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Year-end tax planning toolkit June 2014 Year-ending 30 June 2014

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Year-end tax planning toolkit

June 2014

Year-ending 30 June 2014

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 2014. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Pitcher Partners – Year-end tax planning toolkit

Contents

1 Introduction ................................................................................................................................................. 5

2 Summary checklist ....................................................................................................................................... 7

3 Income ....................................................................................................................................................... 19

4 Deductions ................................................................................................................................................. 28

5 Individuals .................................................................................................................................................. 37

6 Trusts ......................................................................................................................................................... 48

7 Companies ................................................................................................................................................. 58

8 Partnerships ............................................................................................................................................... 69

9 Capital gains tax ......................................................................................................................................... 72

10 Finance issues ............................................................................................................................................ 77

11 International tax ........................................................................................................................................ 81

12 Super and GST ............................................................................................................................................ 91

13 Integrity provisions .................................................................................................................................... 97

This page is intentionally left blank.

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Pitcher Partners – Year-end tax planning toolkit

Introduction 1

Welcome to the Pitcher Partners

30 June 2014 year-end tax planning toolkit.

Year-end tax planning 1A

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.

What does this document do? 1B

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 2014/15 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 1C

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 1D

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. Given that the general anti-avoidance provisions have recently been expanded, taxpayers must always consider these provisions. We have included a number of anti-avoidance or integrity provisions for your consideration in Chapter 13 of this toolkit.

How will you find what you are looking for? 1E

To assist you in quickly locating the area of tax that is relevant to you, this document has been subdivided into chapters. The chapters either relate to a specific type of taxpayer (e.g. a company or trust) or to a specific tax topic (e.g. capital gains tax). Furthermore, Chapter 2 of this toolkit provides a summary of all of the questions contained in Chapters 3 to 13 of this toolkit. The following diagram provides a simplified outline of how this toolkit is arranged.

Pitcher Partners – Year-end tax planning toolkit

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We trust you will find this document useful when considering your 30 June 2014 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 1F

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 2014. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Income [Chapter 3]

Deductions [Chapter 4] CORE SECTIONS

SUMMARISED YEAR-END PLANNING CHECKLIST [Chapter 2]

Trusts [Chapter 6]

Companies [Chapter 7]

Partnerships [Chapter 8]

Individuals [Chapter 5]

ENTITY SPECIFIC QUESTIONS

Capital gains tax

[Chapter 9]

International tax

[Chapter 11]

Super & GST

[Chapter 12]

Finance issues [Chapter 10]

SPECIALIST TOPIC QUESTIONS

Integrity provisions

[Chapter 13]

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Pitcher Partners – Year-end tax planning toolkit

Summary checklist 2

Enter your details 2A

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 2B

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 2C

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 2014 income year or deferred to the 2015 income year and subsequent years.

Business income — If you derive business sales income, you may be able defer sales invoicing or bring forward sales invoicing (in appropriate circumstances). — Chapter 3B

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. — Chapter 3C

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. — Chapter 3D & 3E

Disputed amounts — It may be possible to defer the recognition of disputed income amounts until you have settled the dispute. — Chapter 3F

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 ATO for tax purposes. — Chapter 3G

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. — Chapter 3H

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. — Chapter 3I

Disaster relief money — Exemptions may be available for disaster relief money received. — Chapter 3J

Pitcher Partners – Year-end tax planning toolkit

8 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. — Chapter 3K

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. — Chapter 3L

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. — Chapter 3M

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). — Chapter 3N

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. — Chapter 3O

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. — Chapter 3P

Non-assessable amounts — Consider whether any income you have received this year can be treated as non-assessable. — Chapter 3Q

Personal services income — If you provides services through a trust or company, there is a risk that the income could be your personal services income and attributed to you directly. You should consider the personal services income rules appropriately before year-end. — Chapter 3R

Extraordinary items — If you have received extraordinary (or significant) receipts during the year, these items must be examined closely from a tax perspective. — Chapter 3S

Notes — Review notes taken in relation to the chapter. — Chapter 3T

Deductions 2D

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 2014 income year or need to be deferred to the 2015 income year and subsequent years.

General rules — Consider all material expense items to determine whether there is any risk that certain items may not be deductible (e.g. 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. — Chapter 4A

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. — Chapter 4B

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 2014. — Chapter 4C

Trading stock valuation — Where you hold trading stock, you can choose to value trading stock at year-end 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. — Chapter 4D

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Pitcher Partners – Year-end tax planning toolkit

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. — Chapter 4E

Depreciating assets (small business entities) — If you have depreciating assets and you are a small business entity, further tax incentives can apply to provide a higher deduction claim for the current year. — Chapter 4F

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. — Chapter 4G

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). — Chapter 4H

Employee bonuses — Consider whether your accrued employee bonus plan for 30 June 2014 can be treated as deductible for the current year by changing aspects (e.g. approval timing) of your plan. — Chapter 4I

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. — Chapter 4J

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. — Chapter 4K

Gifts and donations — Review your deductions (or proposed deductions) for gifts and donations and their impact on your tax losses. — Chapter 4L

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. — Chapter 4N

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. — Chapter 4O

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. — Chapter 4P

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. — Chapter 4R & 4S

Tax losses for infrastructure projects — If you are involved in large scale infrastructure projects, new provisions have been introduced that may allow certain entities to recoup early stage losses for approved projects. — Chapter 4T

Notes — Review notes taken in relation to the chapter. — Chapter 4U

Individuals 2E

This section considers specific year-end taxation issues associated with individuals.

Tax rates — The overall tax rate for 30 June 2014 will be up to 2.5% lower as compared to 30 June 2015 (due to the increase in the Medicare Levy to fund Disability Care of 0.5% and the Temporary Budget Repair Levy of 2.0% for income over $180,000). For an individual resident taxpayer, $141,800 of taxable income (which equates to a fully franked dividend of $99,260) provides an average tax rate of 30% for 30 June 2014. — Chapter 5A

Pitcher Partners – Year-end tax planning toolkit

10 Medicare levy — As part of your ordinary tax planning, understand your Medicare levy and consider any opportunities that may reduce this levy. — Chapter 5A

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. — Chapter 5B

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. — Chapter 5C

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. — Chapter 5D

Specific occupations under ATO target — The ATO are targeting work expenses claimed by: (a) those working in the building and construction industry; and (b) sales and marketing managers for 30 June 2014. They are also targeting amounts reported under the Taxable Payments Annual Report in the construction industry and internet sales income that is not being disclosed. — Chapter 5E

Work related car expenses — Ensure that you record your odometer readings for 30 June 2014 and consider a log-book for your car (to maximise options for car expense deductions). — Chapter 5F

Work related travel expenses — Examine whether any additional travel (local, interstate, overseas) expenses are deductible for the 30 June 2014 income year and ensure you have satisfied the substantiation requirements. — Chapter 5G

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. — Chapter 5H

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. — Chapter 5I

Specific industries — If you work in a specific industry, you should consider the ATO’s guide on work related expenses that applies to that industry. — Chapter 5J

Self-education expenses — Review whether education expenses are deductible and apply the non-deductible threshold of $250 to appropriate expenses. — Chapter 5K

Work related expenses you cannot claim — Review whether there are specific rules that will deny a deduction for your work related expenses. — Chapter 5L

Prepaid expenses — Consider whether you can prepay certain expenses before 30 June 2014 to bring forward deductions to the current income year. — Chapter 5M

Salary sacrifice — Ensure that you have appropriately considered the requirements for an effective salary sacrifice arrangement (e.g. into superannuation). Consider whether salary sacrifice opportunities may exist to apply a lower rate of FBT for the period of 1 July 2014 to 31 March 2015 in lieu of the higher marginal income tax rate due to the Temporary Budget Repair Levy. — Chapter 5N

Employee share schemes — If you have received shares as an employee, you need to consider the employee share scheme provisions and whether an amount will be assessable to you. — Chapter 5O

Foreign employment income — You will need to review the income tax and FBT consequences where you have performed foreign employment. — Chapter 5P

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. — Chapter 5Q

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Pitcher Partners – Year-end tax planning toolkit

LAFHA changes — If you have received a living away from home allowance (LAFHA) during the 30 June 2014 income year, you should consider a review of these amounts (due to the significant changes that occurred on 12 October 2012). — Chapter 5S

Notes — Review notes taken in relation to the chapter. — Chapter 5T

Trusts 2F

This section considers specific year-end taxation issues associated with trusts.

ATO compliance activity — The ATO is continuing its trust compliance activities during the current income year. You should therefore carefully review all of your trust requirements before year-end. — Chapter 6A

Trustee tax rate — To avoid a trustee tax rate of 46.5%, ensure that you make beneficiaries entitled to all of the income of the trust before 30 June 2014 (or an earlier time if required by the trust deed). — Chapter 6B

Trustee resolutions — Distribution resolutions or distribution plans must be completed before year-end (or earlier if required by the trust deed) and evidenced. — Chapter 6C

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 2014 tax return. — Chapter 6D

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. — Chapter 6E

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. — Chapter 6F

Trust to company distributions — Ensure that you have appropriately considered Division 7A where your trust distributes (directly or indirectly) to a corporate beneficiary — Chapters 6G and 7E

Trust to trust distributions — Consider the rule against perpetuities to ensure that trust to trust distributions are not invalidated. — Chapter 6H

Eligible beneficiaries — Make sure that the beneficiaries you have identified are eligible under the trust deed before finalising your trust resolutions. — Chapter 6I

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. — Chapter 6J

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). — Chapter 6K

Trust losses and bad debts — Trust losses and bad debt deductions may be denied if a family trust election 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. — Chapter 6L

Franking credits — If you receive dividends through the trust, franking credits may not flow through the trust unless the trust makes a family trust election. — Chapter 6M

Pitcher Partners – Year-end tax planning toolkit

12 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 family trust election is not made. — Chapter 6N

Interest expenses and distributions — Interest deductions may be denied where finance is used to fund distributions to beneficiaries. You may consider alternatives to help protect interest deductions. — Chapter 6O

Family trust elections — Critically review your family trust election 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. — Chapter 6P

TFN withholding — The trustee must obtain TFNs from beneficiaries before 30 June 2014, which have not previously been reported, to avoid penalties. This needs to be reported to the ATO by 31 July 2014. — Chapter 6Q

Review trust deeds — Consider reviewing your trust deed before year-end to ensure that the deed is still appropriate for the type of distribution resolutions that you now want to make / may want to make in the future. — Chapter 6R

Superannuation deductions — Consider carefully the deductibility of payments for superannuation contributions made for directors of a trustee company. — Chapter 6S

Trust distributions to a superfund — Non-arm’s length income derived by a superfund (which may include discretionary trust distributions or private company dividends) can be taxed at 45% in a superfund. — Chapter 6T

Notes — Review notes taken in relation to the chapter. — Chapter 6U

Companies 2G

This section considers specific year-end taxation issues associated with companies.

