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  1. 1. Tax ConsideraTionsfor Year-end Planning for 30 June 2011
  2. 2. Tax Considerations for Year-End Planning for 30 June 2011 1 Introduction 1A What does this document do? Finally, tax planning may often result in a taxpayer paying less income tax in a given income year. It is noted that the As the 30 June 2011 financial year draws to a close, taxpayers definition of a tax benefit under the tax anti-avoidance should be considering their year-end tax planning. Tax provisions includes such a benefit. Therefore the tax anti- planning not only requires consideration of income and avoidance provisions must always be considered as part of deductions for the year but also requires you to consider that your year end tax planning. We have included a number of all of your compliance is in order. This includes the making anti-avoidance provisions in Section 12 for your consideration. of appropriate elections within the time requirements, the preparation and maintenance of appropriate documentation and forward planning of your tax affairs. 1B How will you find what you are looking for? This document provides an outline of the tax issues that To assist you in quickly locating the area of tax relevant you should be considering before year end, updated for to you, this document has been subdivided into categories new developments and (where relevant) the 2011 Budget that either relate to a specific type of taxpayer or to a announcements. This document is specifically tailored to specific tax topic. address the taxation concerns of our clients in the middle We trust you will find this document useful when doing your market. However, this document is not intended to cover 30 June 2011 tax planning. Please talk to your Pitcher Partners every single taxation issue that requires consideration. representative if you want more clarification of some of the Instead, the document provides you with a broad range issues raised in this document. of issues that should be considered before the end of the financial year as part of your overall tax planning strategy. Core Sections Income Expenses Section 2 Section 3 Entity Specific Sections Trusts Companies Partnerships Individuals Section 4 Section 5 Section 6 Section 7 Specialist Topic Sections Capital Finance International Superannuation Integrity Gains Tax Issues Tax Issues Provisions Section 8 Section 9 Section 10 Section 11 Section 122
  3. 3. Tax Considerations for Year-End Planning for 30 June 2011Quick checklist of planning considerationsThe following checklist contains a high level description of the planning opportunities for consideration for 30 June 2011.If you would like to discuss any of the planning opportunities mentioned in the following checklist, we have a detailed year-endtax planning document that provides further commentary and items for consideration. Please contact your Pitcher Partnersrepresentative to meet with us to discuss any year-end planning considerations further.Section 2 – Income Area Summary of planning considerations Business income Consider the ability to bring forward or defer the recognition of certain forms of business income. Accrued / unearned Determine whether you can defer the recognition of income that is accrued or income unearned for accounting purposes. Trade incentives Consider whether discounts and other incentives are brought to account in the correct income year for tax. Disputed amounts It may be possible to defer the recognition of disputed income amounts. Construction contracts Consider the different methods of income recognition for construction contracts. Insurance proceeds Determine whether insurance proceeds are in fact assessable and when such proceeds must be brought to account for tax purposes. Grants, bounties, Determine whether grants, bounties or subsidies are in fact assessable and when subsidies such proceeds must be brought to account for tax purposes. Disaster relief money Exemptions may be available for disaster relief money received. Interest income Examine the timing of interest income closely, especially if TOFA or other accruals regimes apply. Dividend income Dividends accrued may not be assessable at year-end. You should also consider the effect of receiving franked distributions. Trust distributions Year-end tax planning should take into account the expected tax distribution (rather than the expected accounting / cash distribution amount). Rental/leasing income Consider whether the activities are passive or constitute a business and therefore the timing of income. Foreign taxes Examine whether tax offsets are available and ensure you gross-up amounts. Non-assessable Determine whether amounts received for the year can be treated as non-assessable. amounts Personal services Consider the risk of income of a trust or company, being attributed to you as personal services income. This may reduce your deductions. Extraordinary items Review any large transactions that have occurred for 30 June 2011 to determine the tax effect. 3
  4. 4. Tax Considerations for Year-End Planning for 30 June 2011 Section 3 – Expenses Area Summary of planning considerations General rules Ensure that you review all expenses to determine deductibility, including accrued expenses and transactions that may be of a capital nature. Capital expenditure For (otherwise) non-deductible capital expenditure, review your ability to include the amount as a cost base item or the ability to claim a black-hole deduction over five years. Bad debt deductions Consider bringing forward bad debt deductions by writing those amounts off before 30 June 2011. Trading stock You can choose to value trading stock at year-end at cost, market selling value, or valuation replacement value. Under special circumstances a lower “obsolete” stock value may be used. Depreciating assets Review your ability to accelerate depreciation claims for 30 June 2011 using various strategies. Project pools Consider whether (otherwise) non-deductible capital expenditure can be claimed as a project pool cost. Investment Determine whether the investment allowance can apply for 30 June 2011. allowance Internal labour costs Review internally generated assets to determine whether labour costs have been capitalised appropriately for tax purposes. Employee bonuses Consider whether you can bring forward deductions for employee bonuses for 30 June 2011. Exempt income Review the deductibility of expenses where the entity derives non-assessable income or deductions exempt income. 