breach the rules to deny deductions to the trust65.
As the rules can generally be overcome by making an FTE, you should consider whether a FTE should be made by the
relevant trusts. The consequence of making a FTE is that the trust can only distribute to members of the family group
(as defined). Significant penalties are imposed if you breach this rule (see Section 6N).
Year-end planning considerations
d
Where income is to be injected into a trust (for example, by another trust), you should consider whether
a FTE should be made. The consequences of not making an election are: (1) that the trust may not be
able to use its losses and deductions for the income year; and (2) the trustee may be taxed on the
injection of income.
Interest expense to fund distributions to beneficiaries
Care needs to be taken where distributions, or unpaid entitlements, are funded by way of interest bearing loans taken
out by the trustee. The ATO holds the view that borrowings to fund contemporaneous distributions do not give rise to
deductible interest. A similar view is also held where borrowings are used to fund the repayment of beneficiary loans
or unpaid entitlements created from asset revaluation reserves of the trust66.
A different result may occur if the unpaid entitlement has been used to fund income generating assets of the business
and the trustee subsequently borrows an amount to return the funds to the beneficiary. In such a case, it may be
possible to obtain an interest deduction for the refinanced amount.
Year-end planning considerations
d
Carefully consider all loan funding that is used by the trust and consider whether interest deductibility is
compromised if you are looking to borrow in order to distribute amounts to beneficiaries.
Family trust elections
FTEs are made for various reasons. They can enable trusts to carry forward losses or utilise bad debt deductions (see
Section 6J); they can ensure that the income injection test is not breached (see Section 6L); they can ensure that
franking credits can flow through the relevant trust (see Section 6K); and they can ensure that losses are available in a
company that is owned by the trust (see Section 7L).
However, the consequence of making a FTE is that the trust can only distribute to members of the family group (as
defined). A significant family trust distributions tax (“FTDT”) penalty of 49% on the distribution is imposed if the trust
breaches this rule. If a corporate trustee breaches this rule, the directors of the company will be jointly and severally
liable, together with the company, for the FTDT. There is no time limit imposed on the ATO for the raising of FTDT
assessments.
The definition of a distribution is very wide and includes non-arm’s length transactions (for example, interest free
loans67, transfers of trust property, allowing use of trust property, forgiveness of commercial debts or unpaid
entitlements68).
65
Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62.
Taxation Ruling TR 2005/12.
67 Income Tax Assessment Act 1936 (Cth) Schedule 2F s272-60.
68 Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62.
66
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63
An FTE is made when a trust return is lodged. As such, the ATO hold the view that a valid FTE cannot be made unless
the test individual is alive at the time of lodging the return 69. This view can be problematic, especially if new trusts have
operated as part of an existing group during an income year. To help safeguard against this issue, it is typically prudent
to maintain dormant trusts that have made FTEs in prior years. Where this option is not available, the group may need
to consider other options, including whether the test individual can be changed or whether interposed entity elections
can be made.
Year-end planning considerations
d
Where the trust has made a FTE or interposed entity election (“IEE”), ensure that non-commercial
transactions are not made with anyone outside the FTE group (otherwise you may have a FTDT exposure
at a rate of 49%).
d
If an issue is identified, consider charging arm’s length consideration before year-end to reduce any
exposure for FTDT.
d
Where the existing group has made a FTE, consider whether it is prudent to have a number of dormant
discretionary trusts that have made valid FTEs before year-end (as a safeguard if the test individual
passes away).
d
If the test individual has passed away before the making of the FTE and lodgement of the tax return,
consider if other options are available (including the ability to make an IEE or the ability to change the
test individual).
Tax file number withholding and trustee reporting
Beneficiaries must quote their TFNs to trustees prior to receiving or becoming entitled to trust distributions. The
consequences of non-compliance can be a 98% tax rate.
That is, where the trustee has not received the TFN, the trustee is required to withhold 49% from the relevant
distribution. The beneficiary can claim a credit for this amount in their tax return. However, where amounts are not
withheld, the trustee will be liable for penalties and interest. The non-deductible/non-creditable penalty is at least
equal to the withholding amount and can result in a tax rate of up to 98% (i.e. 49% income tax on the distribution in
the hands of the beneficiary and 49% penalties on the trustee). It is therefore critical that trustees comply with these
rules.
In addition, the trustee must report the beneficiary’s TFN to the ATO by 30 days after the quarter end (if the trustee
has not previously reported the TFN), where an amount has been distributed to that beneficiary.
For the 30 June 2016 income year, this means that beneficiary TFNs which have not already been reported in a
previous income year must (essentially) be reported to the ATO by 31 July 2016. Accordingly, it is absolutely critical
that trust resolutions are completed by 30 June 2016 and that new beneficiary TFNs are reported to the ATO by end of
July.
Finally, one way of possibly safeguarding against non-disclosure is to report the TFNs of all potential beneficiaries to
the ATO which have not already been reported in a previous income year by 31 July 2016. Pitcher Partners can assist
you in creating such a report.
69
ATO Interpretative Decision ATO ID 2014/3.
64
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Year-end planning considerations
d
Before year-end, ensure that all beneficiaries have quoted their TFNs to the trustee. Failure to quote a
TFN to the trustee may result in a withholding tax obligation of 49% on the distribution.
d
Ensure that the trustee reports any new beneficiary TFNs to the ATO by 31 July 2016 (if they have not
already been reported in a previous income year).
d
If a new beneficiary does not yet have a TFN, ensure that they make an application to the ATO for a TFN
as quickly as possible (i.e. before 30 June 2016).
d
Consider lodging a TFN report for 31 July 2016 that includes the TFNs of all potential beneficiaries of the
trust not already been reported in a previous income year.
Review of trust deeds
You should closely review the relevant trust deed, on an annual basis, to ensure that the terms of the deed are being
complied with.
The deed of the trust should be reviewed to confirm the vesting date of the trust. Where a trust distributes an amount
of income or capital to another trust, such distributions may (at a later stage) be taken to become void if the trust
breaches the rule against perpetuities.
You should also closely consider the relevant trust deed to ensure that amounts are distributed to eligible beneficiaries
under the relevant deed. Distributions to ineligible beneficiaries may not be effective for tax and trust purposes and
may give rise to assessments to the default beneficiary or the trustee at 49%. This can be particularly important where
the trust is distributing to a new corporate or trust beneficiary (where the trust has not distributed to that beneficiary
previously). In many cases, a nomination or special approval by the guardian or appointor may be required.
Furthermore, you should consider whether the deed defines income of the trust in an appropriate or flexible enough
manner and whether the deed allows streaming. You may wish to also review distribution clauses to ensure they are
appropriate for the current year. There is still time to amend the trust deed (if required) prior to 30 June.
The ATO has acknowledged that a resettlement is unlikely to occur if an amendment to the trust deed is made
pursuant to a power under the deed 70.
Year-end planning considerations
70
d
Ensure that the deed is appropriate for the current year resolutions and distributions.
d
Ensure that distributions for the current year are made to eligible beneficiaries of the trust.
d
Ensure that you have considered the rule against perpetuities when making trust distributions for the
current year.
ATO Decision Impact Statement: Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark and
Taxation Determination TD 2012/21.
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65
Superannuation deductions
Superannuation contribution payments for a director of a corporate trustee of a trust will only be deductible if the
director is a common law employee of the trust engaged in producing the assessable income of the trust or its
business71. This largely agrees with the ATO’s view in TR 2010/172.
Accordingly, before a trustee of a trust makes a superannuation contribution payment to a director of a corporate
trustee, it should consider whether or not the director is an employee. This requirement is more likely to be satisfied
for a trust which is an operating entity.
Year-end planning considerations
d
If you are paying superannuation contributions for directors of the trustee, you need to carefully
consider whether those payments will be deductible to the trust.
Distributing income to a superannuation fund
Care needs to be taken with any distributions that are made to a superannuation fund. Income derived by a SMSF as a
beneficiary of a discretionary trust is non-arm’s length income, as are dividends paid to an SMSF by a private company
(unless the dividend is consistent with arm's length dealing). Non-arm’s length income is taxed at 47%.
Year-end planning considerations
d
Non-arm’s length income derived by a superannuation fund (which may include discretionary trust
distributions or private company dividends) may be taxed at a rate of 47% in the superannuation fund.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
71
72
Kelly v FCT (No 2) [2012] FCA 689.
Taxation Ruling TR 2010/1, paragraph 243.
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Companies
ATO compliance activity
The ATO, through its “Building Confidence” website, has indicated that the issues listed below may attract their
attention73. Companies should pay particular attention to these items and, if required, rectify accordingly.
Small businesses

Businesses who intentionally seek an unfair advantage by hiding income (cash and electronic payments) or
deliberately avoiding their obligations by failing to register, keep records and/or lodge accurately;

Businesses that report outside of the small business benchmarks for their industry;

Employers not deducting and/or not sending the PAYG withholding from employee wages;

Employers not paying the superannuation guarantee; and

Businesses registered for GST but not actively carrying on a business.
Privately owned and wealthy groups

Tax or economic performance not comparable to similar businesses;

Large, one-off or unusual transactions, including transfer or shifting of wealth;

A history of aggressive tax planning;

Lifestyle not supported by after-tax income; and

Treating private assets as business assets.
Publicly listed businesses

Low transparency of tax affairs;

A record of aggressive tax planning;

Choosing not to comply or regularly taking controversial interpretations of the law; and

Poor governance and risk-management systems.
Year-end planning considerations
d
73
The ATO is continuing to scrutinise the taxation affairs of companies and has indicated a number of areas
it will be targeting for 2016 and 2017. The Government has also increased funding to its Tax Avoidance
Taskforce, which will target high wealth individuals. You should consider whether any of your
arrangements are those that have been identified by the ATO, and if required, you should consider
appropriate action.
ATO website: Building confidence.
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67
Tax rates
For the year ending 30 June 2016, two rates of Australian corporate tax can apply. SBEs that are corporate tax entities
with turnover of less than $2 million can be subject to tax at a rate of 28.5%. All other corporate tax entities will be
subject to corporate tax of 30%. This includes all corporates that simply act as a corporate beneficiary.
The Government announced in the Budget that for the 30 June 2017 income year, SBEs that are corporate tax entities
with annual aggregated turnover of less than $10 million will be subject to tax at a rate of 27.5% 74.
As these tax rates will not apply to those businesses operating through a trust structure (using a corporate beneficiary),
businesses operating through a trust structure should consider whether the current structure is the most appropriate
going forward.
Year-end planning considerations
d
SBEs that are corporate tax entities are subject to tax at a rate of 28.5% for the year ending 30 June
2016. For the 30 June 2017 income year, SBEs that are corporate tax entities with annual aggregated
turnover of less than $10 million will be subject to tax at a rate of 27.5%. All other corporate entities are
subject to corporate tax at a rate of 30% (including corporate beneficiaries).
d
If you are operating a business through a trust structure (using a corporate beneficiary), you should
consider whether the current structure is the most appropriate going forward.
Payment of dividends
For taxation purposes, a dividend cannot be franked if it is sourced (directly or indirectly) from share capital. This has
created some significant uncertainty where an entity has current year profits but there are prior year retained losses
(or alternatively, prior year profits and current year losses).
The ATO has provided safe harbours in TR 2012/575. Essentially, the safest option is for a company to create a separate
profit reserve before signing off its financial statements. This can help to ensure that the profits are isolated from
losses. Another option includes appropriately drafted minutes and notes to the signed accounts.
Pitcher Partners worked extensively with the ATO in developing these approaches in the taxation ruling and can assist
you with implementing this strategy.
Year-end planning considerations
d
If your company is looking to pay a franked dividend in circumstances where it has retained losses (or a
current year loss), you may not be able to frank the dividend unless you ensure appropriate actions are
taken before signing of your accounts for the current year.
Franking distributions
When paying dividends for the 30 June 2016 income year, you will need to determine the level of franking for the
relevant distribution. It is noted that the benchmark rate (i.e. the franking percentage) can only be set once a year for
private companies and twice a year for public companies. Once set, all dividends paid during the period must use that
74
75
Budget Paper No.2 – Ten year enterprise tax plan – reducing the company tax rate to 25 per cent – Page 41.
Taxation Ruling TR 2012/5.
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Year-end tax planning toolkit – 2015/16
franking percentage. If you vary this percentage by more than 20% from period to period, this must be disclosed to the
ATO.
The benchmark percentage must be set at the time of making the first distribution for the period. Accordingly, if the
first dividend is to be paid at 30 June 2016, the benchmark rate is set at this time.
Care needs to be taken that you do not create a franking deficit by over franking distributions. Some key items that
should be considered before year-end include the following:

Generally the current year fourth quarter PAYG instalment cannot be included in the current year franking
account. However, you can include the prior year fourth quarter PAYG instalment;

Ensure that you have taken into account any refunds or final tax payments that have been received during the
year;

Make sure that you have removed penalties and interest amounts that may have been included in the relevant
assessments issued for the year; and