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. — Chapter 7A

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 deficits tax). — Chapter 7B

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). — Chapter 7C

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). — Chapter 7D

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. — Chapter 7E

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. — Chapter 7F

Loss carry-back provisions — The Government intends to repeal the loss carry-back provisions for 30 June 2014. However, if you expect to have a tax loss for the current year and you paid tax in the 2012 or 2013 income year, you could be entitled to self-assess a refund of your previous year’s tax by carrying back the current tax loss (until the law changes). — Chapter 7G

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Pitcher Partners – Year-end tax planning toolkit

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. — Chapter 7H

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. — Chapter 7I

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. — Chapter 7J

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 2014 tax calculation. — Chapter 7K

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 — Chapter 7L

Research and development (R&D) — Consider the effect of the R&D tax incentive provisions on your R&D deductions for 30 June 2014. — Chapter 7M

R&D — ineligible companies — If you carry on R&D activities and you have aggregated assessable income of $20 billion or more, legislation has been introduced that will deny an R&D tax incentive claim for 30 June 2014. — Chapter 7N

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. — Chapter 7O

Reportable tax positions — Consider whether you need to prepare the reportable tax position 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. — Chapter 7P

PAYG instalments — Determine whether the PAYG instalment for the fourth quarter for 30 June 2014 can be varied. — Chapter 7Q

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. — Chapter 7R

Notes — Review notes taken in relation to the chapter. — Chapter 7S

Partnerships 2H

This section considers specific year-end taxation issues associated with partnerships.

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. — Chapter 8A

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. — Chapter 8B

Varying distributions — For common law partnerships, consider the ability to vary distribution entitlements before 30 June 2014. — Chapter 8C

Pitcher Partners – Year-end tax planning toolkit

14 Equity contributions — You should appropriately consider equity contributions made to a partnership by a company and the Division 7A treatment of such contributions. — Chapter 8D

Notes — Review notes taken in relation to the chapter. — Chapter 8E

Capital gains tax 2I

This section considers a number of year-end considerations for capital gains that may have been derived during the income year.

General — Ensure that you have considered all contracts and capital receipts for the year to determine whether a capital gain or loss has occurred. — Chapter 9A

Small business CGT concessions — Where you conduct a business (either directly or indirectly), consider your ability to reduce capital gains under the small business concessions. — Chapter 9B

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). — Chapter 9C

CGT discount (non-residents) — Non-residents 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. — Chapter 9C

Earnout arrangements — The capital gain on the sale of a CGT asset can be deferred if you qualify for the earnout rules. — Chapter 9E

CGT exemptions and rollovers — Consider the many CGT exemptions and rollovers that may apply to reduce your capital gain or loss. — Chapter 9F

Main residence exemption — Ensure you have applied the main residence exemption correctly for any sale of residential property and adjacent land. — Chapter 9G

Notes — Review notes taken in relation to the chapter. — Chapter 9H

Finance issues 2J

This section considers a number of year-end considerations for financial transactions and financial type entities for the income year.

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. — Chapter 10A

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. — Chapter 10B

Capital protected borrowings — Interest deductions may be denied in respect of the funding of capital protected shares, units or stapled securities. — Chapter 10C

TOFA — general — On an annual basis, you need to consider whether the TOFA provisions will start to apply to your entity or group of entities. — Chapter 10D

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Pitcher Partners – Year-end tax planning toolkit

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. — Chapter 10E

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). — Chapter 10F

TOFA — compliance issues — If your group is subject to TOFA, the ATO is conducting compliance activity for the current income year. Accordingly, you should ensure you are comfortable with your TOFA positions. — Chapter 10G

Notes — Review notes taken in relation to the chapter. — Chapter 10H

International tax 2K

This section considers a number of year-end considerations where you have international transactions, or inbound or outbound investments.

Non-resident individual tax rates — We have outlined the tax rates for individuals for the 30 June 2014 income year. — Chapter 11B

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 should be excluded. — Chapter 11C

Temporary resident exemption — If you are a foreign citizen and an Australian resident, consider whether you can apply the temporary resident exemption and reduce your taxable income. — Chapter 11D

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. — Chapter 11E

Foreign accumulation funds — If you own any non-controlling interests in foreign companies or trusts, you should consider how you will be taxed on those investments. — Chapter 11F

Controlled foreign companies — You should consider whether the controlled foreign company provisions will result in an accrual of underlying income in your foreign investment, even if your individual interest is a minority interest. — Chapter 11G

Transfer pricing — New transfer pricing provisions apply from 1 July 2013, which can apply to reprice all of your international dealings. The provisions also require documentation to be in place by lodging your tax return. It is therefore critical to ensure that you review your transfer pricing policies and documentation. — Chapter 11H

International dealings schedule — Completion of the international dealings schedule for the 30 June 2014 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. — Chapter 11I

Conduit foreign income — If the Australian company is a conduit between foreign entities, the conduit foreign income provisions may allow unfranked dividends to be paid to non-residents tax free if you meet certain conditions in the relevant income years. — Chapter 11J

Foreign income tax offsets — Consider your FITO position for 30 June 2014 to determine whether there are any excess FITOs that will be wasted. Strategies can be put in place to help reduce FITO wastage. — Chapter 11K

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. — Chapter 11L

Pitcher Partners – Year-end tax planning toolkit

16 Non-residents and asset sales — Non-residents and temporary residents can dispose of certain (e.g. non-land rich) Australian assets without tax consequences. However, non-residents and temporary residents are no longer eligible for the 50% CGT discount. — Chapter 11M

Deductions in earning foreign income — Deductions may be denied where a foreign operation in the group produces exempt or non-assessable non-exempt income to the group. This may be relevant if you carry on a branch (or hold shares in a subsidiary) in a foreign country. — Chapter 11N

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). — Chapter 11O

Thin capitalisation — If you are an inbound or outbound entity, the thin capitalisation provisions may deny interest deductions. You should consider reviewing your thin cap position before year-end. You should also start to consider the significant changes that will apply from 1 July 2014 to the thin capitalisation provisions which (in most cases) will make it harder to claim interest deductions. Addressing your tax gearing ratios before 30 June 2014 may place you in a much better thin capitalisation position for the 30 June 2015 year. — Chapter 11P

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. — Chapter 11Q

Non-resident beneficiaries — If you stream classes of income to non-residents (e.g. interest) you should consider the ATO’s views on streaming and the risk that the current provisions may not support streaming such income. — Chapter 11R

Non-resident trusts — If you have an interest in a foreign trust for the 30 June 2014 income year, you may need to disclose income in your tax return under the accrual provisions. — Chapter 11S

Offshore assets and ATO disclosure opportunity (Project DO IT) — If you have offshore assets or investments that you have not previously disclosed to the ATO, you should consider taking advantage of the current ATO offshore asset voluntary disclosure initiative to avoid steep penalties and the risk of criminal prosecution for tax avoidance. — Chapter 11T

Investment manager regime — If you are a non-resident widely held fund or an Australian investment manager, broker or custodian, you should consider the possible application of the new IMR regime which can exempt certain Australian passive income from Australian tax. — Chapter 11U

Managed investment trust fund payments — The withholding tax rate on fund payments to non-residents during the 2014 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. — Chapter 11V

Notes — Review notes taken in relation to the chapter. — Chapter 11W

Super and GST 2L

This section considers a number of year-end considerations for Superannuation and GST.

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. — Chapter 12A

Super guarantee — Ensure that you have complied with the 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. — Chapter 12B

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Contribution caps — Make sure you have complied with the annual concessional and non-concessional contribution caps. New rules apply to related party asset transfers to super from 1 July 2013. — Chapter 12C

Non-concessional contribution caps — Please note that the non-concessional contribution limit increases to $180,000 p.a. and $540,000 over a fixed three year period from 1 July 2014 for individuals under the age of 65. Consider whether you should defer making such contributions until after 1 July 2014. — Chapter 12C

Personal contributions — Consider whether the individual is eligible to make a deductible concessional contribution before 30 June 2014 and ensure notice requirements are met within time. — Chapter 12D

Excess contributions — When reviewing your superannuation strategy for year-end, carefully consider whether payments are within your contributions cap. — Chapter 12E

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 2014 year. — Chapter 12F

Employment termination payments — If you have received an ETP during the 30 June 2014 income year, you should review changes to the concessional taxation treatment of such payments. — Chapter 12G

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 (which may be subject to concessional treatment). — Chapter 12H

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. — Chapter 12I

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. — Chapter 12J

Financial acquisitions threshold — If you make financial supplies, you should consider whether you have exceeded the financial acquisitions threshold and whether you can claim full input tax credits. — Chapter 12K

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. — Chapter 12L

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. — Chapter 12M

Notes — Review notes taken in relation to the chapter. — Chapter 12N

Integrity measures 2M

This section considers a number of integrity measures that should be considered with your year-end planning.