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. Gifts and donations Review the deductibility of gifts and donations and their impact on tax losses. Prepaid expenditure Only certain expenditure that is prepaid can be deducted. Review the provisions closely if you are intending to claim upfront deductions on prepayments before year end. Service fees Inter-entity service fee and management charges can give rise to issues concerning the deductibility of the fee or charges. Trade incentives Consider whether discounts and other incentives provided are recorded in the correct income year for tax purposes.4
  5. 5. Tax Considerations for Year-End Planning for 30 June 2011Section 4 – Trusts Area Summary of planning considerations Trust resolutions Distribution resolutions and distribution plans should be completed before year end. Meaning of income Review the trust deed to determine how income is defined to ensure distribution resolutions operate as intended. Rule against Consider the rule against perpetuities to ensure that trust to trust distributions are not perpetuities invalidated. Eligible beneficiaries Make sure that you have reviewed the eligible beneficiaries of the trust before making your trust resolutions. Streaming of income Consider the new streaming rules if capital gains or franked dividends have been derived during the year. Trust accounts Determine whether accounts are prepared consistently with: (1) the trust deed definition of income and capital; and (2) the new streaming provisions. Trust losses and bad Trust losses and bad debt deductions may be denied if a family trust election is not made, debts or if the trust loss provisions are not satisfied. Franking credits Franking credit flow through may be denied if a trust does not make a family trust election. Injection of income Trust to trust distributions may create deductibility issues if a family trust election is not made. Interest expenses and Interest deductions may be denied where finance is used to fund distributions to distributions beneficiaries. You may consider alternatives to help protect interest deductions. Family trust elections Critically review your family trust election requirements for the year. TFN withholding The trustee must obtain all TFNs from beneficiaries before 30 June 2011 to avoid penalties. Review trust deeds Consider reviewing your trust deed before 30 June 2011 to ensure that the deed is appropriate for year end resolutions. 5
  6. 6. Tax Considerations for Year-End Planning for 30 June 2011 Section 5 – Companies Area Summary of planning considerations PAYG instalments Determine whether the PAYG instalment for the fourth quarter can be varied. Franking distributions Carefully consider the estimated franking account balance (including expected post-year end refunds) before franking dividends for 30 June 2011. Distribution For 30 June 2011 distributions, ensure compliance with distribution statement statements requirements. Debt / equity Loans made by companies should be reviewed to ensure that they are not inadvertently provisions treated as equity (and thus interest is treated as non-deductible). Division 7A Consider a review of Division 7A before year end where there is at least one corporate entity in the group. Carry forward losses Review the ability to carry forward prior year tax losses, especially where you expect to utilise these during the 30 June 2011 income year. Share capital Integrity provisions can apply to movements in or out of the share capital account. transactions Document any movement in the share capital account and carefully consider the integrity provisions. Tax consolidation Make sure you have reviewed the list of elections that are required to be made by 30 June choices 2011. Rights to future Review the Government’s announcement on rights to future income and the retrospective income impact of this announcement. Research and Review eligible R&D concession expenditure and consider the possible effect of the development proposed new provisions on your deductions for 30 June 2011. Section 6 – Partnerships Area Summary of planning considerations Varying distributions For common law partnerships, consider the ability to vary distribution entitlements before 30 June 2011. Equity contributions Certain capital contributions by companies may not give rise to a deemed dividend under Division 7A if recorded correctly.6
  7. 7. Tax Considerations for Year-End Planning for 30 June 2011Section 7 – Individuals Area Summary of planning considerations Prepaid expenses Consider whether the prepayments of certain expenses before 30 June 2011 can give rise to upfront deductions for the current income year. Interest income Consider the proposed 50% discount for interest in 2012 and whether interest income can (50% discount) be deferred. Salary sacrifice Ensure that you have appropriately considered the requirements for an effective salary sacrifice arrangement where you are considering salary sacrificing amounts (e.g. into superannuation). Employee share Consider the new ESS provisions where shares and options have been issued to you. schemes Foreign employment Review the income tax and FBT consequences where you have performed foreign income employment. Non-commercial Review the deductibility of losses related to your business activities under the non- losses commercial loss provisions. Self education Consider a deduction for self education costs and costs in earning the Youth Allowance. expenses Car expenses