Any refund received within three months of year-end should be taken into account to determine if the year-end
balance is a deficit.
The consequence of a franking deficit is that franking deficit tax will be payable. Generally, this amount can be used as
a tax offset for the following year (i.e. treated as a prepayment of tax). If the amount of franking deficits exceeds 10%
of the franking credits for the year however, the entity may penalised76, by a 30% reduction in the tax offset.
Whilst the tax rate for SBE corporate tax entities is 28.5% for the year ending 30 June 2016, SBEs can continue to pay
fully franked dividends (and thus allocate franking credits at the tax rate of 30%). Care needs to be taken to ensure that
this approach of fully franking a dividend does not result in a franking deficit in the franking account.
Year-end planning considerations
d
If you are paying a franked dividend before 30 June, you should consider reviewing your franking
position so that you do not inadvertently create a franking deficits tax position.
d
SBE corporate tax entities that are eligible for the reduced tax rate of 28.5% can continue to pay fully
franked dividends (i.e. at the 30% tax rate). Care needs to be taken to ensure that this does not result in
a franking deficit.
Distribution statements
A private company must give a distribution statement to the shareholder within four months after the end of the
income year in which the distribution is made. It is noted that this extension of time for giving a statement does not
provide an extension of time to determine to declare a dividend or to determine the extent to which the dividends are
franked (i.e. the benchmark percentage). If the company is not a private company, the statement must be given on or
before the day of the distribution.
Year-end planning considerations
d
76
Where dividends are paid, ensure compliance with the dividend statement requirements including the
period for providing these to your shareholders.
Income Tax Assessment Act 1997 (Cth) ss205-70(6) provides the Commissioner with a discretion.
Year-end tax planning toolkit – 2015/16
69
Debt that can be treated like equity
Companies must apply the debt/equity tax rules when classifying debt and equity that they have issued. Generally,
returns paid by a company on a debt interest can be deductible, while returns on equity interests cannot be deductible
(but may be frankable).
Where loan funding is provided to a company, but not placed on fixed repayment terms, the debt/equity tax provisions
can treat such “at call” loans as equity. An exception applies to certain “at call” loans provided to a company that is a
related party, where the company’s GST turnover is less than $20 million. Where this exception does not apply, such
“at call” loans made to a company run the risk of being treated as equity for tax purposes and thus interest paid may
be classified as an unfranked dividend (depending on your franking benchmark rate).
Agreements can be put in place to ensure that loan arrangements are treated as debt for taxation purposes by either
having a repayment term of 10 years (or less) or by charging an interest rate that satisfies the legislative
requirements77.
The debt/equity tax provisions were introduced with effect from 1 July 2001. A number of loans have been placed on
10 year terms since that date and thus may be due for repayment by 30 June 2016. Accordingly, you should review and
monitor the repayment date on all loans that have been placed on terms for the purpose of the tax debt/equity
provisions. If you are seeking to extend the repayment date, care needs to be taken that this does not turn the debt
instrument into an equity instrument. You should consult your Pitcher Partners representative where this is the case.
Where an error is made in the classification of an arrangement as debt, the ATO has highlighted that it will amend prior
year returns to treat interest as (effectively) dividends and that the benchmark percentage will be applied to such
returns78. This can also give rise to franking deficit issues and penalties where you are treated as over franking the
dividend.
Year-end planning considerations
d
Review loans provided to companies in the group to ensure they have been placed on terms that will not
result in them being treated as equity for tax purposes.
d
Review new loans made to the company during the current income year to ensure that appropriate loan
agreements have been put in place to ensure that the loan is treated as debt for tax purposes.
d
Review the status of existing loan arrangements that have been put in place since 1 July 2001 to
determine whether the 10-year loan repayment date is approaching. Care needs to be taken when
considering options for extending the date of the loan arrangement, as this may result in the
arrangement being treated as equity.
Division 7A — general
Division 7A is an integrity measure to prevent tax-free distributions from private companies to shareholders or their
associates. The provisions operate to deem an unfranked dividend in circumstances where a private company has
provided financial accommodation directly or indirectly to a shareholder or their associate. The extent of the deemed
dividend is limited to the private company’s distributable surplus. Where the operation of Division 7A will deem a
dividend as a result of mistake or omission, the ATO has a discretion to disregard the deemed dividend or deem it to be
a frankable dividend. However while Pitcher Partners has successfully applied for dividends to be disregarded, the
discretion is only exercised in certain circumstances.
77
78
The legislation requires an adjusted benchmark interest rate to be calculated.
ATO Interpretative Decision ATO ID 2005/38.
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The Division 7A legislation is complex and we suggest that you speak to your Pitcher Partner representative to find out
more about how best to manage your Division 7A exposure prior to 30 June 2016. This toolkit considers four key areas
of Division 7A, including: (1) direct transactions by companies (Section 7H); (2) unpaid trust distributions to companies
(Section 7I); (3) other indirect benefits provided by companies (Section 7J); and (4) future proposed amendments
(Section 7K).
Division 7A — direct transactions by companies
Loans, payments or debt forgiveness transactions to shareholders or their associates (and ex-associates in some cases)
will trigger a Division 7A exposure. From 1 July 2009, the use of a company’s assets (for example, a company yacht) for
private purposes at less than their market value will also constitute a payment.
Placing a loan on a Division 7A complying loan agreement can help to mitigate the Division 7A exposure on that loan. A
complying loan generally needs to be repaid over seven years, with interest charged at the benchmark interest rate.
For payments that have been made to shareholders or their associates, charging appropriate amounts to them may
mitigate any exposure under the payment rules. Alternatively, the payment can be converted into a loan, which can be
placed on complying Division 7A loan terms.
Prior to year-end, you may be required to make minimum loan repayments (“MLR”) for existing Division 7A loans. You
should explore the ability to offset amounts due to you against these MLRs. Where insufficient funds are unavailable,
consider paying a dividend prior to year-end to meet repayment obligations.
Benchmark interest rate
Each year the ATO releases the designated benchmark interest rate for the year. The rate is used to determine
minimum yearly interest repayments for Division 7A loans and seven-year investment agreements. The 2015/16
benchmark interest rate is equal to 5.45%79.
Year-end planning considerations
79
d
Identify all Division 7A loans made by the company in prior years and determine the required MLRs
before 30 June. Consider the borrower’s ability to pay the MLR by 30 June and whether dividends need
to be declared before year-end.
d
Identify any new loans that have been made to shareholders or associates. These loans may need to be
placed on complying terms.
d
Identify any payments made for shareholders or associates/ex-associates (including cash payments,
relationship breakdown settlements, payments on their behalf, asset transfers or use of asset
arrangements). Ensure that an appropriate amount is charged before 30 June (either through the P&L or
through the appropriate loan accounts).
d
Ensure that interest has been charged on compliant Division 7A loans using (at the very least) the
2015/16 benchmark interest rate of 5.45%.
Taxation Determination TD 2015/15.
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71
Division 7A — trust distributions to companies
Division 7A may apply to private groups that resolve to distribute income from a trust to a company but do not actually
pay those amounts to the company, creating an unpaid present entitlement (“UPE”).
It is ATO practice to treat UPEs made on or after 16 December 2009 directly or indirectly to a corporate beneficiary as
loans from the company to the trust. This means that the UPE will be treated as a deemed dividend unless the UPE is
placed on complying loan terms (over 7 or 25 years, with principal and interest repayments). It is noted, however that
this is subject to the UPE being placed on a complying investment agreement.
UPEs — complying investment agreement
If the post-16 December 2009 UPE is put on a complying “investment” agreement it will remain a UPE for the purposes
of Division 7A. A number of options exist, including a 7 or a 10 year interest only loan (with a balloon principal
repayment at the end of the agreement) or an investment into an asset. These options can be more flexible that the
ordinary Division 7A loan arrangements.
Note, where a trust has made a current year distribution to a company that remains unpaid, or has a prior year
outstanding UPE owing to a company, Division 7A can deem any loan, payment or debt forgiveness made by the trust
as being made directly by the company. Interposed entity rules can apply these rules and trace UPEs through several
trusts.
Exposure can be mitigated by ensuring that loans from the trust are placed on complying terms or payments made by
the trust are appropriately dealt with. Alternatively, the UPE can be converted to a complying loan and thus be subject
to the ordinary Division 7A rules.
Where existing complying loan agreements have been entered into with the trust in prior years, MLRs will be required
with the trust by 30 June.
Year-end planning considerations
72
d
Identify all pre- and post-16 December 2009 UPEs that are outstanding to a private company within the
group and ensure the pre-16 December 2009 UPEs are recorded separately in the financial statements.
d
Consider whether new UPEs should be placed on complying investment agreements or treated as loans
before the lodgement date of the trust. This should occur for UPEs owing to companies and other types
of entities (for example, trust to trust distributions if there is a corporate beneficiary with a UPE in the
group). You should consider cash flow advantages that can occur.
d
Consider rationalising UPEs and loans around the group to simplify the Division 7A analysis before 30
June 2016. Be mindful of tripping up integrity rules when rationalising arrangements (e.g. interposed
entity rules or the anti-refinancing provisions).
d
For prior year UPEs that have been converted to Division 7A compliant loans, ensure the trust has made
minimum yearly repayments before 30 June 2016.
d
For prior year UPEs that have been placed under an investment option agreement ensure that you
record appropriate amounts of ‘interest’ income in the accounts for the current year.
d
Identify and examine all related party transactions made by a trust where that trust has one or more
UPEs to a corporate beneficiary.
Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
If there are existing complying loan agreements in place between the trust and related entities, you will
need to consider MLRs that need to be made before 30 June.
d
Consider whether turning the UPE with the corporate entity into a complying Division 7A loan provides a
more manageable outcome for the group.
Division 7A — other indirect (interposed) benefits provided by companies
Division 7A contains interposed entity provisions. These provisions may apply where a loan or payment is made from a
company to an entity (for example, another company) which provides a loan to a target entity or trust. They can also
apply where a company guarantees a loan for or on behalf of another entity. The interposed entity rules can trace
through an entity that is not related to the group. It is generally useful to identify all loans, payments or guarantees
between entities within the group (including those arrangements that pass-through an unrelated party) in order to
assist in the application of the interposed entity rules.
Year-end planning considerations
d
Identify all loans, payments and guarantees that have been made by the private company to other
entities within the group (including other private companies) to determine if there is a risk of the
interposed entity rules applying.
d
Consider strategies to mitigate the interposed entity rules from applying, such as placing all loans from
companies on complying Division 7A terms (even when such companies do not have a distributable
surplus).
Division 7A — future simplification
In the 2016/17 Budget, the Government has announced changes to simplify Division 7A that are scheduled to come
into effect from 1 July 2018. Whilst the details of the proposed changes will be subject to consultation, groups should
commence considering their Division 7A positions now and whether it may be possible to restructure their
arrangements in the coming few years.
Year-end planning considerations
d
Consider whether the proposed Division 7A simplification measures could provide better financing
options to the group in the short term future.
Company Losses
It is critical that you consider the application of the carry forward loss provisions for companies where prior year losses
are to be utilised for the 30 June 2016 income year. It is noted that this continues to be a target area of the ATO from a
tax compliance perspective.
Continuity of ownership test
A company can deduct carry forward losses if the entity passes the continuity of ownership test — i.e. it has
maintained the same majority ownership from the start of the loss year to the end of the utilisation year with regard to
Year-end tax planning toolkit – 2015/16
73
shares carrying more than 50% of entitlements to dividends, capital and voting rights. It must also demonstrate that
there has not been a change of control in the voting power of the company. Where the shares in the loss company are
owned by a trust additional rules are required to be satisfied (See Section 6J).
Same business test
Where the ownership test is not satisfied, the same business test must be applied. It is noted that the ATO takes a very
stringent view on what constitutes maintaining the same business.
Similar business test
As part of its National Science and Innovation Agenda, the Government has announced that it will introduce a “similar
business test” to supplement the existing same business test. The similar business test is proposed to provide a slightly
more relaxed test, helping start-ups to seek capital (which would otherwise breach the continuity of ownership test).
At this date, only Exposure Draft legislation has been released, however the provisions have been earmarked to be
effective for losses incurred on or after 1 July 2015.
Year-end planning considerations
d
If you are utilising prior year tax losses, or have tax losses in the current year, you should consider
whether the company has satisfied the continuity of ownership test, the control test and the same
business test.
d
If you have made a loss in the 2016 income year, you should also consider whether the proposed similar
business test may provide a better opportunity to utilise losses in the future.
Share capital transactions
A number of integrity provisions can operate when an amount moves in or out of the share capital account. For
example, if an amount is transferred to the share capital account (outside of the raising of share capital), this can
“taint” the whole of the share capital account. Any subsequent payment from a tainted account will be treated as an
unfranked dividend unless un-tainting tax is paid. Alternatively, transfers of amounts from share capital to other
accounts (or distributions from share capital) can also give rise to unfranked dividends.
Care therefore, needs to be taken in recording such entries to the ‘equity’ section of the balance sheet under
accounting standards, as they can give rise to share capital tainting consequences. This is especially an issue for share
based payment transactions that are accounted for under AASB 2.
As the tax consequences can be severe where share capital transactions occur, it is recommended that a review of all
entries to the equity section of the balance sheet occurs prior to year-end (i.e. to ensure corrections can be made to
errors posted). Furthermore, it is recommended that management consider controls on the posting of accounting
entries to any share capital accounts to prevent the inadvertent application of the share capital tainting provisions.
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Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
Review all accounting entries made to the equity section of the balance sheet for 30 June 2016 and the
income tax consequence of these entries (for example, tainting, unfranked dividends).
d
Consider whether it is possible to correct accounting entries that have been made in error.
d
Consider implementing controls to prevent inadvertent entries to the share capital accounts in future
periods.
Tax consolidation — choice to consolidate
For taxpayers who formed a consolidated group in the 30 June 2016 income year, it is important that they have made a
choice to consolidate80 in writing, and submitted a notification form to the ATO. Both the notification form and the
choice to consolidate must be made by the time the 30 June 2016 tax return is lodged. These documents must state
the effective date from when tax consolidation commenced.
Critically, if the separate written choice to consolidate is not prepared in writing, the tax consolidated group will not
have formed. This document does not need to be lodged with the ATO. You can contact your Pitcher Partners
representative to obtain a pro-forma choice template.
All new tax consolidated groups (and existing tax consolidated tax consolidated groups) should also consider entering
into a tax sharing agreement and tax funding agreement for the current year (to avoid adverse AASB 112 and UIG 1052
consequences, and to avoid being jointly and severally liable for all income tax debts).
Year-end planning considerations
d
If your corporate group formed a consolidated group during the 30 June 2016 income year, you must
ensure that you have made a choice in writing.
d
If your corporate group formed a consolidated group during the 30 June 2016 income year, you must
lodge a notification form with the ATO. This is separate to the choice to consolidate.
d
You should consider entering into tax funding and tax sharing agreements for your new tax consolidated
group prior to lodging your first tax return.
Tax consolidation — change in members
Where new members joined the tax consolidated group during the year, there is a requirement to add the member to
the existing tax sharing and tax funding agreements. Typically this is done by completing a deed, which is generally
included as a schedule to the agreements.
For members that leave a tax consolidated group during the year, there is a requirement for the member to make a
clear exit payment under existing tax sharing and tax funding arrangements.
The head company is also required to notify the ATO of the changes in membership within 28 days of an entity joining
or leaving the tax consolidated group.
80
GE Capital Finance Australasia Pty Ltd & Anor v FCT [2011] FCA 849.
Year-end tax planning toolkit – 2015/16
75
Year-end planning considerations
d
If an entity has joined the tax consolidated group during the income year, ensure that you have updated
your tax sharing and tax funding agreements and notified the ATO within 28 days of joining the group.
d
If an entity has left the tax consolidated group during the income year, ensure that you have made clear
exit payments and notified the ATO within 28 days of leaving the group.
d
Ensure that you have appropriately updated tax sharing and tax funding agreements for new entities and
that appropriate exit payments were made for leaving entities.
Tax consolidation — updating tax costs
If you formed a tax consolidated group during the income year, or if entities joined the tax consolidated group, the tax
cost of assets and certain liabilities need to be reset. This can have a material impact on your tax calculation for 30 June
2016.
Year-end planning considerations
d
Ensure that you have calculated the new tax costs of all assets and certain liabilities for subsidiary
members that joined the tax consolidated group for 30 June 2016.
Tax consolidation — disposal of subsidiary entities
If an entity has left the tax consolidated group (the leaving entity), for example by way of a sale of the shares, the cost
base of the shares in the leaving entity is generally recalculated based on the tax cost of the underlying assets and
liabilities held by the leaving entity. This is known as the exit allocable cost amount (“ACA”). It is noted that the recalculated cost base can sometimes have a material effect on the capital gain or loss that is realised on the disposal of
the subsidiary entity. Furthermore, where a loss is generated on the sale of the subsidiary, special rules can operate to
automatic deny a capital loss being generated (under the loss duplication provisions).
Year-end planning considerations
d
If an entity has left the tax consolidated group, the cost base of the shares needs to be recalculated
based on the underlying tax cost of assets and liabilities of the leaving entity. This can have a material
impact on any capital gain or loss on sale of the leaving entity.
d
Where a loss is generated on the disposal of an entity by a tax consolidated group, the loss can be denied
under the loss duplication provisions.
Tax consolidation — deductible liabilities
In the May 2016 Budget, the Government announced it would not proceed with the previously announced measure
relating to deductible liabilities. Instead, a new measure has been announced, with prospective application from 1 July
2016.
Under the new measure, the head company will not be required to bring to account assessable income amounts
corresponding to the deductible liabilities of a joining entity. However, instead, where a head company acquires a
joining entity, the head company will not be entitled to include those liabilities in the consolidation entry tax cost
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Year-end tax planning toolkit – 2015/16
setting process. This will have the effect of reducing the ACA of a joining member and is likely to result in assessable
income as an indirect consequence over time (e.g. by way of lower revenue deductions such as trading stock or
depreciation claims, or by crystallising a CGT event on entry into the consolidation regime) 81.
Year-end planning considerations
d
Determine whether the budget announcement on deductible liabilities requires any amendments to
prior tax returns lodged.
d
Identify if the tax consolidated group will acquire an interest in a subsidiary (with deductible liabilities)
close to 30 June 2016. The new measures are unlikely to apply if the transaction is completed before 30
June 2016.
Research and development
Companies undertaking eligible R&D activities may qualify for the R&D tax incentive which provides either of the
following:

A 45% refundable tax offset (equivalent to a 150% tax deduction) to eligible entities with an aggregated turnover
of less than $20 million per year; or

A 40% non‐refundable tax offset (equivalent to a 133% tax deduction) to all other eligible entities. Unused offsets
may be able to be carried forward for use in future income years.
Whilst R&D plans are no longer formally required under the R&D tax incentive, a company’s business records must be
sufficient to verify the nature of the R&D activities, the amount of expenditure incurred on those activities and the
relationship between the expenditure and the R&D activities. Furthermore, companies are still required to register
annually with AusIndustry before being able to claim the tax offset. Companies will need to register within 10 months
after the end of their income year in which the R&D activity was undertaken (i.e. by 30 April 2017 for 30 June 2016
year-ends).
R&D activities undertaken overseas may also qualify as eligible R&D activities if they meet certain requirements. In
addition to meeting these requirements, companies need to also ensure they submit their ‘overseas findings’ with
AusIndustry for overseas R&D activities conducted from 1 July 2015 to 30 June 2016, by 30 June 2016.
The period leading up to 30 June is an opportune time to ensure that your accounting, information and record keeping
systems are up to date to accommodate any claims you want to make under the R&D tax incentive for the year-ending
30 June 2016 — especially as the ATO announced in early 2015 that it will be working closely with AusIndustry to
identify entities that it regards as being involved in “aggressive” R&D arrangements that are inconsistent with the
requirements of the R&D regime, may involve tax avoidance and could attract the operation of the promotor penalty
rules.
The ATO have released a new checklist to assist taxpayers in claiming the R&D Tax Incentive, with particular regard to
self-assessing eligibility for the offset82.
Please contact your Pitcher Partners representative if you require any assistance in this process or if you would like to
discuss the potential to claim the R&D tax incentive for the 2016 income year. We can assist you at all stages with your
R&D claims.
81
82
Budget Paper No.2 – Ten year enterprise tax plan – better targeting the deductible liabilities measure – Page 36.
ATO website: Checklist for claiming the Research & Development Tax Incentive.
Year-end tax planning toolkit – 2015/16
77
Year-end planning considerations
d
Consider whether the taxpayer is eligible for the R&D tax incentive for the 30 June 2016 income year
and, if so, whether eligible R&D expenditure can be brought forward into the current year prior.
d
If the taxpayer is eligible for the R&D tax incentive, ensure that the taxpayer lodges the registration of
R&D Activities with AusIndustry within 10 months of year-end.
d
If overseas R&D activities have been conducted during the period 1 July 2015 to 30 June 2016, ensure
that the taxpayer lodges the advance findings and the overseas findings prior to 30 June 2016.
R&D — ineligible companies
Companies with R&D expenditure of greater than $100 million are not eligible for the 40% non-refundable R&D Tax
Incentive, however, they can claim the excess as a tax offset at the company tax rate of 30%.
Year-end planning considerations
d
Where the taxpayer’s R&D expenditure is $100 million or more, the taxpayer is not eligible for the 40%
non-refundable R&D Tax Incentive, however, they can claim the excess as a tax offset at the company tax
rate of 30%.
R&D — feedstock adjustments
When a company obtains a R&D tax incentive offset for their feedstock expenditure incurred on R&D activities (and
where those activities produce either of the marketable products listed below or products applied for the use of the
company), a feedstock adjustment may be required.
The feedstock adjustment applies to expenditure on goods or materials (feedstock inputs) that are transformed or
processed during R&D activities in producing one or more tangible products (feedstock outputs), or energy that is input
directly into that transformation or processing.
The feedstock adjustment works by increasing the company’s assessable income, rather than by reducing the
deductions or offset you can claim. The ATO has released a ruling outlining its views on the feedstock adjustments83.
Year-end planning considerations
d
Consider whether the taxpayer received a R&D tax incentive offset for feedstock expenditure incurred on
R&D activities. If so, it may be necessary to include an adjustment in the assessable income of the
taxpayer.
Reportable tax positions
Certain large business and multinational taxpayers are subject to a reporting requirement to disclose their most
contestable and material tax positions to the ATO by completing and lodging a RTP schedule with their tax return.
83
Taxation Ruling TR 2013/3.
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Year-end tax planning toolkit – 2015/16
A tax position will not need to be disclosed if the position is more likely to be correct than incorrect. However, positions
that are based on pending legislative amendments will need to be disclosed. Due to changes to the Taxation
Administration Act 1953, non-disclosure of information to the ATO can now result in an administrative penalty of up to
$6,60084, even where the non-disclosure does not result in a tax shortfall.
For taxpayers that are required to complete a RTP schedule, it will be important to ensure that you have an appropriate
tax risk management policy in place to monitor RTPs. In particular, this can also assist to identify those contentious
positions, where such positions will not need to be disclosed where the taxpayers can establish a position that is more
likely than not to be correct. Where positions are contentious, it will therefore be important to ensure that the position
is “more likely than not”, to ensure that the position does not need to be disclosed on the RTP schedule.
Year-end planning considerations
d
If you are a large taxpayer, you may be required to complete a RTP schedule with your tax return.
d
You should review all tax positions that are material to identify if there are any positions that are about
as likely as not to be correct as incorrect. You should consider reviewing such positions to determine
whether they can be made more certain before lodging your tax return.
d
You should consider appropriate tax risk mitigation processes to ensure minimisation of issues that are
required to be reported on the RTP schedule.
PAYG instalments
A PAYG instalment operates like a prepayment of a taxpayer’s tax liability for the current year. The amount of the
instalment is calculated either by the ATO or by the taxpayer, based on the income tax payable in the taxpayer’s most
recent income tax return. If the taxpayer is also subject to TOFA, the net TOFA gains should be included in the PAYG
instalment income amount. Prior to 30 June, it is possible to consider varying a final PAYG instalment, if you have
sufficient information to accurately calculate the estimated tax payable for the year.
Generally, a 15% buffer is provided for such estimates, whereby a taxpayer will be liable to the general interest charge
(i.e. GIC) if the varied instalment is less than 85% of the actual tax that would have been paid. Due to the penalties that
may be imposed for getting a variation incorrect, you should consider seeking advice prior to lodging the variation
amount.
Year-end planning considerations
84
d
Consider whether there is an opportunity to vary the PAYG income tax instalment for 30 June 2016.
d
Where you are subject to TOFA, ensure that your PAYG instalment income only includes your net TOFA
gains and not your gross income from TOFA arrangements. For example, interest expenses may reduce
your PAYG instalment income.
Taxation Administration Act 1953 (Cth) Sch 1 s284-75.
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Director penalty regime
There have been recent changes that expand the director penalty regime where a company fails to remit SG amounts
and PAYG withholding. As a consequence, directors should ensure that SG payments and PAYG withholding payments
are all up to date.
Year-end planning considerations
d
Review any outstanding PAYG and SG payments at year-end and ensure that these are paid within the
appropriate timeframe.
d
Consider implementing stringent internal guidelines and requirements in relation to PAYG withholding
and SG charge payments.
Tax transparency
The ATO is required to publicly report the following information about certain corporate tax entities: (1) the entity's
name and ABN; (2) total income; (3) taxable income (or net income for a corporate unit trust, public trading trust or
corporate limited partnership); and (4) income tax payable.
These laws apply to Australian public and foreign-owned corporate tax entities with total income of $100 million or
more, entities that have an amount of Petroleum Resource Rent Tax payable and Australian-owned resident private
companies with total income of $200 million or more.
An entity's total income is the accounting income reported by the entity (i.e. based on its financial statements) which is
disclosed in the company income tax return.
As the disclosure is based on accounting income, we note that taxpayers may be inadvertently reporting income
incorrectly in their tax returns and thus may be subject to these measures incorrectly. This may occur, for example,
where income that should be reported on a net basis is otherwise being reported on a gross basis. If you are concerned
about the public release of the above information, please contact Pitcher Partners to discuss your situation.
Year-end planning considerations
d
The ATO is required to publicly report tax information for certain corporate tax entities. If you will be
subject to these rules, you should consider whether amounts are disclosed in your tax return correctly
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Partnerships
Professional practices and trusts as partners
The ATO has released guidelines “Assessing the risk: allocation of profits within professional firms” concerning income
splitting for professional practices for 2014/15 and later years 85.
Relevantly, the ATO allow any form of professional practice structure, providing it is legally effective, including a
partnership that comprises trustee partners.
Whilst these guidelines may discriminate between professionals and other businesses, and may not have a technical
foundation, they do offer a choice and some certainty for taxpayers. The choice for a practitioner/owner is whether or
not to follow the guidelines, by meeting at least one of three tests.
The ATO provide three benchmark guidelines, which (if followed by those partnerships and taxpayers) can mitigate the
risk of an ATO review. Essentially these three benchmark rules are aimed at ensuring that a sufficient amount of the
partnership income is included in the individual partner’s tax return.
Year-end planning considerations
d
Where the professional practice discloses (in its tax return) partners in the partnership as being “trust”
entities, you should carefully consider the issues being examined by the ATO in relation to this issue.
d
The ATO has recently indicated that you may be able to mitigate the risk of the ATO taking an issue with
the structure if an appropriate amount of income is included in the principal’s tax return (under one of
three acceptable methods). Pitcher Partners can assist you in reviewing this issue.
Professional practices (unincorporated and incorporated)
The ATO has released guidelines as to their administrative treatment of the acquisition and disposal of interests in nogoodwill professional partnerships, trusts and incorporated practices 86. These guidelines have replaced a number of tax
determinations.
Broadly, the guidelines provide that the ATO will not undertake compliance action in relation to the four tax issues
identified below where the practice meets certain criteria, as outlined below.

CGT — In relation to the calculation of the cost base or reduced cost base of the practice interest, the market value
of the practice interest at the time of acquisition is treated as being equal to the amount the taxpayer pays
(including nil) in respect of the acquisition.

ESS — In relation to the calculation of a discount on the issue of shares in an incorporated practice, the market
value of the practice interest at the time of acquisition is treated as being equal to the amount the taxpayer pays
(including nil) in respect of the acquisition.