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 2014 income year, including the new changes which extend the scope of Part IVA from 16 November 2012. — Chapter 13A

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. — Chapter 13B

Pitcher Partners – Year-end tax planning toolkit

18 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. — Chapter 13C

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. — Chapter 13D

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 the franking credit benefit provisions. The ATO has released a ruling where it will seek to apply the anti-avoidance provisions to such arrangements. The Government has also announced changes from 1 July 2013 dealing with double benefits on franking credit arrangements. — Chapter 13E

Trust streaming to exempt entities — Consider the impact of the anti-avoidance rules on distributions from trusts to exempt entities. — Chapter 13F

Trust distributions — The ATO is soon to release a fact sheet that could indicate 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). — Chapter 13G

Notes — Review notes taken in relation to the chapter. — Chapter 13H

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Pitcher Partners – Year-end tax planning toolkit

Income 3

General rules on income 3A

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 (e.g. a finance entity) would need to bring such income to account on an accruals basis.

Business income 3B

The accruals method is generally used 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 consider accrued income accounts to determine whether such amounts are assessable income at year-end (see Chapter 3C).

Year-end planning considerations

Determine whether you have brought income to account in the correct year. Some income is brought to account on a cash basis (e.g. interest), while other income is brought to account on an accruals basis (e.g. business income).

Consider whether you issue invoices in June 2014 that relate to work that is completed in the 2015 income year.

Accrued and unearned income 3C

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 completed2. 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 issued3. As a final note, construction contract income may be derived on a different basis than on a billings basis (see Chapter 3G).

1 TR 98/1: Income tax: determination of income; receipts versus earnings 2 TR 93/11, para 6 3 See ATO ID 2012/15

Pitcher Partners – Year-end tax planning toolkit

20 Unearned income

An exception to the ordinary derivation rule can occur where amounts are received or 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 early4. The tax treatment also considers the accounting and commercial treatment of the relevant income. Accordingly, if one is seeking to defer such income, it is prudent to record such income as “unearned” in the accounts (subject to limitations imposed by accounting standards).

Note that not all unearned income will qualify for deferral. There have been many cases where the principle has been distinguished. Where this amount is material, you should consider this opportunity further.

Year-end planning considerations

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 2014.

Determine whether such amounts have been derived for tax purposes and whether a tax adjustment should be made for the 30 June 2014 balance.

Trade incentives (purchase of stock) 3D

Trading stock acquired may be subject to a trade incentive (e.g. volume rebate, trade discount, promotional rebate etc.). This discount amount may either give rise to assessable income to the purchaser, or can reduce the cost of trading stock5, depending on the nature of the trade incentive.

For unconditional trade incentives (e.g. 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 this case, the purchase of trading stock is to be recorded at the full (undiscounted) price (see Chapter 4R). Accordingly, these discounts can be deferred until derived by the taxpayer and do not have to be included in income at year-end.

Year-end planning considerations

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) 3E

Where you sell trading stock and offer trade incentives, the treatment of the discount component predominantly follows the treatment in Chapter 3D.

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.

4 TR 93/11, para 8 and Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314. See also TR 2014/1, para 5. 5 TR 2009/5

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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

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.

Customer disputed amounts 3F

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 settled6. Generally, this treatment will need to be consistently applied in the accounts of the taxpayer.

Year-end planning considerations

If you have an unsettled dispute in relation to an amount of income from a customer that relates to a sale in the 2014 income year, you may be able to defer the recognition of income until settlement of the dispute in the subsequent year.

Construction contracts 3G

The ATO administratively provides taxpayers with a number of methods for bringing to account construction contract income where construction activities are carried on by a taxpayer that is separate to 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)7. 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 (e.g. 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 group8.

6 BHP Billiton Petroleum (Bass Strait) Pty Ltd v FCT 2002 ATC 5169 7 IT 2450 8 IT 2450, para 13

Pitcher Partners – Year-end tax planning toolkit

22 Year-end planning considerations

Where you 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 the taxable income for 2014 (subject to the consistency requirement).

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 3H

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 (e.g. income protection insurance) or compensate for the loss of revenue assets (e.g. trading stock), such proceeds may be regarded as ordinary income. Where such amounts are not ordinary income, specific statutory provisions may include such receipts as income where they relate to trading stock9 or where they relate to a loss of an amount of income10.

Where these provisions do not apply and insurance proceeds relate to the loss or destruction of a capital gains tax asset or a depreciating asset, the amount may be taken to constitute proceeds on the disposal of those assets11. Where the proceeds do not constitute ordinary income or statutory income, the receipt of insurance proceeds can be an “assessable recoupment”12.

It is noted that the relevant provisions mentioned above also have their own timing rules for when insurance proceeds are to be brought to account13. 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 income.

Year-end planning considerations

Where the loss event, claim and insurance receipt straddle the year-end, you should consider the applicable provision closely to determine whether the gain must be brought to income in this year or in a later income year.

Where an asset has been lost or destroyed, you may be able to claim a loss in respect of the asset and you may be able to claim rollover relief if the proceeds are used to acquire a replacement asset.

The current Government confirmed that it would proceed with changes that will allow CGT exemptions to apply to compensation or insurance payments received through a trust from 1 July 2005.

Grants, bounties and subsidies 3I

The treatment of Government grants or subsidies is complex and will depend on the nature of the grant 14. An amount will be treated as ordinary income where the amount is for the expected reduction in income, to assist with operating costs, to compensate for a loss of profits or 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 received15. Amounts received in relation to commencing a business activity or acquiring new assets may also be assessable depending on the circumstances.

9 Section 70-115 of the ITAA 1997 10 Section 15-30 of the ITAA 1997 11 TD 31 and ATO ID 2011/82 12 Sections 20-20 and 20-30 of the ITAA 1997 13 For example, section 15-30 requires the amount to be received. 14 TR 2006/3 15 Section 15-10 of the ITAA 1997

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The timing of the amount as income will again depend on the nature of the amount, however generally the amounts are included 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 non-assessable and not exempt income (NANE)16.

You should also ensure you have considered the operation of the provisions relating to insurance (Chapter 3H) and disaster relief (Chapter 3J) closely.

Year-end planning considerations

Where Government grants have been received, determine whether such amounts will be assessable income or whether an exemption may apply.

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 3J

There are a number of grants that have been provided to individuals, small businesses and primary producers in relation to natural disasters that are not taxable. Furthermore, the NSW and Victorian floods in 2012 were declared a disaster, to ensure people in communities affected by the floods could receive tax deductible donations17.

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.

On 14 December 2013, the Government announced that it would not be proceeding with the prior announcement that from 1 July 2011, taxpayers would be able to choose a CGT exemption for assets that are lost, destroyed or disposed of to an Australian Government agency for replacement assets as a consequence of a natural disaster. Those taxpayers who have already acted on the basis of the previous announcement will however, not be required to amend their assessments as a result of this change in policy.

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 (Chapter 3H) and grants, bounties and subsidies (Chapter 3I) closely.

16 Section 59-30 of the ITAA 1997 17 Assistant Treasurer, Media Release, No 3, 9 March 2012 18 For example, TD 2006/22 19 Section 124-95(6) of the ITAA 1997 20 PSLA 2011/25

Pitcher Partners – Year-end tax planning toolkit

24 Year-end planning considerations

Consider whether special tax treatment may occur for money that has been received relating to a natural disaster or assets replaced due to a natural disaster.

Consider whether you can access the ATO’s concessions for reconstructing records or making reasonable estimates for your income or deductions.

Interest income 3K

Interest income is usually included 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 your ordinary activities (e.g. 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 (e.g. on a discounted bond -see Chapter 10D).

You should consider reviewing interest income to determine whether amounts “accrued” can be deferred to the 2015 income year.

Year-end planning considerations

Review interest income and determine whether any “accrued” interest can be deferred until the 2015 income year.

Dividend income 3L

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 (e.g. from a share buyback or in respect of a loan from a private company under Division 7A -see Chapter 7E).

Year-end planning considerations

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 2014 or 2015 income year.

Consider whether you have participated in a share buyback plan and whether any amount of the buyback is considered a dividend for taxation purposes.

Retail premiums 3M

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

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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 unfrankable21.

Year-end planning considerations

Consider whether you received a retail premium during the 2014 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 3N

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 2014 (or will be entitled to receive trust distributions by year-end) you should estimate the 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

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 3O

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 2014 taxable income.

Year-end planning considerations

Consider whether rental or lease income “accrued” at 30 June 2014 can be deferred for taxation purposes (e.g. where a cash basis is an appropriate method for the taxpayer).

Foreign taxes paid on your behalf 3P

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 foreign income tax offset (FITO) for the amount of foreign taxes paid22. Refer to Chapter 11K for considerations relating to FITOs.

Year-end planning considerations

In considering your budgeted 30 June 2014 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 3Q

A number of provisions treat receipts as not being assessable income. Examples include non-portfolio foreign dividends derived by companies, first home saver account income, mutual receipts received from members, income derived by

21 TR 2012/1 22 This amount is ordinary income under section 6-5 of the ITAA 1997

Pitcher Partners – Year-end tax planning toolkit

26 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 Chapter 11L) and amounts remitted as GST.

Year-end planning considerations

Consider whether any income you have derived during the income year should be excluded being either exempt or not assessable.

Personal services income 3R

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 (e.g. 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

Where you have provided services and you have operated through an entity (e.g. 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.

If you operate in professional services through a trust or company, you need to consider the extent to which income should be distributed to you for 30 June 2014.

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 3S

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 (e.g. 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

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 chapter 3T

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Pitcher Partners – Year-end tax planning toolkit

28 Deductions 4

General rules of deductibility 4A

A taxpayer can only claim a general deduction for losses or outgoings that are incurred in that year, where the purpose is to earn assessable income or in carrying on a business of earning assessable income23.