Ensure that you record your odometer readings for 30 June 2011 and consider a log book for your car (to maximise options for car expense deductions).Section 8 – Capital gains tax Area Summary of planning considerations General Ensure that you have considered all contracts and capital receipts for the year to determine whether a capital gain or loss has occurred. Small business CGT Where you conduct a business, consider your ability to reduce capital gains under the small concessions business concessions. CGT discount Consider whether assets held for over 12 months qualify for the CGT discount and ensure that the amounts will not be treated as ordinary income. Earnout payments The sale of any CGT assets during the income year (or possible year end opportunities) may require your consideration of the earnout provisions. CGT exemptions and Consider the many CGT exemptions and rollovers that may apply to reduce your capital rollovers gain or loss. Main residence Ensure you have applied the main residence exemption correctly for any sale of residential exemption property or adjacent land. 7
  8. 8. Tax Considerations for Year-End Planning for 30 June 2011 Section 9 – Finance issues Area Summary of planning considerations Loan rationalisation Consider the many tax provisions that could operate on a loan rationalisation or debt and debt forgiveness forgiveness during the year. 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. Capital protected Interest deductions may be denied in respect of the funding of capital protected shares, borrowings units or stapled securities. TOFA You should consider whether TOFA applies to change the taxation of financial arrangements, or whether you should make an election before 30 June 2011.8
  9. 9. Tax Considerations for Year-End Planning for 30 June 2011Section 10 – International tax Area Summary of planning considerations Tax residency You should carefully consider whether the relevant entity is a tax resident for 30 June 2011 and the tax implications that may follow. Temporary resident If you are a foreign citizen and an Australian resident, consider whether you can apply the exemption temporary resident exemption. Change in residence A change in residence may have significant tax implications and may also require elections to be made. Foreign accumulation If you own any non-controlling interests in companies or trusts, you should consider how funds you will be taxed on your investments. Controlled foreign You should consider whether the controlled foreign company provisions will result in an companies accrual of income, even if your individual interest is a minority interest. Transfer pricing All dealings with non-residents should be reviewed to ensure compliance with the transfer pricing provisions. Conduit foreign If the Australian company is a conduit between foreign entities, the conduit foreign income income provisions may allow unfranked dividends to be paid to non-residents tax free. Foreign income tax Consider your FITO position for 30 June 2011 to determine whether there are any excess offsets FITOs that will be wasted. Strategies can be put in place to help reduce FITO wastage. Non-resident Consider whether non-resident distributions (including capital reductions) can or have distributions been made to an Australian entity in a tax free manner. Non-residents and Non-residents or temporary residents can dispose of certain Australian assets without tax asset sales consequence. Deductions in earning Deductions may be denied where a foreign operation in the group produces exempt or foreign income non-assessable non-exempt income to the group. 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. Thin capitalisation In-bound or outbound entities may be denied debt deductions where the thin capitalisation provisions are not satisfied. Withholding tax and Non-compliance with the withholding tax provisions may result in deductions for certain deductions expenditure (e.g. interest and royalties) being denied for the income year. Non-resident Consider issues with streaming income to non-residents and any withholding tax issues beneficiaries that may occur. Non-resident trusts Consider whether you have an interest in a foreign trust for the 30 June 2011 income year. 9
  10. 10. Tax Considerations for Year-End Planning for 30 June 2011 Section 11 – Superannuation issues Area Summary of planning considerations Deductions for Consider paying superannuation contributions before the 2011 year end where a deduction contributions for such amounts is sought. Super guarantee Ensure compliance with superannuation guarantee requirements, especially for bonuses paid and payments made to contractors, consultants or members of the board who are not paid via the payroll. Contribution caps Consider the ability to utilise the higher concessional contribution caps until 30 June 2012. Personal contributions Consider whether the individual is eligible to make a deductible concessional contribution before 30 June 2011. Excess contributions When reviewing your superannuation strategy for year end, carefully consider whether payments may breach your contributions cap. Section 12 – Integrity provisions Area Summary of planning considerations Part IVA You should consider Part IVA in relation to any material tax planning strategy that may be implemented for the 30 June 2011 income year. Related party Where tax planning arrangements involve related party transactions, consider carefully the transactions application of the anti-avoidance provisions that may deny deductions incurred by one of the related parties. 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. 1D 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 first 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.10
  11. 11. Tax Considerations for Year-End Planning for 30 June 2011 www.pitcher.com.au Melbourne | Sydney | Perth | Adelaide | Brisbane Pitcher Partners, including Johnston Rorke, is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.11 11