CGT — In relation to the calculation of the capital proceeds in respect of a CGT event happening to a practice
interest, the market value of the practice interest at the time of disposal is treated as being equal to the amount
the taxpayer receives (including nil) in respect of the disposal.
85
ATO website: Assessing the risk: allocation of profits within professional firms.
ATO website: Administrative treatment: acquisitions and disposals of interests in ‘no goodwill’ professional partnerships, trusts
and incorporated practices.
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
OMB — In relation to the calculation of consideration in respect of an off-market share buy-back of shares in an
incorporated practice, the market value of the practice interest at the time of disposal is treated as being equal to
the amount the taxpayer receives (including nil) in respect of the disposal.
Year-end planning considerations
d
Where you operate a no-goodwill professional practice, you should consider whether the ATO’s revised
views apply to your circumstances.
Varying distribution amounts to partners
Where a partnership exists at common law, it may be possible to vary the distribution of partnership profits amongst
the partners of the partnership. The ATO accepts that an agreement by the partners of a partnership to allow a partner
to draw a 'partnership salary' is a contractual agreement among the partners to vary the interests of the partners in the
partnership (and thus the partnership’s net income) between the partners. However, for such an agreement to be
effective for tax purposes in an income year, the agreement must be entered into before the end of that income
year87.
Care needs to be taken as the ATO may seek to adjust such amounts where they believe that the distributions made
are completely out of proportion to either a partner’s true interests in the partnership assets or their participation in
the partnership business88. Furthermore, a partnership agreement cannot exist or operate retrospectively 89.
Accordingly, special consideration should be given to the partnership agreement when varying such rights.
This principle can also arguably be extended to profits relating to property that is an asset of a partnership at general
law. In this case, the parties may be able to determine the proportion of the profit and loss from that property to which
each partner will be entitled90. Again, care needs to be taken to ensure that amendments do not crystallise CGT events.
Furthermore, the ATO does not accept variations where no partnership exists at common law 91.
Year-end planning considerations
d
Where a partnership exists at common law, consider whether partnership distribution variations can be
utilised before 30 June 2016 to vary distribution entitlements for various partners.
Equity contributions by a company
An ATO fact sheet92 stipulates that bona fide capital contributions to a partnership by a company will not trigger
Division 7A. Furthermore, undrawn partnership profits of a company partner are not treated as a loan to the
partnership. Accordingly, care should be taken in reclassifying any such amounts as loans from the partner, where they
are (in fact) partnership capital or current account amounts. The consequence of a classification error could be a
deemed unfranked dividend by the company to the partnership, which would be shared between the partners.
It is noted that the statement by the ATO is only contained in a non-binding fact sheet. However, care should be taken
if the amounts are material.
87
Taxation Ruling TR 2005/7.
Taxation Ruling No. IT 2316 and Income Tax Assessment Act 1936 (Cth) s 94.
89 Waddington v O'Callaghan (1931) 16 TC 187.
90 FC of T v Nandan 96 ATC 4095.
91 Taxation Ruling TR 93/32 and FC of T v McDonald (1987) 18 ATR 957.
92 ATO website: Division 7A – answers to FAQs.
88
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Year-end planning considerations
d
Review partnership accounts to ensure that amounts of partnership equity and undrawn profits owing to
a company are not inadvertently recorded as partnership loans at year-end.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Capital gains tax
General
Where amounts or proceeds are received by an entity, those amounts may be subject to the CGT provisions. Generally,
CGT applies to the disposal of CGT assets acquired after 19 September 1985. However, CGT events apply in broader
circumstances, with catch-all CGT events that can apply to capital proceeds received in respect of other assets and the
creation of other rights93. It is therefore prudent to consider all proceeds received during the year, especially in respect
of amounts received that have not otherwise been included in assessable income.
The capital gains rules may crystallise a gain or loss in a year that is earlier than the settlement of the contract or
receipt of proceeds. For example, CGT events can happen at the time you enter into the contract. Accordingly, you
should review all contracts that straddle year-end to ensure that you have correctly taken into account the CGT
consequences.
Generally, a capital gain or loss is calculated by comparing the proceeds from the event with the cost base of the
relevant asset. Exclusions apply to exempt a capital gain derived in respect of certain events (for example, main
residence — refer to Sections 9F and 9H).
The ATO has indicated on its ‘Building Confidence’ webpage that it will be conducting ongoing compliance activity on
capital gains derived from the sale of shares and rental properties94.
Year-end planning considerations
d
Review all proceeds received during the year, especially where those proceeds have not been included in
assessable income.
d
A CGT event may happen on entering into a contract (for example, entering into a contract for the sale of
a CGT asset). Consider any contracts that straddle year-end that may give rise to a capital gain in the 30
June 2016 income year.
d
Consider whether there are any exceptions to the CGT provisions to exempt the capital gain or capital
loss (refer to Sections 9F and 9G).
d
If you have material capital gains, the ATO may review those under its compliance activity. Consider
whether specific advice or an ATO private binding ruling should be obtained.
Small business CGT concessions
Where you have made a capital gain for the year, you should consider the ability to reduce that gain through the small
business CGT concessions.
A taxpayer can qualify for these concessions if the taxpayer satisfies the $6 million net assets test (on a connected
entity and affiliate basis) or the $2 million turnover test (on a connected entity and affiliate basis). The asset must be an
active asset (i.e. an asset used in business) and can extend to certain assets held by connected entities, affiliates and
partners in a partnership where those entities do not carry on a business. The small business concessions can also
apply to the sale of shares in a company or units in a trust, provided additional requirements are satisfied (for example,
the CGT concession stakeholder test).
93
94
Income Tax Assessment Act 1997 (Cth) s104-35 and s104-155.
ATO website: Building confidence.
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The four small business CGT concessions available are: (1) the 15-year exemption; (2) the 50% active asset reduction;
(3) the retirement exemption; and (4) the replacement asset rollover.
The small business concessions require choices to be made by certain dates. Some of these elections are due by the
date of lodgement of the return, while others require choices to be made at earlier times (for example, the election to
apply the retirement exemption may be required within seven days of payment). Breaching these dates may have
significant consequences. Furthermore, where the retirement exemption is being sought and contributions are
required to be made to a superannuation fund, it is critical to not only ensure that the amounts qualify for the CGT
concessions but to lodge the required CGT election form with the superannuation fund on or before the contribution is
made. Otherwise, you may risk the amount being an “excessive” contribution and taxed at penalty rates (see Section
12I).
Finally, it is important to note that recently there has been a considerable amount of ATO audit activity and litigation
dealing with the $6 million net asset value test. Taxpayers should ensure that when relying on the $6 million net asset
value test, they have valued their assets correctly just before the CGT event happens (i.e. generally the date of signing
the sale contract) and that they have correctly identified all of the relevant associated entities. In some cases, the
alternative $2 million turnover test can help to overcome this issue.
Year-end planning considerations
d
If a capital gain arises on a business related asset (including shares or units) during the current income
tax year by a taxpayer (or its affiliates/connected entities), consider whether the small business CGT
concessions can be accessed.
d
Where the taxpayer is seeking to utilise the retirement exemption and there is a risk that this concession
will not be available, consider obtaining a ruling to confirm that the contributions will not be treated as
“excessive” contributions.
d
Where the taxpayer is seeking to utilise the retirement exemption, ensure that you lodge the required
CGT election form with the superannuation fund on or before the contribution is made.
d
When relying on the $6 million net asset value test to access the small business concessions, ensure that
your valuation method is appropriate and you have identified all assets and associated entities that are
required to be valued. You may also wish to consider the ability to use the $2 million business turnover
test.
d
Ensure that choices are made by the relevant dates.
CGT discount
A capital gain can be reduced by 50% if an individual or trust holds an asset for more than 12 months before a CGT
event happens to it. The day of acquisition and the day of the CGT event do not count towards the 12 month period 95.
Not all CGT events qualify for the 50% CGT discount.
Depending on certain criteria, a partial CGT discount may be available for non-resident individuals and temporary
resident individuals in some circumstances where a CGT event occurs on or after 8 May 2012.
Finally, the ATO may also seek to classify capital gains as being on revenue account in certain cases (see Section 6I).
Where this occurs, the CGT discount will not be available.
95
Taxation Determination TD 2002/10.
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85
Year-end planning considerations
d
For asset sales contemplated before year-end, consider whether the asset has been held for at least 12
months and consider the commercial implications (as compared to the taxation consequences) of
delaying a disposal of the asset.
d
Where assets have been held for a short period, for example just over 12 months, consider whether
there is a risk that the gains are on revenue account (i.e. no discount is available).
d
Non-resident individuals and temporary resident individuals may be eligible for a partial CGT discount in
some circumstances where a CGT event occurs on or after 8 May 2012.
CGT and international tax
Special rules apply to inbound investments by non-residents and outbound investments made by residents into nonresident countries. In addition, CGT withholding tax may apply to sales of Australian property by non-residents from 1
July 2016. Refer to Sections 11N and 11O for further details.
Earnout arrangements
Earnout arrangements are commonly employed when selling private businesses or the assets used in such a business.
On 25 February 2016, legislation was enacted to provide look-through CGT treatment for look-through earnout rights
created on or after 24 April 2015.
Broadly, under the look-through CGT treatment, capital gains and losses arising in respect of the look-through earnout
rights are disregarded. For the purchaser of the business, any financial benefit provided (or received) under a lookthrough earnout right increases (or decreases) part of the cost base or reduced cost base of the underlying asset. For
the seller of the business, any financial benefit received (or provided) under the look-through earnout right increases
(or decreases) the capital proceeds for the underlying asset.
The rules only apply to a narrow set of circumstances, so it is important to ensure that sale agreements are drafted
appropriately. For example, shares need to be an active asset. Furthermore, complications may occur where an
earnout is in respect of the head company of a tax consolidated group (e.g. by way of the interaction with the single
entity rule) or where an entity joins a tax consolidated group via an earnout arrangement.
The new rules do not apply prior to 24 April 2015, however the ATO has stated that it will provide transitional
protection to taxpayers that have reasonably and in good faith anticipated the changes to the tax law in this area as a
result of the announcement by the former Government 96.
Year-end planning considerations
96
d
Consider whether the sale of any CGT assets for the income year requires consideration of the new
earnout provisions.
d
If you are considering entering into a sale agreement for a business or its assets under a qualifying
earnout arrangement, you will need to ensure that the sale agreement is drafted appropriately and that
all conditions of the provisions are satisfied.
ATO Guide: Look-through treatment for earnout rights.
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CGT exemptions
A number of CGT exemptions can apply to reduce capital gains and losses derived during an income year. The following
provides a non-exhaustive list of exemptions that should be considered during your year-end tax planning:

Pre-CGT assets;

Certain collectible and personal use assets;

Shares in a pooled development fund;

Trading stock;

Certain payments for compensation and damages;

Transfer of stratum units to occupiers;

Certain testamentary gifts;

Marriage or relationship breakdown settlements;

Main residence exemption;

Cars, motor vehicles and valour decorations;

Assets used to produce exempt and NANE income;

Capital losses by a lessee where the asset is non-income producing;

Capital gains or losses on certain boats;

Depreciating assets used for producing income;

CGT events on death;

TOFA financial arrangements;

Forex hedging gains or losses on liabilities; and

Forex hedging gains or losses on pre-CGT assets.
Year-end planning considerations
d
Where you have significant capital gains, consider if any exemptions will reduce your capital gains or
losses for the income year.
CGT rollovers
In addition, there are a number of CGT rollovers that may apply to reduce capital gains and losses derived during an
income year. These include:

Rollover for assets compulsorily acquired/lost/destroyed;

Scrip for scrip rollover relief;

Demerger relief;

Splitting of assets and merging of assets; and

Rollover for the change of an unincorporated body to an incorporated company.
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From 1 July 2016, new legislation will allow SBEs to restructure the way their business and associated assets are
owned, without crystallising an income gain or loss. These provisions specifically disregard the CGT, trading stock,
depreciating assets and certain Division 7A consequences of the restructure. The rollover does not extend to GST or
stamp duty, which must be considered as part of any restructure.
Year-end planning considerations
d
Where you have significant capital gains, consider if any rollovers will reduce your capital gains or losses
for the income year.
d
If you are contemplating a restructure of your business and its associated assets, consider whether you
should delay the restructure until after 1 July 2016 to access the new small business restructure rollover
provisions.
d
Consider the indirect tax consequences of a restructure, including GST and stamp duty considerations.\
d
Always consider the commercial and legal implications of a restructure.
Main residence exemption
If a taxpayer sold their dwelling in the 2016 income tax year, the individual may qualify for the main residence
exemption to reduce the capital gain made from this sale.
Special rules apply in a range of circumstances, including: (1) where there was an absence during the ownership period;
(2) adjacent land (whether up to two hectares or more) is being sold with the main residence; (3) compulsory
acquisitions of the main residence and/or adjacent land have occurred; (4) where the residence was used for a period
to derive income; (5) when there are two properties that are both used as a main residence; and (6) when special
disability trusts can claim the main residence exemption.
Furthermore, where dwellings have been acquired from a deceased estate, the ATO has a discretion to extend the two
year ownership period in which the trustee of the deceased estate or a beneficiary must dispose of the dwelling to
qualify for the main residence exemption.
Year-end planning considerations
d
Apply the main residence exemption if a CGT event happens to a dwelling that was used by an individual
taxpayer as a main residence and the relevant conditions are met.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Finance issues
Loan rationalisation and debt forgiveness
At 30 June of each year, it is often common to rationalise loans between group entities and/or for debt restructuring to
occur. This can make the group’s Division 7A position easier to manage by reducing the number of loans around the
group. Furthermore, the relevant entity may have entered into debt restructuring or debt forgiveness transactions
during the relevant income year.
However, loan rationalisation and debt restructuring can give rise to significant taxation issues that need to be carefully
considered — especially if one of the entities involved has a deficiency in net assets. Some of these issues are listed
below:

Limited recourse debt provisions — where limited recourse debt (defined to include certain non-arm’s length
group debt) is terminated, the termination can have significant tax consequences if the debt was used to fund
capital allowance deductions. Termination includes repayment, refinancing and debt forgiveness.

Division 7A — an assignment of debts can give rise to debt forgiveness, where the creditor is a company and the
assignee will not exercise the assigned right. This may give rise to a deemed dividend under Division 7A.

Debt forgiveness provisions — an assignment of debts can give rise to debt forgiveness. This may trigger the debt
forgiveness provisions and therefore could result in a reduction of losses or the tax cost of assets.