No deduction is available for expenses that are not related to earning assessable income, 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 2014 income year if an amount is actually paid or where the taxpayer becomes definitively committed to pay the amount.

However, where the general 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 incurred24. It is noted that only the taxpayer actually incurring the expense can claim a deduction.

Year-end planning considerations

Review all your expenses and payments during the year to determine whether you may be able to claim a deduction for the expense.

Determine whether the expense can be claimed in the current year (e.g. whether you have made a payment, incurred an obligation, or prepaid amounts).

Keep documentation so that you can prove that you have in fact incurred the expenses before year-end.

Capital expenditure 4B

Expenses should be reviewed annually to determine whether the amounts are capital in nature and therefore non-deductible. 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 (instead) be included in the cost base of a capital gains tax asset or claimed over five years under the business black-hole provisions25.

Year-end planning considerations

Review expenditure incurred during the year to determine whether the amounts are capital (e.g. repairs and maintenance, legal costs, or restructuring expenditure incurred during the year).

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 over five years.

Bad debt deductions 4C

A taxpayer can only claim a deduction for bad debts if the debts: (i) are written off as bad before year-end; and (ii) 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

23 Section 8-1 of the ITAA 1997 24 See for example Re Sobel Investments Pty Ltd and FCT [2012] AATA 180 and AAT Case [2012] AATA 174 25 Section 40-880 of the ITAA 1997 and TR 2011/6

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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).

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.

On 6 November 2013, the Government announced that it would not be proceeding with the previous announcement that deductions would be denied where a taxpayer writes off a related party bad debt. If you have acted on the basis of the previous announcement, you may be entitled to favourably adjust this item and claim an amount for the prior year deduction.

Year-end planning considerations

Before year-end, review the debtor’s ledger and write off any bad debts to ensure that the amounts can be deducted for the 2014 income year. Keep written records approving the write-off.

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.

If there are doubts on claiming the bad debt, consider whether the TOFA provisions may provide a more appropriate outcome.

If you did not claim a “related party” bad-debt deduction in a prior period (based on the previous Government announcement), you may be able to adjust this position and claim an amount for the prior year item.

Trading stock valuation 4D

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.

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 obsolete26, giving rise to tax deductions for the taxpayer.

With effect from 1 July 2010, foreign investments that are trading stock that previously constituted Foreign Investment Funds (FIFs) can now also be valued at the market selling value on an investment-by-investment basis.

Year-end planning considerations

Consider the possibility of valuing trading stock at either market selling value, replacement value or identifying obsolete stock at year-end.

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) 4E

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 asset27. For assets acquired during the 2014 income year, the effective lives are set out in Taxation Ruling TR 2013/4 (applicable from 1 July 2013).

26 TR 93/23 27 The amount of the deduction is reduced if the asset is held for a non-business purpose.

Pitcher Partners – Year-end tax planning toolkit

30 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.

Year-end planning considerations

Ensure that you review your depreciation schedules and consider writing off obsolete and scrapped items by 30 June 2014 (in order to claim the remaining written down value).

Consider self-assessing the effective life of depreciating assets, but note that this is an item that must be disclosed in tax returns.

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.

An outright deduction can be claimed for depreciable assets costing less than $300 where they are not used in a business.

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.

Note the ability to allocate the cost of developing in-house computer software (e.g. website expenditure) to a software development pool and depreciate such expenditure at a rate of 40% in the subsequent year.

Depreciating assets (small business entities) 4F

Special depreciation concessions apply to an entity that is considered a small business entity. 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 a small business entity, please ensure that you have considered the following concessions. If you are not a small business entity (but qualify for being so), you should consider the following concessions in order to determine whether you should make an election for the 2014 income year.

It is noted that the existing legislation currently provides for a number of benefits, including an immediate write-off for assets costing less than $6,500.

The Government has introduced a Bill to modify these benefits from 1 January 2014 and replace them with an immediate deduction for assets cost less than $1,000.

However, the Bill did not pass the Senate and was defeated on 25 March 2014. Until such legislation passes, taxpayers are still entitled to claim a deduction under the current law. If the proposed amendments become law, taxpayers who have claimed deductions on the basis of the (now) current law will need to amend their assessments.

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Year-end planning considerations

Consider the following concessions if you are a small business entity or if you qualify as being a small business entity. The following concessions are based on the current Government’s proposals to amend the depreciation rules from 1 January 2014 - which have yet to be enacted.

Assets costing less than $6,500 (the “asset threshold”) can be written off immediately if they were installed ready for use before 1 January 2014.

Assets costing less than $1,000 (the “asset threshold”) can be written off immediately if they are installed ready for use on or after 1 January 2014.

For depreciating assets that cost more than the asset thresholds above, small businesses will be able to depreciate these assets at a rate of 15% initially and 30% in following years using the pooling method.

Prior year-long life pooled assets can be pooled and depreciated at a rate of 30%.

An accelerated initial depreciation deduction of $5,000 will be provided for motor vehicles acquired on or after 1 July 2012 and before 1 January 2014 (with the remaining cost being depreciated under the pool rates). Motor vehicles acquired after 1 January 2014 will be depreciated in the same way as other depreciating assets.

Project pools 4G

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 provisions28.

Costs that can be deductible under this provision include community infrastructure costs, certain site preparation costs for depreciating assets, project feasibility costs, environmental assessment costs, amounts to obtain information for projects, amounts in seeking to obtain intellectual property rights, amounts in relation to ornamental trees or shrubs, mining expenditure29, and transport capital expenditure (including costs associated with transport facilities, earthworks, bridges and tunnels that are necessary for that facility).

Year-end planning considerations

Consider whether you incurred any 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 4H

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 equipment30.

28 Section 40-830 of the ITAA 1997 29 ATO ID 2012/17 – subject to any impact of the proposed changes to mining information contained in the 14 May 2013 Budget announcement. 30 ATO ID 2011/43

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32 Year-end planning considerations

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.

Employee bonuses 4I

A taxpayer can only claim a deduction for employee bonuses in the 2014 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 resolution31) or by incurring a quantifiable legal liability to pay a bonus32.

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 2014 income year. Accordingly, a properly executed bonus plan may bring forward deductions to the 2014 income year. You should also consider the related party deduction provisions where the bonus is not paid until the subsequent year (see Chapter 13C).

Year-end planning considerations

If you pay employees 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 2014 income year.

Earning exempt type income 4J

Expenditure incurred to earn exempt or non-assessable non-exempt (NANE) income is generally not deductible, except where the amount incurred is interest in relation to certain foreign NANE dividend income33 or where the expense relates to the earning of attributable CFC income34.

The Government is currently considering a targeted integrity rule that may deny interest deductions claimed in deriving certain foreign NANE dividend income.

Where the expenditure is an indirect expense (e.g. it is an overhead cost), you should consider whether a portion of such expenditure should be treated as non-deductible35.

Year-end planning considerations

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.

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 4K

Where TOFA does not apply to an arrangement (see Chapter 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 foreign exchange gains and losses, generally spot exchange rates are required to be used which (due to the prescriptive rules) may not align with accounting rates used.

31 Taxation Ruling IT 2534 32 Merrill Lynch International 2001 ATC 4541 33 Section 25-90 of the ITAA 1997 and FCT v Noza Holdings Pty Ltd & Anor [2012] FCAFC 43 34 Section 23AI(2) of the ITAA 1936 35 Kidston Goldmines Ltd v FC of T 91 ATC 4538

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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, such as: a functional currency election (which allows taxable income to be calculated in the foreign currency); a forex retranslation election (which allows the accounting method to be used); and 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

Have you had any significant foreign currency transactions that have occurred during the income year?

Ensure that your 30 June tax calculations include adjustments for unrealised foreign exchange gains and losses.

Consider whether elections should be made to simplify the calculation of realised foreign currency gains and losses for the year.

As TOFA applies in precedence, you should consider the TOFA implications for foreign currency transactions (see Chapter 10D).

Gifts and donations 4L

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 $5,00036). Such an election must be made before you lodge your 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 PAF (Private Ancillary Fund), to which tax deductible donations can be made.

Year-end planning considerations

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.

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.

Consider whether you wish to establish your own charitable structure such as a PAF to which tax deductible donations can be made.

Interest deductions 4M

Refer to Chapter 10B under Finance Issues for consideration of the deductibility of interest costs.

36 Subdivision 30-DB requires any gift of property to be valued by the ATO

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34 Prepayments 4N

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 Chapter 5M).

Excluded expenditure covers expenditure that is less than $1,000 (GST exclusive); payments that are required to be made pursuant to a law or court order; and payments that are for salary or wages under a contract of service37.

Year-end planning considerations

Unless you are an individual or small business taxpayer, 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 4O

Service and management fees paid to associated service entities may not always be deductible because38:

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.

The documents or arrangements are put in place after year-end.

The ATO has set out detailed guidelines in relation to the deductibility of such 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 Chapter 13).

Year-end planning considerations

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.

Capital support payments 4P

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 determination 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 are not for services but (instead) relate to providing support to the subsidiary entity for losses incurred.

Year-end planning considerations

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

37 Section 82KZL of the ITAA 1936 38 TR 2006/2

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appropriate arm’s length service fee.

Superannuation expenses 4Q

Refer to Chapter 12A for the superannuation issues to be considered before year-end. Also refer to Chapter 5 for issues to be considered before year-end relating to superannuation payments from Trusts.

Trade incentives (purchase of stock) 4R

Refer to Chapter 3D 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

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.

Trade incentives (sale of stock) 4S

Refer to Chapter 3E of this document. An incentive that is not directly related to the sale of trading stock (or is not virtually certain at the time of the sale) does not reduce the sales price. In this case, the incentive is treated as deductible when the incentive is actually provided.

Year-end planning considerations

Review incentives on the sale of trading stock and determine whether a deduction should be claimed at the time of providing the incentive (rather than as an adjustment to the sales price).

Tax loss incentive for designated infrastructure projects 4T

The tax loss incentive for designated infrastructure projects came into effect on 11 July 2013 and aims to encourage private investment in nationally significant infrastructure by providing eligible entities the benefits of: uplifting the value of carry forward losses by the 10 year Government bond rate; and exempting the carry forward losses and bad debt deductions from the continuity of ownership and the same business tests. The amendments will apply to the tax losses for the 2012/2013 and later income years.

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

If your entity is involved in large scale infrastructure projects, legislation for the tax loss incentive for designated infrastructure projects has been introduced that will allow an incentive to recoup early stage losses for approved projects.

Notes relating to items in this chapter 4U

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Individuals 5

Tax rates for 30 June 2014 and 2015 5A

The following table outlines the tax rates that apply to resident individuals and non-residents for the 30 June 2014 and 2015 income years (excluding the Temporary Budget Repair Levy and the Medicare Levy - see below). There are no differences to the tax rates for these income years.

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

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 1.5% is payable on taxable income for the year-ending 30 June 2014. If you do not have appropriate private health insurance, then a Medicate levy surcharge of up to 1.5% can apply depending on your taxable income. From 1 July 2014, the Medicare levy will increase to 2% to include the 0.5% levy to be used for funding the National Disability Insurance Scheme. Non-residents are not required to pay the Medicare levy.

The following table applies for the year-ended 30 June 2014.

Base tier Tier 1 Tier 2 Tier 3

Singles $88,000 or less $88,001—102,000 $102,001—136,000 $136,001 or more

Families $ 176,000 or less $ 176,001— 204,000 $ 204,001— 272,000 $ 272,001 or more

Surcharge rate 0.0% 1.0% 1.25% 1.5%

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38 You may be exempt from paying the Medicare levy if you're a foreign resident, a resident of Norfolk Island, not entitled to Medicare benefits or you meet certain medical requirements.

The Medicare levy can be reduced for a number of reasons. These include: where your income is below certain thresholds; you had a spouse (married or de facto); you had a spouse that died during the year and you did not have another spouse before the end of the year; you are entitled to a child housekeeper or housekeeper tax offset; or 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 temporary budget repair (TBR) levy of 2% will apply for a three-year period from 1 July 2014 to 30 June 2017. The levy applies to income in excess of: (i) $180,000 for resident and non-resident individuals; and (ii) $416 for minors.

From 1 July 2015 the TBR levy will also be accompanied by a decrease in the rate of franking credits provided on dividends paid (reduced from 30.0% to 28.5%). Accordingly, the payment of a dividend after 1 July 2014 could result in an overall increase in the personal top-up tax payable on a franked dividend from approximately 24% to 29% of the cash component of the dividend received - i.e. compared to receiving a dividend on 30 June 2014.

It is further noted that the Fringe Benefits Tax (FBT) rate will increase to 49% from 1 April 2015, to match the highest marginal tax rate with the TBR levy. However, this creates a mismatch for a nine-month period from 1 July 2014 to 31 March 2015. Accordingly, individuals with taxable income that is greater than $180,000 could consider salary sacrifice arrangements for the period 1 July 2014 to 31 March 2015.

Comparison of income years and tax rates

As outlined above, over the next few years there are three main changes proposed that will have an important impact on the amount of tax paid by individual taxpayers: the first being the Medicare Levy increase of 0.5% from 1 July 2014; the second being the TBR levy of 2.0% from 1 July 2014 on taxable income over $180,000; and the third being the reduction in the franking credit offset to 28.5% from 1 July 2015. The effect of these three changes is that additional tax will be paid where income is derived in the later years (as compared to the 30 June 2014 income year).

In some cases the timing of income can be managed. For example, consider whether it is better to pay a dividend on or before 30 June 2014 as compared to 1 July 2014. A fully franked dividend of $99,260 (grossed up to $141,800) paid to a resident individual taxpayer, that has no other taxable income, will result in no additional tax payable in 2013/14 (including the Medicare levy) after taking into account the franking credit rebate. In 2014/15, this will decrease to a fully franked dividend of $93,744 (grossed up to $133,920).

Gross taxable income of $141,800 in 2013/14 will result in tax payable of $42,540 (including Medicare levy) and an average tax rate of 30.0% for an individual resident taxpayer. In 2014/15, to achieve the same average tax rate, a lower dividend of $133,920 will result in an average rate of tax of 30.0% (or $40,176).

Where an individual taxpayer is on the top marginal rate, a dividend paid on or before 30 June 2014 will result in less tax being paid of approximately 3.57% as compared to a dividend to be paid for the 30 June 2015 income year; and less tax of approximately 5.10% as compared to a dividend to be paid for the 30 June 2016 income year.

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Year-end planning considerations

Due to the 0.5% increase in the Medicare Levy and the 2.0% Temporary Budget Repair (TBR) Levy from 1 July 2014, you should consider the impact of bringing forward income to the 30 June 2014 income year. This can include bringing forward dividends to 30 June 2014.

Up to 5.10% of tax can potentially be saved by bringing forward dividends to 30 June 2014 as compared to paying dividends in later years.

The tax free threshold for minors that earn taxable income (that is not excepted income) is $416.

Salary sacrifice arrangements may provide a benefit to 31 March 2015, as the FBT rate will not be adjusted to reflect the TBR Levy until that time.

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 5B

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 the premium reduction entitlement by income threshold for 2013/14

From 1 April 2014, all rebate percentages are adjusted annually by a rebate adjustment factor. This means the rebate percentage for premiums paid before 1 April 2014 will be different to the rebate percentage for premiums paid on or after 1 April 2014.

Status Income thresholds

Base tier Tier 1 Tier 2 Tier 3

Single $88,000 or less $88,001 — $102,000 $102,001 — 136,000 $136,001 or more

Family $176,000 or less $176,001 — 204,000 $204,001 — 272,000 $272,001 or more

Age Rebate for premiums paid from 1 July 2013 — 31 March 2014

Under 65 yrs 30% 20% 10% 0%

65–69 yrs 35% 25% 15% 0%

70 yrs or over 40% 30% 20% 0%

Age Rebate for premiums paid from 1 April 2014 — 30 June 2014

Under 65 yrs 29.040% 19.360% 9.680% 0%

65–69 yrs 33.880% 24.200% 14.520% 0%

70 yrs or over 38.720% 29.040% 19.360% 0%

The family income threshold is increased by $1,500 for each Medicare levy surcharge dependent child after the first child.

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40 Year-end planning considerations

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.

Rebates and offsets 5C

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 2014 income year.

Year-end planning considerations

Mature age worker tax offset — available to taxpayers born before 1 July 1957 that are still in work. This offset will not be available from 1 July 2014.

Low income rebate — due to the change in marginal rates, the low income rebate will remain at $445 for the 2013/14 income year, with a further reduction to $300 for the 2015/16 year.

Income received in arrears — the rebate may be available if you receive income in a lump sum payment containing an amount that accrued in earlier income years.

Spouse superannuation contribution rebate — you may be entitled to a tax offset if contributions are made to a complying superannuation fund or RSA for the purpose of providing superannuation benefits for your spouse who is a low income earner or not working.

Net medical expenses tax offset — taxpayers with an adjusted taxable income below certain thresholds, and who claimed the net medical expenses tax offset for the year-ended 30 June 2013, can claim a reimbursement of 20% for net medical expenses over $2,162 (CPI indexed for 2013/14)39.

Recipients of social security benefits and allowances — the rebate may be available if you receive certain Australian benefit payments.

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 (ADF).

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.

Franked dividend tax offset — a refundable tax offset where you receive a franked distribution.

The Australian superannuation income stream tax offset — may be available if you receive an income stream from your superannuation fund.

Unused leave payments — a tax offset may be available to limit the tax payable on certain unused leave payments to 30%.

Zone rebates — you may be entitled to a rebate of tax where you are resident of specified remote areas of Australia (known as Zone A and Zone B).

Work expenses and substantiation 5D

For the 2014 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 allowancea, award

39 Note that from 1 July 2013, the METO is being phased out, with eligibility now being dependent on whether taxpayers are eligible for the rebate in the prior year.

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transport payments allowance and travel allowance expenses. The ATO accept a wide range of documents as written records of your claim, for example 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.

Year-end planning considerations

Ensure that you have kept appropriate records to substantiate your work expenses claim for 30 June 2014.

Specific occupations under ATO target for work expenses 5E

The ATO’s Compliance Program40 has outlined two specific occupations that it will be closely examining for work related expenses and deductions. These occupations are:

• Building and construction labourers, construction supervisors and project managers.

• Sales and marketing managers.

The ATO has indicated that it has selected these occupations because it has found them to be at higher risk of making mistakes with their work-related expenses due to the types of deductions they are entitled to claim. Furthermore, the ATO will be examining and matching amounts reported under the Taxable Payments Annual Report (TPAR) in the construction industry.

The ATO will also look closely at high work-related travel expense claims across all individuals.

The ATO has announced a data-matching program targeting online sellers. The ATO will collect data from online selling websites to identify sellers who have made sales of $10,000 or more during the 2012/13 and subsequent income years.

Year-end planning considerations

If you are either: [i] a building or construction labourer, construction supervisor or project manager; or [ii] a sales or marketing manager, the ATO will be closely scrutinising your 30 June 2014 work expenses and deductions.

The ATO will scrutinise high work related travel expenses by all other individuals. You should ensure your work related expenses can be validly claimed and that you have appropriate documentation.

If are you selling products through online selling sites, please note that the ATO will be conducting data matching on your activities.