Debt/equity swaps — a debt/equity swap may give rise to the application of numerous tax provisions, including
the possible application of the share tainting provisions and the debt forgiveness provisions.
Year-end planning considerations
d
Consider rationalising all group loans prior to year-end to simplify the loan structure and the
management of Division 7A loans around the group.
d
Consider whether a loan rationalisation could result in a debt forgiveness. Consider whether there are
any other tax issues that may arise from a loan rationalisation.
Interest deductibility
Interest expenses can form a major part of a taxpayer’s deductions for an income year. Where this is the case, the
taxpayer should carefully consider the deductibility of the interest and any tax planning items that may be available for
prepaying interest (see Section 4O).
Questions concerning the deductibility of interest can occur in the following circumstances:

The costs are incurred before the project has started to earn income;

The deductions exceed any likelihood of income to be derived from the property financed;

Interest is incurred after the income producing asset has been disposed of or the business has ceased;

An entity obtains financing to repay partnership capital or UPEs;

Interest is incurred on perpetual debt or convertible interests;

Interest is incurred on an instrument that is not debt under the debt/equity rules (see Section 7F);

The loan is used to finance an asset that is provided to a related party at less than market rates;
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
Interest is paid to a non-resident and withholding tax has not been remitted; and

You do not satisfy the thin capitalisation provisions (see Section 11R).
Furthermore, the prepayment of interest expenses close to year-end is often considered as an option to reduce the 30
June taxable income position. However, you should consider closely whether the prepayment of such expense amounts
can be deductible as paid or is only deductible over time (see Sections 4O and 5M).
It is important to note that the ATO has indicated that it will paying close attention to interest deductions claimed for
the private proportion of loans97.
Year-end planning considerations
d
Consider whether interest deductions can be claimed for the year.
d
If you are considering a prepayment of interest, ensure that the prepayment will be deductible as
intended (see Sections 4N and 5M).
d
Ensure that interest deductions are not claimed for the private proportion of loans.
Capital protected borrowings
Where a product (being a direct or indirect interest in a share, unit or stapled security) involves capital protection to
the taxpayer in respect of a borrowing (for example, an embedded put option that ensures the investment value is
protected or where debt is secured only against the value of the investment), this may result in a component of the
interest expense being reclassified as a capital protection component.
Where the investor holds the underlying asset on capital account, the capital protection amount may not be
deductible. You should carefully consider whether you hold any such products (or are looking at investing into any
products before year-end), as these provisions may apply to deny deductions for 30 June 2016. This should be
considered where a deductible prepayment of interest is being considered close to year-end.
Year-end planning considerations
d
Consider whether any of your investments in shares, units or stapled securities are capital protected
products and whether any of your interest deductions for the year are at risk of being treated as capital.
Taxation of financial arrangements — general
The TOFA provisions apply to “financial” arrangements (for example, loans, derivatives, foreign currency). The
provisions aim to apply a systemic set of rules to bring to account gains and losses on such arrangements.
TOFA can apply to taxpayers that that have an aggregated turnover of $100 million or more, gross assets greater than
$300 million or financial assets greater than $100 million. The rules also apply to a taxpayer where the arrangement is a
qualifying security (for example, has deferred interest and has an issue life of greater than 12 months) 98. A small
taxpayer can also elect to apply the TOFA provisions.
97
98
ATO website: Building confidence.
Income Tax Assessment Act 1997 (Cth) s230-455.
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TOFA applies an accruals regime, so that gains (for example, interest income) and losses (for example, interest
expense) are accrued where they are sufficiently certain. Accordingly, TOFA can change the basis for assessing returns
to taxpayers. In addition, TOFA can allow a taxpayer to make an election to use one or more of four elective methods
for recognising gains and losses (See Section 10E below.)
Being taxed under the TOFA rules may offer advantages as compared to the ordinary provisions. For example dividends
paid on preference shares that are debt interests under the debt/equity rules may be deductible on an accruals basis
under TOFA, while they are only deductible on a cash basis outside of TOFA.
However, TOFA also requires interest income to be accrued. Accordingly, this will mean that unearned interest income
would need to be brought to account at year-end under TOFA.
The Government announced in the 2016/17 Federal Budget that the TOFA regime will reformed to remove the majority
of taxpayers from its scope, decrease compliance costs and provide simpler rules and more certain outcomes for those
subject to the rules. The new rules will apply to income years on or after 1 January 2018.
Year-end planning considerations
d
Consider whether TOFA applies mandatorily to your entity for the 30 June 2016 income year and the
impact it may have on financial type arrangements (for example, loans, bank accounts, swaps, debts,
deferred settlements).
d
Consider whether it may be preferable to elect into the TOFA regime due to the treatment of
arrangements under TOFA as compared to provisions outside of TOFA (for example, preference share
deductions).
TOFA — elections
The TOFA provisions allow taxpayers to make a number of elections that align their taxation outcomes with their
accounting outcomes. These elections include: (1) an election to allow small taxpayers to be taxed under TOFA; (2) an
election to use the tax hedging provisions; (3) an election to use the fair value accounting method; (4) an election to
use the forex retranslation accounting method; and (5) an election to book gains and losses on financial arrangements
for tax purposes in accordance with the accounts.
The elections are once off (i.e. if the election was made for the 2015 income year, the election would also apply to the
2016 and subsequent income years) and require a number of conditions to be satisfied (for example, audited
accounts).
Where such an election has not previously been made, the elections will need to be made by 30 June 2016 if the
election is to apply for the 30 June 2016 income year. Accordingly, this means your consideration of TOFA should be
performed before this date.
Year-end planning considerations
d
TOFA allows a number of elections to align tax with accounting. Such elections need to be made before
30 June 2016.
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TOFA — consolidated groups
Changes have been introduced that deem the head company to acquire the TOFA liabilities of the joining entity.
Accordingly, this sets a starting value for those TOFA liabilities in the head company. This means that a deduction
would be denied for the subsequent settlement of an out-of-the-money derivative, to the extent of its value at the
time the entity joined the tax consolidated group.
Year-end planning considerations
d
Where a taxpayer has joined a consolidated group, ensure that TOFA liabilities acquired by the head
company are adjusted appropriately (which may deny a deduction for settlement of the liabilities or may
prevent a gain from accruing on settlement).
TOFA — compliance issues
Taxpayers should also be aware that the ATO is conducting targeted implementation reviews of TOFA focusing on
identifying taxpayers who meet the TOFA thresholds to ensure they are applying the TOFA rules correctly (for example,
the validity of elections made under TOFA, compliance with the hedging method recording requirements and the
appropriate application of the TOFA tax-timing methods).
Year-end planning considerations
d
Ensure that you have appropriately considered your TOFA positions for the 30 June 2016 income year as
the ATO are conducting compliance activity through TOFA questionnaires.
FATCA compliance for investment entities
Australian has implemented legislation and signed an intergovernmental agreement (“IGA”) which requires investment
entities in Australia to comply with FATCA of the US. FATCA is a piece of US legislation intended to attack US taxpayers
who fail to include foreign income on their US tax returns. The Australian legislation and IGA applies irrespective of
whether the investor is a US resident, or whether the investments held are US investments. It is highlighted that it is
therefore possible for an Australian investment company or trust to be caught up within these rules as a financial
institution even if their only investments are in Australian managed funds.
The Australian legislation requires investors to complete forms to identify their status for FATCA purposes. It also
requires an entity that is defined as a financial institution to report information to the ATO on an annual basis. Where
an entity is a financial institution, such entities may also be required to register in the US. There are strict penalties for
non-compliance, which can also result in an entity being tagged as a non-complying entity. There are also due diligence
requirements and reporting requirements (which are due to the ATO by 31 July 2016).
Year-end planning considerations
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d
If you have been asked to “certify” your FATCA status or produce a W8-BEN form, it is likely that FATCA
could apply to your entity. You should carefully consider your FATCA obligations.
d
If you are a financial institution (as defined in the IGA), you need to ensure that you have considered
FATCA for 30 June 2016, including: registration requirements; due diligence procedures; and reporting
requirements (which are due to the ATO by 31 July 2016).
Year-end tax planning toolkit – 2015/16
Financing structures
A large number of changes have occurred during the 30 June 2016 income year with respect to financing structures.
This includes: (1) new legislation to simplify taxation of managed investment trusts, which can potentially apply from as
early as 1 July 2015; (2) amendments to the Venture Capital provisions to provide additional tax incentives on
investments into ESVCLPs; (3) the introduction of tax incentives for share capital acquired by certain sophisticated
investors in qualifying ESICs; (4) legislation that supports the creation of retail crowd sourced equity finance; (5) the
introduction of a funds passport regime with Asia; and (6) a proposed new collective investment vehicle regime for
companies and limited partnerships.
Some of the tax concessions can apply to investments made prior to 30 June 2016 (e.g. an investment in certain
ESVCLPs), while other tax concessions will apply from 1 July 2016 (e.g. an investment in an ESIC). There are also a large
number of traps that can occur in applying the legislation. For example, an investment in an ESIC via a unit trust can
trigger a capital gain (under CGT event E4). Due to the complexity in the nature of these provisions, we would
recommend you seek appropriate advice in considering any of these proposed options.
Year-end planning considerations
d
If you are considering creating a new investment structure, or considering investing in such a structure,
consider whether the new AMIT rules, new ESVCLP rules, new ESIC rules, new crowdfunding rules, new
funds passport rules, or the new CIV rules could provide you with benefits.
d
As tax concessions apply differently before and after 1 July 2016 for both the ESIC and ESVCLP regime,
you should consider the timing of investments carefully.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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International tax
General
Generally, international tax issues are complex and the application of various provisions can have a significant impact
on your 30 June results. When dealing with international tax issues, it is always necessary to consider whether the
relevant entity is a resident or non-resident for Australian tax purposes. It is also important to consider the entity’s
inbound and outbound taxation issues for the income year. Where foreign tax may be payable, it is always prudent to
seek foreign tax advice.
ATO compliance activities
International tax issues are becoming an increasingly important focus area for ATO compliance activity. Various
taxpayer alerts have been released in the past financial year that concern international dealings and cross-jurisdictional
activity. They include:

TA 2015/5: Arrangements involving offshore procurement hubs99;

TA 2016/3: Arrangements involving related party foreign currency denominated finance with related party cross
currency interest rate swaps100; and