Work related car expenses 5F

Where you use a motor vehicle 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. The available methods are the: cents per km method (business use of up to 5,000 km); the 12% of original value method (if business use over 5,000 km); the one-third of actual expenses (if business use over 5,000 km); and the logbook method.

For the cents per km and 12% original value 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 one-third of actual costs and the logbook method. Furthermore, odometer readings are required for the logbook method.

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 100km41. The average fuel price can be obtained from a number of sources42.

40 ATO Compliance Program 2013/14

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42 Year-end planning considerations

To leave your options open make sure that you have kept odometer readings for your car for the 30 June 2014 year.

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.

If using the log-book method, ensure that you have appropriately completed a valid log-book that can be used for the 30 June 2014 income year.

Work related travel expenses 5G

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 2014 income year43. 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 6 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.

Year-end planning considerations

Review whether you have incurred any costs during the year for work related travel expenses.

Ensure that you have kept travel records where you are away for 6 or more nights in a row.

Work related clothing, laundry and cleaning expenses 5H

You can claim a deduction for the cost of buying or cleaning: occupation specific or protective clothes; 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.

• 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 (e.g. 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 deductions.

41 This information can be obtained from http://www.greenvehicleguide.gov.au/GVGPublicUI/home.aspx for most vehicles 42 See http://www.aip.com.au/pricing/pdf/AIP_Annual_Retail_Price_Data.xls for annual average prices 43 TD 2013/16

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Year-end planning considerations

Examine whether you can claim deductions for work related clothing, laundry and dry cleaning expenses for 30 June 2014.

Ensure you have reviewed your industry guidelines published by the ATO.

Other work related expenses 5I

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, work related 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 34 cents per hour44.

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, DVDs, memory sticks, compact discs and insurance against the loss of your income.

Tools, equipment and stationary

This category of expenses may include depreciation on tools of your trade, protective items, computers and software. This category may also include items of stationary 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.

Year-end planning considerations

You should consider whether you can claim other work related expenses including: home office expenses; occupancy expenses; work related registration, development and support amounts; tool, equipment and stationary; and overtime meal allowance expenses?

Work related specific deductions for industries 5J

The ATO publish industry guidelines to help assist you with your claims for work related deductions. You should consider the specific industry guidelines for your profession.

44 Home Based Business ATO Fact Sheet

Pitcher Partners – Year-end tax planning toolkit

44 Year-end planning considerations

Examine the ATOs industry guidelines for your occupation to ensure that you are maximising your claim for deductions for 30 June 2014.

Self-education expenses 5K

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.

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.

Year-end planning considerations

Determine if you have self-education costs that relate to your current employment.

You should quantify your self-education expenses and determine whether you need to reduce those costs by $250.

Work related expenses you cannot claim 5L

There are generally 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 (e.g. buying a meal for a client or colleague).

Fines or penalties.

Child care expenses.

Fees paid to social clubs.

Year-end planning considerations

Review your work related expenses to ensure that they do not include non-deductible expenses for 30 June 2014.

Prepaying expenses 5M

Prepaying expenses can be an effective way of reducing taxable income for an income year. Where amounts are incurred by an individual or small business entity, such amounts may still be deductible upfront if the eligible service period is essentially less than 12 months45 or does not end later than 12 months after year-end. However, this is subject to another qualification.

45 Section 82KZM of the ITAA 1936

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Where the amount is incurred under an agreement46, 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

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.

Salary sacrifice arrangements 5N

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. For example: 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 (e.g. superannuation guarantee charges etc.).

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 (e.g. employees) to enter into salary sacrifice arrangements.

It is noted that the FBT rate will increase to 49% from 1 April 2015, to match the highest marginal tax rate for individuals due to the temporary budget repair levy. This provides a mismatch in the highest marginal tax rate compared to the FBT rate for a nine-month period from 1 July 2014 to 31 March 2015. Accordingly, individuals with taxable incomes greater than $180,000 could consider salary sacrifice arrangements for the period 1 July 2014 to 31 March 2015.

Year-end planning considerations

Where you are considering a salary sacrifice arrangement before year-end, ensure that the arrangement is effective for tax purposes. As the ATO are currently challenging some of these arrangements, if the amount is material you should seek appropriate advice.

Where individuals are expected to have taxable income of greater than $180,000 for the year-ended 30 June 2015, consider the opportunity to salary sacrifice prior to 31 March 2015 and the ability to utilise the lower FBT rate.

Employee share schemes 5O

Revised employee share scheme rules apply from 1 July 2009 to the taxation of the discount on shares, stapled securities and right/options acquired under an employee share scheme.

Pursuant to these rules, 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.

46 Section 82KZME of the ITAA 1936

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46 Pitcher Partners can assist you with the design of an employee share scheme and can also help you with any valuation issues you might have when trying to value the options granted under an employee share scheme.

Year-end planning considerations

Consider whether employee options and/or shares qualify for deferral under the employee share scheme provisions.

Foreign employment income 5P

From 1 July 2009, only the foreign employment income of Australian resident individuals engaged on foreign aid projects or military service overseas, is exempt from Australian tax. This means that fringe benefits provided in respect of non-exempt overseas employment can now be subject to FBT. However, the Government has introduced legislation dealing with fly-in / fly-out arrangements from 1 July 2009.

Year-end planning considerations

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 5Q

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 2014 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 3 of the last 5 years from this business activity.

Land worth more than $500,000 is used in this business activity.

Plant and equipment of more than $100,000 is used in this business activity.

These exceptions are no longer available for 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 discretion47 that the non-commercial business activities are commercially viable.

Year-end planning considerations

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.

If your adjusted taxable income is equal to or less than $250,000, you can only offset your loss made in the 2014 income year from the non-commercial activity if you can satisfy one of the 4 tests mentioned above. Otherwise, consider applying to the ATO to obtain access to the losses.

Personal services income 5R

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

47 AAT Case [2011] AATA 779

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regime may apply to attribute such income to you. You therefore need to consider the application of these provisions. See Chapter 3R for details.

Year-end planning considerations

Where you have provided services and you have operated through an entity (e.g. a trust or company), you need to consider the possible application of the PSI. Refer to Chapter 3R for details.

Living Away from Home Allowance 5S

Living away from home allowances (LAFHAs) will continue to be taxed under the FBT regime going forward however, the eligibility for the concessions relating to food and accommodation expenses has been reduced significantly.

With effect from 1 October 2012 there are new requirements that must be satisfied in relation to these two items to be eligible to claim the LAFH concessions. The new main condition 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. cannot be rented out etc.). The employee must also have a sufficient interest in the home (i.e. they or their spouse must own or lease the property).

Furthermore, the ability to be exempt from FBT for LAFHA food and accommodation costs is now 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.

Transitional arrangements apply to 30 June 2014 for permanent Australian resident employees whose LAFHA arrangements were in place prior to 8 May 2012. Other concessional living away from home benefits [such as: 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

If you are in receipt of a living from way from home allowance (LAFHA), you need to review the changes to LAFHA effective from 1 October 2012.

Notes relating to items in this chapter 5T

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

Pitcher Partners – Year-end tax planning toolkit

48 Trusts 6

ATO compliance activity 6A

Over the last few years, the ATO has increased its scrutiny of trusts and has sought to apply the law in a strict manner. In addition a Trust Taskforce has been established by the ATO to target the use of trust structures by wealthy individuals.

Accordingly, if you operate your activities through a trust, you should carefully review all of the planning considerations contained in this chapter and ensure that you strictly comply with the law and the requirements of your trust deed on an annual basis.

Year-end planning considerations

As the ATO has announced a number of trust compliance activities for 30 June 2014, you should carefully review all of the 30 June 2014 planning considerations contained in this chapter.

Trustee tax rate 6B

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 (taxable) income of the trust at the top marginal rate (i.e. 46.5%). 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.

Year-end planning considerations

To avoid a trustee assessment at 46.5%, you should ensure that beneficiaries are made presently entitled to all of the income of the trust estate by either 30 June 2014 or an earlier time (if required by the trust deed).

Trustee resolutions 6C

For the 30 June 2014 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 purposes48 and to avoid trustee assessments at 46.5%.

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 2014, 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 before year-end.

48 Rulings IT 328 and IT 329, which gave an extension to 31 August, have been withdrawn with effect from September 2011.

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Year-end planning considerations

Ensure that you have made distribution resolutions or distribution plans before year-end (or earlier if required by the trust deed) and that these can be evidenced.

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 6D

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: (a) income according to ordinary concepts; (b) the taxable income of the trust; or (c) 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 ruling49 in 2012 which provides its initial views on the meaning of income of a trust estate where the trust deed equates the amount to taxable income. Whilst this draft Ruling will not be finalised prior to the outcome of the trust tax reform process that commenced under the previous [Labor] Government and is continuing as part of the current Government’s tax reform ‘White paper’ process, in the interim the ATO hold the view that notional (or fictional) tax amounts (such as franking credits, Division 7A dividends, etc50), cannot form part of the income of the trust estate and should be excluded unless there is trust property that can support the amount. While the draft taxation ruling is highly controversial, taxpayers need to be careful where their trust deed attempts to define income as equating to taxable income and such types of fictional tax income exist.

Finally, it is noted that in practice issues mostly only occur where trustee distribution resolutions are based on distributing “fixed” amounts of income of the trust. 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

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.

Note that you will need to disclose the income of your trust estate for trust purposes in the 30 June 2014 tax return.

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.

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 (e.g. revaluation or devaluation amounts) by having regard to your resolutions and trust deed.

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.

Consider using percentages in your distribution resolutions to avoid a dispute with the ATO as to the meaning of income of your trust estate.