TA 2016/4: Cross-border leasing arrangements involving mobile assets 101.
In addition, the Government announced in the 2016/17 Budget that a new ATO Avoidance Taskforce will be created to
monitor and closely scrutinise multinational tax avoidance. It appears that large multinationals, large private groups,
and high net worth individuals, will be the main focus of the ATO taskforce.
If you operate cross jurisdictionally or hold various assets overseas, you should review your tax affairs and consider
making voluntary disclosures prior to the establishment of the ATO taskforce.
Year-end planning considerations
d
You should carefully consider whether your arrangements with international parties are likely to be
scrutinised by the ATO.
Non-resident individual tax rates
The following table outlines the tax rates that apply to non-resident individuals for the 30 June 2016 income year. As
noted at Section 5C, non-resident individuals are not required to pay the Medicare levy, but may be subject to the TBR
levy.
Taxable Income
Tax Payable
0 — $80,000
32.5%
$80,000 — $180,000
$26,000 + 37% of excess over $80,000
$180,001+
$63,000 + 45% of excess over $180,000
99
Taxpayer Alert TA 2015/5.
Taxpayer Alert TA 2016/3.
101 Taxpayer Alert TA 2016/4.
100
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Tax residency and source
On an annual basis, entities should consider their tax residency as this can be an issue of dispute with the ATO. For
individuals, trusts and companies, the residency of a taxpayer is dependent on many factors. For example, a company
may need to consider its place of incorporation as well as where central management and control is located. For treaty
purposes, specific tie-breaker rules can apply.
The consequence of a taxpayer being a resident is that the entity will be taxed on its worldwide income, subject to
available exemptions (for example, branch profits, non-portfolio dividends). A non-resident taxpayer will only be taxed
on its Australian sourced income.
Whether an amount is sourced in Australia is a question of fact and degree. The ATO has released a taxation
determination102 providing rules for determining the source of gains from the disposal of shares. However, even where
income is sourced in Australia, Australia’s taxing rights may be limited by a Double Taxation Agreement (“DTA”) that is
in force.
Furthermore, different tax provisions can apply depending on whether an entity is a resident or non-resident. As a part
of your review, you should always also consider the effect of the application of a DTA.
Year-end planning considerations
d
You should carefully consider whether the relevant entity is a tax resident for 30 June 2016 and the tax
implications that may follow.
d
Where the taxpayer is a non-resident, you should carefully consider the source of income (subject to any
limitation imposed by a DTA).
Temporary resident concessions
Under Australian income tax laws, a foreign individual may be considered a resident where they reside in Australia or
where they are in Australia for at least 183 days. Subject to DTAs, this could result in the individual’s worldwide income
being taxed in Australia.
A concession can apply if the individual is considered a temporary resident individual. Generally, an individual can be a
temporary resident if that person holds a temporary visa granted under the Migration Act 1958 and the person (and
their spouse or de facto) is not an Australian resident within the meaning of the Social Security Act 1991. Where the
provisions are satisfied, most foreign income (other than employment income), most capital gains (except for taxable
Australian property) and interest that has been subject to withholding tax are considered not assessable and there is a
relaxation of some record keeping rules.
According to a taxation determination103, a New Zealand citizen who was in Australia and then departs Australia will
not lose their temporary resident status (when he or she returns to Australia).
102
103
Taxation Determination TD 2011/24.
Taxation Determination TD 2012/18.
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Year-end planning considerations
d
If you are a citizen of a foreign country and visiting Australia, you should consider whether this will make
you a resident of Australia.
d
Where you are a resident of Australia, you should consider whether there is an opportunity to apply the
temporary resident concession to your income for 30 June 2016.
d
Where you are a citizen of New Zealand, consider the potential impact TD 2012/18 may have on your
temporary resident status.
Changing residence
When a taxpayer ceases to be an Australian resident for tax purposes during the income tax year, a CGT event (i.e. a
deemed disposal) can occur for all CGT assets that are not taxable Australian property. Where the taxpayer is an
individual, a choice can be made to treat all assets as being taxable Australian property (subject to limitations placed on
Australia’s taxing rights under a DTA).
When a taxpayer becomes an Australian resident for tax purposes, special rules can apply to treat non-taxable
Australian property as being acquired at that time, generally for its market value. This can also occur where an
individual ceases to be a temporary resident but remains an Australian resident.
Special rules also apply in respect of financial arrangements under TOFA that are held by the taxpayer at the relevant
changeover time. Accordingly, it is critical that you consider the tax consequences for all of your assets on a possible
change in residency.
Year-end planning considerations
d
Consider the potential tax implications of a change in residency of the relevant taxpayer, if there is a risk
that the taxpayer has changed residency during the year.
Controlled foreign company regime
The CFC regime can apply to attribute income derived by a CFC to the Australian investor. The provisions operate
where a foreign company is controlled by an Australian resident(s). Accordingly, in some cases, it can apply to
Australian taxpayers that hold a minority interest in a CFC.
The complexity of these rules makes it easy for taxpayers to overlook whether they have invested in a CFC and the tax
consequences associated with the investment. The consequence of an incorrect assessment can be quite substantial
where the underlying entity has income that may be attributable under these rules.
Year-end planning considerations
d
96
Where you have foreign investments, you should consider the application of the CFC provisions — even
where you only have a minority interest in the relevant entity.
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Transfer pricing — general
Australia’s transfer pricing rules apply to all taxpayers that have international dealings and can apply in some
circumstances to reconstruct all your international dealings (for example, loans, service fees, transfers of trading stock)
if these are deemed to be inconsistent with the arm’s length principle.
The rules interpret the arm’s length principle in accordance with international (i.e. OECD) guidance and ensure that the
transfer pricing articles contained in Australia's DTAs can operate independently of our unilateral domestic transfer
pricing rules.
Additional funding has been provided for the ATO to increase compliance activity targeted at restructuring activity that
facilitates transfer pricing opportunities. With the information provided to the ATO by the IDS (see Section 11K) and the
extended powers given by the amendments to the transfer pricing rules, the ATO is in a strong position to challenge
pricing methodologies adopted by taxpayers for their international related party dealings.
Taxpayers should review and/or consider formalising their inter-company services, sales/distribution and loan
agreements before year-end. In particular, where period end ‘true-ups’ (i.e. adjustments) are required to give effect to
any profit based transfer pricing methods, the relevant service/purchase/sale agreements should incorporate
provisions specifically acknowledging that such periodic true-ups/adjustments have been agreed between the parties.
Year-end planning considerations
d
If you have international dealings, you should ensure that you have appropriately considered Australia’s
transfer pricing provisions.
Transfer pricing — contemporaneous documentation
Under Australia’s transfer pricing rules, Australian taxpayers are not required to prepare contemporaneous transfer
pricing documentation. However, they are precluded from receiving relief from penalties in the event of an ATO
adjustment if they do not have contemporaneous documentation in place at the time of lodging their income tax
return.
In light of the current focus on international base erosion and profit shifting (i.e. BEPS), this is another area where
taxpayers should expect an increased level of scrutiny, and thus taxpayers should ensure that their transfer pricing
documentation is both contemporaneous and robust.
Pitcher Partners can assist you to develop contemporaneous transfer pricing documentation.
Year-end planning considerations
d
If you have international dealings, you should ensure that you have appropriately considered Australia’s
transfer pricing provisions.
d
Ensure that you have adequate and appropriate transfer pricing documentation in place and that the
transfer pricing approach taken is fully and accurately reflected in the IDS for the 30 June 2016 income
year.
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Transfer pricing — simplified record keeping
The ATO has developed some simplified record keeping options that enable certain taxpayers to minimise some of the
record-keeping and compliance costs associated with complying with Australia’s transfer pricing provisions 104.
These options, can be broadly classed into two categories. The first category includes options for particular classes of
taxpayers (i.e. distributors and small business taxpayers). The second category includes options for particular classes of
international related party dealings, including transactions based on certain materiality levels, intra-group services,
management and administrative services, technical services and certain inbound low level loans.
Each of the options requires taxpayers to self-assess their compliance with Australia’s transfer pricing rules. Pitcher
Partners can assist you in accessing and implementing these simplified measures.
Year-end planning considerations
d
Consider whether you are eligible to apply one or more of the simplified transfer pricing record keeping
options. If so, take action to record your self-assessment of your eligibility for the option.
International dealings schedule
Entities with $2 million or more of international dealings are required to complete an IDS. The $2 million threshold
includes the value of any property/services transferred or the balance of any loans.
As the IDS requires significant disclosures to be made, we recommend that you contact your Pitcher Partners
representative if you are required to complete this form for the 30 June 2016 income year. Completion of this form
should be done contemporaneously with preparing your transfer pricing documentation. Due to its complexity and the
requirement for transfer pricing documentation, preparation of the IDS cannot be left until the lodgement of your tax
return.
Year-end planning considerations
d
Consider the information required to complete the IDS for the 30 June 2016 income year well in advance
to lodging your return. Ensure that your IDS response is consistent with your transfer pricing
documentation.
Conduit foreign income
The CFI provisions enable an Australian company to make tax-free distributions of certain foreign income to non-resident
shareholders in the form of unfranked dividends that are not subject to withholding tax.
Examples of CFI income that can be flowed through an Australian company include: (1) non-portfolio dividends105; (2)
foreign equity distributions106; (3) foreign branch profits107; and (4) non-portfolio capital gains108. Where other income
was subject to foreign tax the grossed up value of the income may also be considered CFI (i.e. the amount on which no
Australian tax has been paid). The CFI provisions also require consideration of offsetting expenses in determining the
net amount that may be distributed. It is also possible to be able to access the CFI concession where the Australian
entity is owned by a trust, where the trust distributes the income to a non-resident.
104
ATO website – Simplifying transfer pricing record keeping.
Income Tax Assessment Act 1997 (Cth) sub-div 768-A.
106 Income Tax Assessment Act 1997 (Cth) s768-5.
107 Income Tax Assessment Act 1936 (Cth) s23AH.
108 Income Tax Assessment Act 1997 (Cth) s768-505.
105
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Certain time restrictions apply in respect of when the CFI must be paid to the non-resident (typically the Australian
company must on-pay the CFI in a distribution made before it is due to lodge its income tax return).
Year-end planning considerations
d
Where the Australian company is a conduit between two foreign entities (i.e. it is owned by a foreign
entity or is owned by a trust that has a foreign resident beneficiary) and the Australian company also
owns a foreign company, consider whether you can access the CFI exemption to reduce Australian tax
paid.
Foreign income tax offset
Where the FITO rules apply, a taxpayer can claim a tax offset for the foreign tax paid on their income against their
Australian tax paid. Under the current rules, FITOs cannot be carried forward. Accordingly, excess FITOs can (easily) be
wasted if there is inappropriate planning or consideration.
If you expect there to be excess FITOs in a year (i.e. in this year or another year), you should consider whether there is
other lowly taxed foreign income that could be derived (or brought forward) to offset against that excess.
As FITOs do not give rise to franking credits, strategies to maximise FITOs should also be compared with top-up tax
payable on the payment of the profit to shareholders through a dividend.
Year-end planning considerations
d
Consider your FITO position for 30 June 2016 to determine whether there are any excess FITOs that will
be wasted. Strategies can be put in place to help reduce FITO wastage.
d
Beware of flowing through FITOs to loss trusts or loss companies, which may result in wastage of the tax
offset
Exempt type distributions and gains from non-residents
Distributions from a non-resident entity may be exempt or NANE income of an entity. These distributions include: (1)
branch profits received by a company109; (2) dividends where there is an attribution account surplus 110; (3) nonportfolio dividends received by a company111; and (4) capital gains made on the disposal of a non-portfolio active nonresident shareholding112. In order to qualify for these exemptions, certain conditions may need to be satisfied.
Checking whether distributions received qualify as NANE income of an entity is especially important for the year ending
30 June 2016 as the rules covering non-portfolio dividends/foreign equity distributions changed during the year. For
distributions after 16 October 2014, if: (1) an Australian corporate tax entity receives a foreign equity distribution from
a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and (2) the
Australian corporate tax entity holds a participation interest of at least 10% in the foreign company, the distribution is
NANE income for the Australian corporate tax entity.
In addition, the relevant rules look to whether an Australian corporate tax entity holds an equity interest for the
purposes of the debt/equity provisions and not whether they just have an interest which is legally a share.
109
Income Tax Assessment Act 1936 (Cth) s23AH.
Income Tax Assessment Act 1936 (Cth) s23AI and s23AK.
111 Income Tax Assessment Act 1997 (Cth) sub-div 768-A.
112 Income Tax Assessment Act 1936 (Cth) sub-div 768-G.
110
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Year-end planning considerations
d
Consider whether non-resident distributions (including capital reductions) can or have been made to an
Australian entity in a tax free manner.
Sale of assets by non-residents or temporary residents
The sale of a CGT asset by a non-resident may not be taxable where the asset is not taxable Australian property.
Generally, taxable Australian property includes land, land rich entities, assets used by a permanent establishment
(“PE”) and certain assets held by non-residents on changing residency. (Note, where the non-resident has a PE in
Australia this can deem a number of assets as being taxable Australian property).
These provisions can apply to indirect sales of land by non-residents or temporary residents. However, this will not
necessarily mean that a capital gain will be taxable in Australia. A review of the relevant DTA is required to determine
Australia’s taxing rights. You should consider these provisions carefully if you are a non-resident or a temporary
resident disposing of Australian property. Please note that the CGT discount for non-resident and temporary resident
individuals is not available on capital gains accrued after 7:30 pm (AEST) on 8 May 2012 on taxable Australian property
(see Section 9C).
It is highlighted that the CGT exemption from the sale of non-taxable Australian property does not apply to revenue
assets. However, careful consideration of the DTA should also occur in this alternative case113.
Furthermore, from 1 July 2016 a purchaser of certain Australian property assets from a foreign resident vendor (where
the market value of the property asset is greater than $2 million) will be required to withhold and pay 10% of the
purchase price of such property to the ATO.
Year-end planning considerations
d
Where non-residents or temporary residents are considering a sale of Australian assets, you should
consider whether such assets are taxable Australian property.
d
Non-residents and temporary residents should consider obtaining a market valuation of their taxable
Australian property held at 8 May 2012 in order to claim a 50% discount on gains accrued prior to that
date.
Deductions in earning foreign income
Where deductions are incurred in earning exempt income or NANE income, such deductions may be denied. However,
there are two exceptions for foreign income. The first is in relation to previously attributed income, where deductions
are not precluded due to such income not being assessable 114. The second is in relation to debt deductions incurred in
respect of previously attributed income and foreign equity distributions paid to a company115. Note that interest
deductions relating to branch income are not deductible.
Where expenses do not meet the above exceptions, they could be denied as a deduction. Examples where this may
occur may be overhead expenses attributable to foreign operations or black hole expenditure deductions where the
group owns a foreign operation.
113
Taxation Determination TD 2010/21 and Taxation Determination TD 2011/25.
Income Tax Assessment Act 1936 (Cth) s23AI(2) and 23AK(10).
115 Income Tax Assessment Act 1997 (Cth) s25-90.
114
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Year-end planning considerations
d
Where there is a foreign operation in the group that produces exempt or NANE income to the group,
closely consider whether any deductions incurred for the year will be denied.
Deemed dividends from non-resident CFCs
Integrity provisions can operate to treat certain transactions made by a CFC as a deemed dividend to the shareholder
or associate116. These provisions are similar to Division 7A, however they take precedence to Division 7A and can
operate even where the transactions are at an arm’s length price.
Where the group has a CFC, related party transactions should be reviewed to determine whether the provisions may
apply to treat such transactions as a deemed unfranked dividend. There is no ATO discretion in respect of such
provisions. Where the ATO is not notified of the deemed dividend (by lodging the return or within 12 months of yearend), the provisions can operate to deny access to the FITO provisions and attribution credit provisions. The provisions
do not contain an exemption for benefits provided to other companies. However, limited relief may be available if the
benefit is provided to a shareholder in certain circumstances 117.
Year-end planning considerations
d
Closely consider related party transactions where benefits are provided by a CFC to a shareholder or
associate of the shareholder.
Thin capitalisation
Thin capitalisation rules are designed to ensure that multinationals do not allocate an excessive amount of debt to their
Australian operations. The provisions can apply to Australian entities that have foreign controlled operations and/or
investments (outbound) or to Australian entities that are foreign controlled entities (in-bound). Where the provisions
apply, deductible borrowings can be capped, whereby debt deductions (i.e. interest) on excess borrowings can be
denied.
The thin capitalisation rules do not apply where an entity (together with its associate entities) has debt deductions of
$2 million or less for an income year.
In the case of outward investors, there is also an exception where the outward investing entity (together with its
associates) has 90% or more of the total average value of all its assets represented by Australian assets.
Where the thin capitalisation rules apply, the safe harbour debt to equity ratio of 1.5:1 is generally used to determine
whether the rules are satisfied. This means that assets must be funded by at least 40% equity and no more than 60% by
way of debt. Where the safe harbour ratio is breached, taxpayers may be able to look at alternative methods of
satisfying the thin capitalisation rules (for example, the worldwide debt test).