Complexities can occur if your trust deed defines income as being equal to taxable income (as outlined in TR 2012/D1). Consider either amending the definition in your trust deed before 30 June 2014, or exercising

49 Draft Taxation Ruling TR 2012/D1 50 Colonial First State Investments Ltd v FC of T [2011] FCA 16

Pitcher Partners – Year-end tax planning toolkit

50 discretions under the trust deed to alter the definition of income (where such an option is available under the deed).

Distribution of timing differences 6E

The ATO is focussing 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 to avoid top-up tax being paid by individuals.51

Year-end planning considerations

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.

Unit Trust - distribution of timing differences 6F

If a unit holder 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 capital gains tax event E4).

The ATO has released ATO ID 2012/63 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 Chapter 6D above.

Year-end planning considerations

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 6G

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 or UPEs) must not be ignored. See Chapter 7E for a more detailed description of Division 7A.

Year-end planning considerations

Ensure that you have considered Division 7A when making trust to company distributions for the current year.

Ensure you have complied with Division 7A in relation to prior year unpaid trust distributions to corporate beneficiaries.

Trust to trust distributions (rule against perpetuities) 6H

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. This may occur (for example) if the receiving trust has a later vesting date than the first trust. This may create an issue, for example, if the first trust is due to vest

51 See TA 2013/1

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within the next few years. Where the group consists of a large number of trusts, you should consider whether this rule may have practical implications for your 30 June 2014 trust distributions.

Year-end planning considerations

Ensure that you have considered the rule against perpetuities when making trust to trust distributions for the current year.

Eligible beneficiaries of the trust 6I

You should 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 46.5%.

This problem can occur, for example, where the trust deed of the first trust in a trust to trust distribution chain excludes the “trustee” of that trust from being a beneficiary of the first trust (e.g. under the excluded beneficiary clause). Typically, in such a case, it may not be possible to distribute to a second trust where the trustee of the first trust is an eligible beneficiary of the second trust (i.e. as the second trust may therefore be classified as an excluded beneficiary of the first trust). Accordingly, you should consider the trust deed very carefully.

Year-end planning considerations

Review the trust deed to ensure that distributions for the current year are made to eligible beneficiaries of the trust.

Trust streaming 6J

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 (express or implied). 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 for franked distributions, with an extension to 31 August for capital gains. The legislation also requires for the full amount of the financial (economic) benefits to be allocated to beneficiaries.

Pitcher Partners have developed standard documentation to help your trust satisfy the record keeping requirements for 30 June 2014.

Care needs to be taken with streaming any other form of income (e.g. interest, unfranked dividends, rental income, royalties, foreign income etc.) as the ATO’s view is that such streaming is ineffective for tax purposes.

Pitcher Partners – Year-end tax planning toolkit

52 Year-end planning considerations

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.

If your deed does not explicitly allow for streaming, consider whether the trust deed should be amended before year-end.

Complete a written record before midnight on 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.

Complete a written record before midnight on 31 August 2014 (or earlier if required by the deed) that evidences the specific entitlement for capital gains from the trust. Consider utilising the Pitcher Partners standard documentation. An earlier time may be required (e.g. 30 June) if the trust deed defines capital gains to be income.

Make sure you understand the tax consequences of trying to stream any other forms of income, other than capital gains and franked distributions.

Capital gains versus revenue gains 6K

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 public ruling indicating that (in its view) not all gains made by an investment trust are to be treated on capital account52.

The ATO holds the view that a gain or loss will be only be on capital account if the trustee adopts a “buy and hold” style of investment, where annual turnover is less than 10% of the portfolio of investments and 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 arguing53 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.

Year-end planning considerations

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.

Ensure that you are aware of 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 6L

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 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 Chapter 6N). 52 TD 2011/21 53 August v FCT [2013] FCAFC 85

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However, a trust may automatically satisfy the trust loss provisions if the trust makes a family trust election (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 Chapter 6P).

Accordingly, if the trust has not made (and is unlikely to make) a FTE, the control and ownership tests must be considered before year-end. This is because distributions made at year-end may result in failure of these tests.

Year-end planning considerations

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.

If elections are unlikely to be made, current year distributions to a trust may result in the trust being unable to utilise tax losses or bad debts. Accordingly, consider trust distributions carefully before year-end.

Flowing franking credits through a trust 6M

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 45-day 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 discretion54.

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

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.

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 6N

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.

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 unpaid present entitlement is sufficient to breach the rules to deny deductions to the trust55.

54 Colonial First State Investments Ltd v FC of T [2011] FCA 16 55 Corporate Initiatives Pty Ltd & Ors v FC of T 2005 ATC 4392

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54 As the rules can generally be overcome by making an FTE, you should consider whether a family trust election 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 Chapter 6P).

Year-end planning considerations

Where income is to be injected into a trust (e.g. by another trust), you should consider whether a family trust election 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 6O

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 trust56.

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

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) 6P

FTEs are made for various reasons. They can enable trusts to carry forward losses or utilise bad debt deductions (see Chapter 6L); they can ensure that the income injection test is not breached (see Chapter 6N); they can ensure that franking credits can flow through the relevant trust (see Chapter 6M); and they can ensure that losses are available in a company that is owned by the trust (see Chapter 7F).

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 46.5% 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 raising FTDT assessments.

The definition of a distribution is very wide and includes non-arm’s length transactions (e.g. interest free loans57, transfers of trust property, allowing use of trust property, forgiveness of commercial debts or unpaid entitlements58).

Because an FTE is made when a trust return is lodged, 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. 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 family trust elections 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.

56 TR 2005/12 57 Section 272-60 of Schedule 2F of the ITAA 1936 58 Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62

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Year-end planning considerations

Where the trust has made a family trust or interposed entity election, ensure that non-commercial transactions are not made with anyone outside the FTE group (otherwise you may have a family trust distribution tax exposure at 46.5%).

If an issue is identified, consider charging arm’s length consideration before year-end to reduce any exposure for family trust distributions tax.

Where the existing group has made a family trust election, 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).

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 interposed entity election or the ability to change the test individual).

TFN withholding and trustee reporting 6Q

Beneficiaries must quote their tax file numbers (TFNs) to trustees prior to receiving or becoming entitled to trust distributions. The consequences of non-compliance can be a 95% tax rate.

That is, where the trustee has not received the TFN, the trustee is required to withhold 46.5% 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 95% (i.e. 46.5% income tax on the distribution in the hands of the beneficiary and 46.5% penalties on the trustee). It is therefore, critical that trustees comply with these rules.

Where the trust distributes an amount to a beneficiary, the trust must obtain a TFN from the beneficiary before the distribution. The trustee must then report the TFN to the ATO by 30 days after the quarter end (if the trustee has not previously reported the TFN).

For the 30 June 2014 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 2014. Accordingly, it is absolutely critical that trust resolutions are completed by 30 June 2014 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 2014. Pitcher Partners can assist you in creating such a report.

Pitcher Partners – Year-end tax planning toolkit

56 Year-end planning considerations

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 46.5% on the distribution.

Ensure that the trustee reports any new beneficiary TFNs to the ATO by 31 July 2014 (if they have not already been reported in a previous income year).

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 2014).

Consider lodging a TFN report for 31 July 2014 that includes the TFNs of all potential beneficiaries of the trust not already been reported in a previous income year. Pitcher Partners can assist you in creating such a report.

Review of trust deeds 6R

You should consider whether the relevant trust deed should be reviewed before year-end. For example, you may wish to consider whether the trust deed defines income of the trust in an appropriate or flexible enough manner and whether the deed allows streaming (or at least does not forbid it). You may wish to also review distribution clauses to ensure they are appropriate for the current year.

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 deed59. You should also be aware that further changes to your deed may subsequently be required following any changes to the taxation of trusts under the Government’s proposed ‘White Paper’ on tax reform.

Year-end planning considerations

Consider reviewing your trust deed before year-end to ensure that the deed is appropriate for the current year resolutions and distributions.

Superannuation deductions 6S

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 business60. This largely agrees with the ATO’s view in TR 2010/161.

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.

59 ATO Decision Impact Statement: Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark and TD 2012/21 60 Kelly v FCT (No 2) [2012] FCA 689 61 TR 2010/1, paragraph 243

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Year-end planning considerations

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 superfund 6T

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 45%.

Year-end planning considerations

Non-arm’s length income derived by a superfund (which may include discretionary trust distributions or private company dividends) can be taxed at 45% in a superfund.

Notes relating to items in this chapter 6U

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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58 Companies 7

Payment of dividends 7A

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 2012/5. 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

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 7B

When paying dividends for the 30 June 2014 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 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 2014, 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:

Generally the 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.

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 deficits 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 is penalised, by a disallowance of the offset by 30%.

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Year-end planning considerations

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.

Distribution statements 7C

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

Where dividends are paid, ensure compliance with the dividend statement requirements including the period for providing these to your shareholders.

Debt that can be treated like equity 7D

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 requirements62.

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 2014. 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 returns63. This can also give rise to franking deficit issues and penalties where you are treated as over franking the dividend.

62 The legislation requires an adjusted benchmark interest rate to be calculated. 63 ATOID 2005/38

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60 Year-end planning considerations

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.

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.

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 7E

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, leave is only granted in certain circumstances.

The ATO has announced that it will be conducting compliance activity on Division 7A64. 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 2014.

Direct loans, payments and debt forgiveness transactions

Loans, payments or debt forgiveness transactions to shareholders or their associates will trigger a Division 7A exposure. From 1 July 2009, the use of a company’s assets (e.g. 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 for existing Division 7A loans. You should explore the ability to offset amounts due to you against these minimum loan repayments. 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 7 year investment agreements. The 2013/14 Benchmark interest rate is equal to 6.20%65.

64 ATO Compliance Program 2013/14 65 TD 2013/17

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Year-end planning considerations

Identify all Division 7A loans made by the company in prior years and determine the required minimum loan repayments (MLR) 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.

Identify any new loans that have been made to shareholders or associates. These loans may need to be placed on complying terms.