In addition, it is important to note that UPEs may need to be considered when applying the thin capitalisation rules.
There are a number of actions that may be taken to improve a taxpayer’s thin capitalisation position before 30 June
2016. These include refinancing interest bearing debt with certain complying non-interest bearing debt, injecting
further capital into the taxpayer before 30 June 2016, or revaluing assets within the acceptable rules contained in the
provisions. However, consideration should be given to integrity provisions (See Section 13) that may also need to be
complied with prior to adopting such strategies.
116
117
Income Tax Assessment Act 1936 (Cth) s47A.
Income Tax Assessment Act 1936 (Cth) 23AI or Income Tax Assessment Act 1997 (Cth) s768-5.
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Year-end planning considerations
d
Perform high-level calculations to see whether debt deductions exceed $2 million (for both inward and
outward investors) and whether the value of Australian assets represents at least 90% of all worldwide
group assets for the year (only for outward investors who fail the $2 million test) to determine whether
the thin capitalisation rules are likely to apply.
d
Where the thin capitalisation measures are likely to apply, perform a high-level thin capitalisation
calculation based on 31 May 2016 figures to determine whether there may be a denial of debt
deductions for the 30 June 2016 year.
d
Consider various strategies to improve your thin capitalisation position before 30 June 2016, taking into
account the various integrity provisions that apply.
Deductions where withholding tax payable is not paid
For certain payments made to a non-resident (for example, interest, royalties, construction payments), withholding tax
may be payable. Where an entity fails to withhold and pay the withholding tax to the ATO, a deduction may be denied
for the relevant payment to the non-resident. Accordingly, you should ensure that you have considered the
withholding tax obligations in relation to payments made for the 30 June 2016 income year.
Year-end planning considerations
d
Ensure that you have complied with the withholding tax provisions so that deductions for payments to
non-residents (for example, interest, royalties and construction payments) are not denied for the income
year.
Non-resident beneficiaries
If a trust has a non-resident beneficiary that is presently entitled to the income of the trust, the trustee will be assessed
on that non-resident beneficiary’s share of the net income of the trust. Where the income consists of interest,
dividends, royalties or CFI, special withholding tax rates may apply. Due to the decision in the Bamford case118 and the
ATO’s view on streaming (refer to Section 6H), this may impact on your ability to stream such income to non-residents.
The ATO has indicated that while it still may be possible to stream income from a trust that is subject to the
withholding tax rules, this may give rise to anomalous results 119.
The full 50% CGT discount is not available on capital gains made by non-residents and temporary residents which
accrue after 8 May 2012 (see Section 9C).
118
119
Commissioner of Taxation v Bamford [2010] HCA 10.
Refer to ATO Interpretative Decision ATO ID 2002/93 and ATO Interpretative Decision ATO ID 2002/94.
102
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Year-end planning considerations
d
Where trusts in the group distribute income to non-resident and temporary resident taxpayers, consider
the income tax implications of those distributions, including withholding tax issues.
d
Where streaming is required in respect of certain classes of income, consider carefully whether income
subject to the withholding rules can be streamed to non-residents and temporary residents (for example,
interest income and unfranked dividends), given the ATO’s views on streaming.
d
The CGT discount can be denied to non-residents and temporary residents on capital gains flowing
through trusts. You need to consider these rules if you are distributing capital gains to non-residents and
temporary residents.
Non-resident trusts and other offshore assets
An interest in a foreign trust may give rise to a number of taxation issues including the application of the transferor
trust provisions or the deemed present entitlement provisions in section 95A(2) (where the trust is a fixed trust at law).
These provisions may deem you to have an amount of assessable income for the 30 June 2016 income year attributable
to the foreign trust. Therefore, you should consider the application of these provisions closely if you have had any
interest in a foreign trust during the income year.
Furthermore, you should also closely consider these provisions where either: (1) non-resident relatives control a
foreign trust (i.e. whereby the class of beneficiaries may be wide enough to encapsulate Australian residents); or (2)
you have recently changed residency to being an Australian resident (i.e. which may result in you having an interest in a
foreign trust).
Year-end planning considerations
d
Consider whether you have an interest in a foreign trust for the 30 June 2016 income year. You may be
required to include income in your tax return under the transferor trust provisions or the deemed
entitlement provisions (where the trust is a fixed trust at law).
Offshore assets and ATO disclosures
Whilst the ATO does not have a specific initiative to allow eligible taxpayers to come forward and voluntarily disclose
unreported foreign income and assets it is less likely to seek to apply fraud or evasion to the taxpayer or refer a matter
for criminal prosecution if a taxpayer makes a voluntary disclosure.
If you are concerned about your treatment of foreign income in the past, Pitcher Partners can assist you in reviewing
your position and making a voluntary disclosure.
Year-end planning considerations
d
If you have offshore assets or investments that you have not previously disclosed to the ATO, you should
consider making a voluntary disclosure to minimise penalties and the risk of criminal prosecution for tax
avoidance.
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103
Investment manager regime
The new IMR regime is in effect for the year ending 30 June 2016 120. Broadly, the new regime is designed to attract
foreign investment to Australia and promote the use of Australian fund managers by removing tax impediments to
investing in Australia.
The IMR applies to foreign entities that invest directly in Australia (direct investment concession) or investing via an
Australian fund manager (indirect investment concession). An entity may independently qualify for the direct
investment concession or the indirect investment concession. Whilst the tax consequences of either concession are the
same, the indirect investment concession applies to a broader range of transactions.
Year-end planning considerations
d
If you are a non-resident investor, you should consider the application of the new IMR regime for the
year ending 30 June 2016.
Managed investment trust fund payments
For the 30 June 2016 year, the withholding tax rate for fund payments made by a MIT to a resident of an EOI country is
15%, while it is 30% for all other non-EOI countries.
From 1 July 2012, MITs that hold one or more newly constructed energy-efficient commercial buildings (i.e. 5-star
Green Star rating or a predicted 5.5 star NABERS (National Australian Built Environment Rating System) rating) are
eligible for a 10% withholding tax rate on fund payments made to foreign investors residing in countries with which
Australia has effective EOI arrangements. The reduced withholding rate will only apply where construction of the
building commences on or after 1 July 2012.
Year-end planning considerations
d
The withholding tax rate on fund payments to non-residents during the 2016 income is equal to 15% for
EOI countries and 30% for non-EOI countries. Ensure that you comply with the withholding tax rates and
obligations for MITs in respect of the 30 June 2016 income year.
d
Consider the ability to access the reduced 10% withholding tax rate for energy efficient buildings
constructed after 1 July 2012.
Treatment of foreign exchange gains and losses
The treatment of foreign exchange gains and losses is considered in Section 4L of the document.
120
Tax and Superannuation Laws Amendment (2015 Measures No. 1) Bill 2015.
104
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Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Superannuation, GST and state taxes
Superannuation
Deductions for superannuation contributions
An employer must contribute to a complying superannuation fund or retirement savings account, in respect of an
employee, before year-end (i.e. 30 June) in order to obtain a tax deduction for superannuation contributions.
The SG contribution rate for the 30 June 2016 financial year remains unchanged at 9.5% of an employee’s “ordinary time
earnings” (“OTE”). An employer does not have to make SG contributions in respect of employee’s salary over a “maximum
salary base”. For the year-ending 30 June 2016, the maximum salary base is $50,810 per quarter.
There are essentially two types of contributions. Concessional contributions (i.e. pre-tax/employer contributions) are
deductible to the payer and are taxable in the receiving superannuation fund at 15%. Non-concessional contributions
(i.e. after-tax) are not deductible to the payer and are not taxable when received by a superannuation fund. Employers
cannot make non-concessional contributions.
Year-end planning considerations
d
To claim a deduction for superannuation contributions, they must be made (i.e. received by the
superannuation fund) on or before 30 June 2016.
Superannuation guarantee
Employers have to make a contribution of 9.5% of each employee’s OTE and have to pay this amount within 28 days of
the end of the quarter. An employer who fails to do this will have to pay a non-deductible SG charge — comprising of a
SG shortfall, interest and an administration fee.
Year-end planning considerations
d
If you are an employer, ensure you pay the required compulsory SG on each employee’s OTE within 28
days of the end of each quarter. It is important to note that certain awards, agreements or other
contractual arrangements may impose an obligation to make contributions at a greater frequency (for
example, monthly).
d
Consider if you have to make SG payments in respect of bonuses and allowances paid to employees and
payments made to non-employees (for example, contractors, consultants or members of the board who
are not paid via the payroll).
Concessional contribution cap
Each individual has caps on the amount of contributions that can be made by them or for them each year before tax
penalties are applied. The base annual concessional contribution cap for the 2016 income year is $30,000. Individuals
aged 49 and over on 1 July 2015 have a concessional contribution cap of $35,000.
The Government announced in the 2016/17 Budget that the annual concessional contribution cap will be reduced to
$25,000 from 1 July 2017.
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Year-end planning considerations
d
Make sure you have complied with the annual concessional contribution cap.
d
Consider whether additional concessional contributions should be made before the reduction in the
concessional contribution cap on 1 July 2017.
Non-concessional contribution cap
A lifetime cap for non-concessional contributions of $500,000 was announced by the Government in the 2016 Federal
Budget. The lifetime cap replaces the annual non-concessional contribution cap of 180,000 (or $540,000 at any time
across a fixed three-year period)121.
Non-concessional contributions made from 1 July 2007 will count towards the lifetime cap. If you had already exceeded
the $500,000 cap at 7.30pm on 3 May 2016, you will not be required to remove the excess and no penalty will apply.
Non-concessional contributions made after 7.30pm on 3 May 2016 that exceed the $500,000 cap will need to be
removed or a penalty will apply.
Year-end planning considerations
d
Make sure you have complied with the non-concessional contribution cap.
d
If you are planning related party asset transfers to a superannuation fund you should consider the rules
covering superannuation funds as they may impact on when the transfer needs to be completed or how
the transfer needs to be structured to comply.
d
Consider the introduction of the $500,000 lifetime cap for non-concessional contributions, and ensure
the cap is not breached with contributions made after 3 May 2016.
Personal superannuation contributions
Individuals can make concessional contributions. Currently, an individual is eligible for a tax deduction for personal
superannuation contributions when less than 10% of their income (being assessable income plus reportable fringe
benefits plus reportable employer contributions) is from employment activities.
An individual must lodge a valid “section 290-170 notice” with the receiving fund within specified time periods. The
notice tells the fund of the individual’s intention to claim a deduction for a specified part of their contributions. The
fund must acknowledge the notice in writing before the individual can claim the deduction.
It was announced by the Government in the 2016/17 Budget that there will be changes to the deductibility of personal
superannuation contributions and to the annual concessional cap from 1 July 2017.
There are penalties for breaching the relevant caps (see Section 12I).
121
Budget Paper No.2 – Superannuation Reform Package – Introduce a lifetime cap for non-concessional superannuation
contributions – Page 27.
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Year-end planning considerations
d
Consider whether the individual is eligible to make a deductible concessional contribution before 30 June
2016 and ensure notice requirements are met within time.
Low income superannuation contribution
The low income superannuation contribution (“LISC”) is a government payment of up to $500 paid into the
superannuation account of an eligible taxpayer with an adjusted taxable income of up to $37,000. The LISC is designed
to refund some of the tax paid on the concessional contributions of low income earners.
Year-end planning considerations
d
If you are a low income earner, consider making a contribution to your superannuation fund before 30
June 2016.
Low income spouse superannuation contribution
Taxpayers that make superannuation contributions on behalf of their low income spouse (married or de facto) may be
able to claim a tax offset. The contributing taxpayer will be entitled to a tax offset of up to $540 per year where their
spouse’s income was less than $13,800.
Year-end planning considerations
d
If you have a spouse with a low income, consider whether contributions made to their superannuation
account will be eligible for the tax offset.
Cap on superannuation transfers into retirement products
From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of
accumulated superannuation an individual can transfer into the retirement phase. Subsequent earnings on these
balances will not be restricted122.
Where the individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in
an accumulation phase account (where earnings will be taxed at the concessional rate of 15 per cent). Members
already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to
$1.6 million by 1 July 2017.
A tax on amounts that are transferred in excess of $1.6 million cap (including earnings on these excess transferred
amounts) will be applied. We believe taxpayers should commence consideration of the implications of these measures
as soon as possible.
122
Budget Paper No.2 – Superannuation Reform Package – Introduce a $1.6 million superannuation transfer balance cap – Page 25.
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Year-end planning considerations
d
If you are in retirement phase, or about to enter retirement phase, consider the impact of the
introduction of the $1.6 million transfer balance cap on your superannuation account balances, and
whether you will need to maintain excess amounts in an accumulation phase account.
Excess contributions
If concessional contributions exceed an individual’s concessional contribution cap, the “excess” contribution will be
included in the individual’s assessable income and taxed at their marginal tax rate plus an interest charge. The
individual will have the choice of paying the excess contributions tax personally, through their superannuation fund or
fully releasing the after tax excess concessional contribution from the superannuation fund.
In terms of non-concessional contributions, contributions made in “excess” of the non-concessional contributions cap
should be withdrawn by the individual and taxed at their marginal tax rate. If the excess non-concessional
contributions are not withdrawn, they will be taxed at a rate of 49% in the hands of the fund.
Year-end planning considerations
d
When reviewing your superannuation strategy for year-end, carefully consider whether payments to the
superannuation fund are within your concessional and non-concessional contributions caps. Penalties
can apply if you are in breach of the contributions caps.
Additional contributions tax for higher income earners
Individuals with income (as defined) in excess of $300,000 are liable for an additional 15% tax on contributions,
bringing the effective rate of tax on concessional contributions to 30%. Income broadly includes taxable income,
reportable superannuation contributions (SG and salary sacrifice contributions), adjusted fringe benefits, and total net
investment loss. If you are aged 55 to 59 years old, you exclude any taxed element of a superannuation lump sum,
other than a death benefit, which you received that does not exceed the $185,000 low rate cap amount.
If an individual’s income excluding their concessional contributions is less than $300,000 but the inclusion of their
concessional contributions pushes their income over $300,000 the higher tax rate will apply to the part of their
contributions above $300,000.
The higher contributions tax rate does not apply to excess concessional contributions. Individuals will have the choice
of paying the additional tax personally or by their superannuation fund.
From 1 July 2017, the income threshold, at which the additional 15% tax applies, will be lowered from $300,000 to
$250,000.
Year-end planning considerations
d
Individuals with income exceeding $300,000 pay an additional 15% contributions tax (i.e. 30%) on
contributions for the 30 June 2016 year. You should take this into consideration when making
superannuation contributions prior to year-end.
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Taxing of employment termination payments
The Government has limited the concessional taxation treatment of certain affected ETPs, such as golden handshakes,
so that only that amount which takes a person’s taxable income (including the ETP) to no more than $195,000 will
receive the ETP tax offset. Any amount of an ETP which takes the employee’s total income above the $195,000 cap will
be taxed at the employee’s marginal tax rate, typically 49%.
Certain ETPs such as genuine redundancy payments are taxed at a maximum rate of 16.5% for those over preservation
age (currently 55 years of age) and to a maximum rate of 31.5% for those under preservation age, up to an indexed cap
— which is $195,000 in 2015/16.
Year-end planning considerations
d
If you have received an ETP during the 30 June 2016 income year, you should consider the taxation
treatment of such payments.
Receipts from legal settlements on employment termination
Amounts received in respect of legal costs incurred in a dispute concerning the termination of employment will not
form part of an ETP where the amounts can be separately identified as relating to legal costs123.
However, the ATO holds that where the amount of the settlement is an undissected lump sum, where the legal cost
component cannot be determined separately, the whole amount will be treated as being received in consequence of
termination of employment.
If the legal costs are deductible the settlement or award may also need to be included in the recipient's assessable
income as an assessable recoupment124.
Year-end planning considerations
d
Consider whether amounts received in respect of legal costs incurred in disputes concerning the
termination of employment can be treated as an ETP (which may be subject to concessional treatment).
Goods and Services Tax (“GST”)
GST adjustments for bad debts written off
Where you have written off bad debts during the year or the debts have been overdue for at least 12 months, you will
be able to make a decreasing adjustment (which decreases your GST liability to the ATO) in the BAS relating to the
period in which you wrote off the bad debts or the period in which the debts become overdue by at least 12 months.
However, if you have previously made a decreasing adjustment in relation to a bad debt written off but the bad debt is
subsequently recovered, an increasing adjustment (which increases your GST liability to the ATO) will be required in the
BAS that relates to the period in which the bad debt is recovered.
123
124
TR 2012/8.
Income Tax Assessment Act 1997 (Cth) sub-div 20-A.
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Year-end planning considerations
d
If you write off a bad debt during the year, a debt has been overdue for at least 12 months or you
recover a bad debt previously written off during the year, you may need to make a GST adjustment in
the relevant BAS.
Accounting for GST on a cash or accruals basis
If you currently account for GST on a cash basis, you may have to change your basis of accounting if you no longer meet
the eligibility criteria for the cash basis of accounting. You are eligible to account for GST on a cash basis if you meet
any of the following criteria:

You are a small business with an annual turnover (including the turnover of your related entities) of $2 million or
less;

You are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less;

You account for income tax on a cash basis;

You carry on a kind of enterprise that the ATO has determined is able to account for GST on a cash basis,
regardless of your GST turnover; or

Regardless of your GST turnover, you are either an endorsed charitable institution, a trustee of an endorsed
charitable fund, a deductible gift recipient entity or a government school.
If you change from accounting for GST on a cash basis to a non-cash basis (i.e. accruals), you may be required to make
an adjustment in relation to your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.
The Government announced in the 2016/17 Federal Budget that the ability to account for GST on a cash basis will be
extended to entities with an annual turnover or GST turnover less than $10 million. These measures are intended to
apply to income years commencing from 1 July 2016. At the time of writing, these measures have not been enacted.
Year-end planning considerations
d
d
If you currently account for GST on a cash basis you should consider whether you still satisfy the
eligibility requirements for cash basis accounting.
Where you change your basis of accounting for GST from cash to accruals, you may need to make an
adjustment to your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.
Financial acquisitions threshold
If you make financial supplies, such as buying and selling securities or lending money, a calculation is required to
determine if input tax credits can be claimed on all expenses incurred in relation to making the financial supplies. This
test is known as the FAT test.
If the FAT is exceeded, you will not be able to claim full input tax credits for acquisitions that relate to making financial
supplies. There are two limbs of the FAT test that determine whether you exceed the FAT. The FAT can be exceeded
under either limb. In testing both limbs you should look at the current month and the previous 11 months as well as
the current month and the next 11 months (each a “relevant 12 month period”). As a minimum, the FAT test should be
done each time a BAS is prepared.
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111
You will exceed the FAT in a particular period if the GST amount that you pay on acquisitions that relate to making
financial supplies (financial acquisitions) is more than:

$150,000 in the relevant 12 month period; or

10% of the total GST amount that you pay on all your taxable acquisitions (including financial acquisitions) during
the relevant 12 month period.
If the FAT is not exceeded, you will be entitled to full input tax credits in respect of your acquisitions that relate to
making financial supplies. However, if the FAT is exceeded you will not be entitled to claim full input tax credits but
may still be entitled to claim reduced input tax credits (“RITC”) for certain specified acquisitions.
Year-end planning considerations
d
If you make financial supplies, you should consider whether you have exceeded the FAT in order to
determine whether you can claim full input tax credits in relation to your acquisitions.
GST adjustments for changes in use
Where you have changed the use of something that has been acquired or imported (in respect of which an input tax
credit has been claimed), you may have to make an adjustment (to the input tax credit claimed) in your business
activity statement (“BAS”) for the period ended 30 June. Generally, you use goods or services for a creditable purpose
(with an input taxed credit entitlement) if you use them in carrying on your business. However, you do not use goods
or services for a creditable purpose to the extent that they are either used to make input taxed supplies, or for private
or domestic use. The extent to which you use something that you have acquired or imported for a creditable purpose
may change over time.
An example of a change in use is where you have previously claimed input tax credits on acquisitions relating to the
construction of new residential premises on the basis that your original intention was to sell the premises on
completion. In this situation the acquisitions relating to the construction would be for a creditable purpose as the sale
of new residential premises is a taxable supply. However, should your intention change from selling the units to leasing
the units or the units are actually leased, there may be a change in use adjustment required. This is because a lease of
residential premises is input taxed and acquisitions for the purpose of making an input taxed supply are not made for a
creditable purpose.
Year-end planning considerations
d
If you have changed the extent to which an acquisition or importation is used for a creditable purpose,
you should consider whether a change in use adjustment is required in the BAS for the period ended 30
June.
Reporting requirements for the building and construction industry
It is also relevant to note the compulsory reporting system in place that requires businesses in the building and
construction industry to report to the Commissioner the details of the payments they make to contractors for the
supply of building and construction services.
Such payments will need to be reported annually by 28 August each year (i.e. the report will be required by 28 August
2016). The Pitcher Partners TPAR system allows an automatic upload of information from a client’s trial balance, to
help simplify the preparation of the report. Please speak to your Pitcher Partners representative to find out more.
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Year-end tax planning toolkit – 2015/16
Year-end planning considerations
d
Consider reporting requirements to the Commissioner for payments made to contractors for the supply
of building and construction services.
d
If you are required to prepare a TPAR, Pitcher Partners has a system that allows an automatic upload of
information from a client’s trial balance. Pitcher Partners can assist you in meeting this reporting
requirement.
State taxes
Stamp duty surcharge for foreign purchasers of property
From 1 July 2015, a stamp duty surcharge of 3% can apply where a foreign purchaser acquires residential property in
Victoria. A foreign purchaser can include a foreign controlled company, or a trust with one or more foreign
beneficiaries, where those beneficiaries either: (1) can be entitled to more than 50% of the capital of the trust; or (2)
can sufficiently influence the trust.
The duty surcharge rate is set to increase from 3% to 7% from 1 July 2016. We note that the increased duty surcharge
could be inadvertently triggered on a change in the proposed use of the property post-1 July 2016. An opportunity may
exist between now and 30 June 2016 to save 4% in duty by bringing forward any future proposed change of intention.
Year-end planning considerations
d
Consider whether you can modify the trust deed to exclude foreign beneficiaries from receiving more
than 50% of the capital of the trust estate.
d
Consider whether there is an intention to change the use of the property to residential and, if so,
whether it will be beneficial to bring forward that change in intention prior to 30 June 2016.
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Integrity provisions
ATO compliance activity
The ATO releases various taxpayer alerts to inform taxpayers of the types of activities that the ATO believe may be
undermining the integrity of the Australian tax system. The following alerts which were released in the 2016 income
year may be potentially relevant to the middle market. You should be aware of these target areas when considering
your year-end tax planning for 30 June 2016:

TA 2015/4 — Accessing business profits through an interposed partnership with a private company partner 125;

TA 2015/5 — Arrangements involving offshore procurement hubs126;

TA 2016/1 — Inappropriate recognition of internally generated intangible assets and revaluation of intangible
assets for thin capitalisation purposes127;

TA 2016/3 — Arrangements involving related party foreign currency denominated finance with related party cross
currency interest rate swaps128;

TA 2016/4 — Cross border leasing arrangements involving mobile assets129; and

TA 2016/6 — Diverting personal services income to self-managed superannuation funds130.
Year-end planning considerations
d
You should consider whether any of the issues identified in these taxpayer alerts apply to your tax
affairs.
Part IVA
As tax planning strategies may reduce your taxable income, it is always prudent to consider the potential application of
the general anti-avoidance provision contained in Part IVA to any strategy. Part IVA can apply to arrangements which
are entered into for the dominant purpose of obtaining a particular tax outcome. Examples include split loan
arrangements,131 and schemes under which Australian resident companies convert assessable interest income into
NANE dividends.132
Year-end planning considerations
d
You should consider Part IVA in relation to any material tax planning strategy that may be implemented
for the 30 June 2016 income year.
125
Taxpayer Alert TA 2015/4.
Taxpayer Alert TA 2015/5.
127 Taxpayer Alert TA 2016/1.
128 Taxpayer Alert TA 2016/3.
129 Taxpayer Alert TA 2016/4.
130 Taxpayer Alert TA 2016/6.
131 Taxation Determination TD 2012/1.
132 Taxation Determination TD 2011/22.
126
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Promoted schemes
As noted above, many tax planning strategies may reduce taxable income. However, beware of schemes or
arrangements that are promoted around year-end. The ATO has produced guidance as to schemes they have
identified133, what to look out for and what will attract the ATO’s attention as being a tax effective arrangements134.
Year-end planning considerations
d
Be careful of schemes that are promoted to taxpayers to reduce their taxable income for the income
year. Consider the ATO guidance on what to look out for.
Related party deductions
Where a tax planning opportunity gives rise to a differential in the timing of income and deductions between two
related parties, you need to consider the application of special integrity provisions that may apply. These provisions
may deny deductions for certain prepaid expenditure 135 or may deny deductions where the income is also not brought
to account in the same year136.
Year-end planning considerations
d
Where tax planning arrangements involve related party transactions, consider carefully the application
of the anti-avoidance provisions that may deny deductions incurred by one of the related parties.
Wash sales
The ATO may apply Part IVA to “wash sale” arrangements 137 where CGT assets — for example shares — are sold for
the purpose of realising a capital gain or loss and substantially the same assets are reacquired shortly thereafter138. The
ATO states that this rule does not apply where (for example) a taxpayer disposes of shares in one company and
purchases shares in a competitor company that carries on a similar business, as shares in the two companies do not
constitute substantially the same assets.
Year-end planning considerations
d
Consider the ATO’s view on wash sale arrangements where assets are disposed of for a loss or gain and
(subsequently) substantially the same assets are re-acquired.
Franking credit trading arrangements
A number of provisions can deny franking credits where an arrangement seeks to provide a franking credit benefit to a
taxpayer139. Accordingly, where a return to a shareholder is calculated with reference to franking credits, care needs to
be taken that the arrangement does not fall foul of the specific anti-avoidance provisions.
133
ATO website: Tax planning – schemes we have identified.
ATO website: Investigating tax-effective arrangements.
135 Income Tax Assessment Act 1936 (Cth) s82KJ.
136 Income Tax Assessment Act 1936 (Cth) s82KK.
137 Cumins v Commissioner of Taxation [2007] FCAFC 21, Taxation Ruling TR 2008/1 and Taxpayer Alert TA 2008/7.
138 Taxation Determination TD 2014/10.
139 For example, Income Tax Assessment Act 1997 (Cth) sub-div 204-D or Income Tax Assessment Act 1936 (Cth) s177EA.
134
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115
The ATO has announced that it will apply the anti-avoidance provisions to deny franking credits received through a
dividend washing arrangement. These are arrangements that seek to take advantage of franking credits on shares
acquired cum-dividend under a Special Market. The ATO believes the arrangement is a scheme entered into for the
purpose of obtaining franking credit benefits 140. In addition, the Government has introduced a specific anti-avoidance
provision targeting these arrangements141.
The ATO released two Taxpayer Alerts in 2015 on franking credit streaming arrangements. The first142 is aimed at what
the ATO calls ‘dividend stripping arrangements involving the transfer of private company shares to a self-managed
superannuation fund’ and the second143 is targeted at what the ATO terms ‘franked distributions funded by raising
capital to release franking credits to shareholders’.
Year-end planning considerations
d
You should review any arrangements that purport to provide a return that is calculated with reference to
franking credits. Such arrangements may fall foul of the franking credit benefit provisions.
Trust streaming to exempt entities
There are two specific anti-avoidance rules that apply to prevent exempt beneficiaries being used to inappropriately
reduce the amount of tax payable on the taxable income of a trust.
Under the first rule144, an exempt entity that has not been notified of its present entitlement to income of trust estate
within two months after year-end will be treated as if it was not presently entitled to that amount. This will generally
result in the trustee being liable to pay tax on the relevant distribution.
Under the second rule145, where an exempt entity's share of the taxable income of a trust estate exceeds a prescribed
benchmark percentage, the excess will be (generally) taxable to the trustee. This rule is aimed at preventing an exempt
entity from receiving a disproportionate share of the trust's taxable income relative to the exempt entity's actual
entitlement under the trust deed. For example, where an exempt entity receives 100% of the taxable income of a trust
yet only receives 1% of the actual economic benefits of the trust.
Year-end planning considerations
d
Consider the trust anti-avoidance rules that apply to distributions made to exempt entities.
Trust distributions and the trust stripping provisions
The ATO has released a fact sheet on the application of the trust stripping provisions. These provisions can tax the
trustee at 49% in cases where the trustee distributes income to one beneficiary (that pays little or no tax), where the
economic benefits of the distribution are instead provided to an alternative taxpayer.
Typically, the trust stripping provisions have only been applied in promoter scheme type cases, typically involving loss
trusts and exempt entities. The ATO has indicated that (in its view) the provisions can apply more broadly to family
140
Taxation Determination TD 2014/10.
Income Tax Assessment Act 1997 (Cth) s207-157.
142 Taxpayer Alert TA 2015/1.
143 Taxpayer Alert TA 2015/2.
144 Income Tax Assessment Act 1936 (Cth) s100AA.
145 Income Tax Assessment Act 1936 (Cth) s100AB.
141
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trust arrangements. Accordingly, care needs to be taken where amounts are distributed to a beneficiary in
circumstances where the beneficiary is unlikely to ever call on the funds (or be paid those funds).
Year-end planning considerations
d
The ATO has released a fact sheet indicating that it may apply the trust stripping provisions more
broadly to family trust arrangements. Care needs to be taken where income is distributed to a
beneficiary, where it is unlikely that the beneficiary will ever call on the funds (or be paid those
funds).
Notes relating to items in this section
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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The contents of this document are for general information only and do not consider your personal circumstances or situation.
Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been
summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners
representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage
arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, June 2015. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited
by a scheme approved under Professional Standards Legislation.
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