Identify any payments made for shareholders or associates (including cash payments, 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).

Ensure that interest has been charged on compliant Division 7A loans using (at the very least) the 2013/14 benchmark interest rate of 6.20%.

Unpaid entitlements — Division 7A loans

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.

Unpaid entitlements — 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.

The complying investment agreement, usually referred to as a sub-trust arrangement, may consist of a 7 or a 10 year interest only loan, with a balloon principal repayment at the end of the agreement. Alternatively, the post 16 December 2009 UPE may be invested into an asset for which all benefits must be returned to the corporate beneficiary.

Where a UPE to a company remains a UPE, you will still need to consider the implications of a UPE to a company situation.

Where a trust has an outstanding UPE directly to a company, Division 7A will deem any loan, payment or debt forgiveness made by the trust as being made directly by the company. Interposed entity rules can trace UPEs through several trusts.

Where a trust has made a distribution to a company in a prior year and that amount is still unpaid, then all loans, payments and debt forgiveness by the trust in the current year (whether directly or indirectly through one or more trusts) can be deemed to be made directly by the company.

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, minimum loan repayments will be required with the trust by 30 June.

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62 Year-end planning considerations

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.

Consider whether UPEs arising on or after 16 December 2009 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 (e.g. trust to trust distributions if there is a corporate beneficiary with a UPE in the group).

Consider rationalising UPEs and loans around the group to simplify the Division 7A analysis before 30 June 2014.

For prior year UPEs that have been converted to Division 7A compliant loans, ensure the trust has made minimum yearly repayments before 30 June 2014.

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.

Identify and examine all related party transactions made by a trust where that trust has one or more UPEs to a corporate beneficiary.

If there are existing complying loan agreements in place between the trust and related entities, you will need to consider minimum loan repayments that need to be made before 30 June.

Consider whether turning the UPE with the corporate entity into a complying Division 7A loan provides a more manageable outcome.

Other interposed entity transactions

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. It is generally useful to identify all loans and payments between entities within the group to assist in the application of the interposing rules.

Year-end planning considerations

Identify all loans and payments 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.

Consider strategies to mitigate the interposed entity rules from applying, such as placing all loans from companies on complying Division 7A terms (e.g. even when such companies do not have a distributable surplus).

Company Losses 7F

A company can only utilise 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 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 Chapter 6L).

Where the ownership test is not satisfied, the same business test must be applied. However, the ATO takes a very stringent view on what constitutes maintaining the same business.

It is critical that you consider the application of the carry forward loss provisions where prior year losses are to be utilised for the 30 June 2014 income year. It is noted that this continues to be a target area of the ATO from a tax compliance perspective.

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Year-end planning considerations

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.

Loss carry-back provisions 7G

The current Government's Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 (the “Mining Tax Repeal Bill”) proposed to abolish the loss carry-back rules for the 2013/14 income year and later income years. The defeat of this Bill in the Senate on 25 March 2014 however, means the proposed repeal has not been passed and the current loss carry-back rules still stand (despite the Government's intention that they be repealed). The current rules allow the 2014 losses to be carried back to either (or both) of the 2012 and 2013 income years. The maximum amount of the rebate is the lesser of: $300,000 (i.e. $1 million of losses multiplied by 30%); the company’s franking surplus at the end of the 2014 income year; and the amount of tax paid in the relevant prior 2012 and 2013 income years (adjusted for net exempt income where applicable).

If a taxpayer is eligible to claim a loss carry-back tax offset in respect of the 2014 income year the ATO has announced that it is open for a company to self-assess on the basis of the existing law but once the law is repealed, the ATO will amend the company tax return to disallow the claim. This will result in an increase in the taxpayer’s tax liability. No tax shortfall penalties will be applied by the ATO and any interest attributable to the shortfall will also be remitted to nil according to the ATO.66

Year-end planning considerations

While the Government intends to repeal of the loss carry-back rules for the year ending 30 June 2014, legislation has not yet passed. Consider whether you should be making a claim or not based on the currently enacted provisions.

Companies self-assessing on the basis of the existing law should examine transactions close to year-end to determine whether they will jeopardise their ability to carry-back losses (e.g. receiving a dividend from a subsidiary entity).

Share capital transactions 7H

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.

66 https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Company-loss-carry-back/

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64 Year-end planning considerations

Review all accounting entries made to the equity section of the balance sheet for 30 June 2014 and the income tax consequence of these entries (e.g. tainting, unfranked dividends etc).

Consider whether it is possible to correct accounting entries that have been made in error.

Consider implementing controls to prevent inadvertent entries to the share capital accounts in future periods.

Tax consolidation — choice to consolidate 7I

For taxpayers who formed a consolidated group in the 30 June 2014 income year, it is important that they have made a choice to consolidate67 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 2014 tax return is lodged. These documents must state the effective date from which tax consolidation must be applied.

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.

You 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

If your corporate group formed a consolidated group during the 30 June 2014 income year, you must ensure that you have made a choice in writing. This choice does not need to be lodged with the ATO. You can obtain a pro-forma choice from your Pitcher Partners representative.

If your corporate group formed a consolidated group during the 30 June 2014 income year, you must lodge a notification form with the ATO. This is separate to the choice to consolidate.

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 7J

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.

67 GE Capital Finance Australasia Pty Ltd & Anor v FCT [2011] FCA 849

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Year-end planning considerations

If an entity has joined the tax consolidated group during the income year, ensure that you have updated your tax sharing agreement and notified the ATO within 28 days of joining the group.

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.

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 7K

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 2014.

Year-end planning considerations

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 2014.

Tax consolidation — disposal of subsidiary entities 7L

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 ACA amount. It is noted that the re-calculated 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

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.

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.

Research and development (R&D) 7M

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.

• 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

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66 after the end of their income year in which the R&D activity was undertaken (i.e. by 30 April 2015 for 30 June 2014 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 ‘advance findings’ and ‘overseas findings’ with AusIndustry for overseas R&D activities conducted from 1 July 2013 to 30 June 2014, by 30 June 2014.

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 2014 – especially as the Government announced in the Budget that from 1 July 2014 it plans to reduce: the 45% refundable tax offset to 43.5%; and the 40% non-refundable tax offset to 38.5%.

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 2014 income year. We can assist you at all stages with your R&D claims.

Year-end planning considerations

Consider whether the taxpayer is eligible for the R&D tax incentive for the 30 June 2014 income year and, if so, whether eligible R&D expenditure can be brought forward into the current year prior to the proposed reductions in the R&D tax offset rates from 1 July 2014.

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.

If overseas R&D activities have been conducted during the period 1 July 2013 to 30 June 2014, ensure that the taxpayer lodges the advance findings and the overseas findings prior to 30 June 2014.

R&D — ineligible companies 7N

Under legislation currently before Parliament, companies with an aggregate turnover of greater than $20 billion will no longer be eligible for the 40% non-refundable R&D Tax Incentive from 1 July 201368. In calculating the R&D entity's aggregate turnover, the assessable income of entities that are connected or affiliated with the entity along with entities that it is an affiliate of, for the same income year will be counted, even if their corresponding income year starts before 1 July 2013. These companies can however still claim the expenditure as a tax deduction at the company tax rate of 30%.

Year-end planning considerations

In light of draft legislation, where the taxpayer’s aggregated turnover is $20 billion or more the taxpayer will be ineligible for the R&D tax incentive from 1 July 2013.

R&D — feedstock adjustments 7O

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.

68 Tax Laws Amendment (Research and Development) Bill 2013

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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 adjustments69.

Year-end planning considerations

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 7P

Certain large business and multinational taxpayers are subject to a new reporting requirement to disclose their most contestable and material tax positions to the ATO by completing and lodging a reportable tax position (RTP) schedule with their tax return.

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 $6,60070, 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 reportable tax positions. 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

If you are a large taxpayer, you may be required to complete a reportable tax position (RTP) schedule with your tax return.

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.

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 7Q

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. At 30 June, it is possible to consider varying a final PAYG instalment - i.e. if you have sufficient information to accurately calculate the company tax for the year.

Generally a 15% buffer is provided for such estimates, whereby a taxpayer will be liable to the general interest charge (GIC) if the (varied) instalments are 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.

69 TR 2013/3 70 Section 284-75 of the TAA 1953

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68 Year-end planning considerations

Consider whether there is an opportunity to vary the PAYG income tax instalment for 30 June 2014 (for example, if an instalment is payable but a large refund is expected for the income year).

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.

Director penalty regime 7R

There have been recent changes that expand the director penalty regime where a company fails to remit superannuation guarantee amounts and PAYG withholding. As a consequence, directors should ensure that superannuation guarantee payments and PAYG withholding payments are all up to date.

Year-end planning considerations

Review any outstanding PAYG and superannuation guarantee payments at year-end and ensure that these are paid within the appropriate timeframe.

Consider implementing stringent internal guidelines and requirements in relation to PAYG withholding and SGC payments.

Notes relating to items in this chapter 7S

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Partnerships 8

Professional practices and trusts as partners 8A

The ATO is now considering its position in relation to a number of related issues for professional practices and partnerships, including71:

• Whether CGT has been accounted for when there has been a transfer of an interest in the partnership to a discretionary trust, or a change in owner’s interests.

• The commerciality of using a trust in a professional practice (e.g. determining how a trust partner carries on business in a professional partnership).

• Supporting documentation to transactions that are occurring, including the admission of the trust as a partner and appropriate legal documentation, including whether legal documentation matches what has occurred.

• Whether Part IVA will apply where a practitioner is returning income which is now low compared to the partnership profitability following a restructure.

• Understanding the commercial drivers when practitioners restructure to a partnership of discretionary trusts.

If you operate in professional services, it will be important to consider the extent to which income of the partnership is to be distributed to the underlying principals and any risks associated with the issues being examined by the ATO.

Year-end planning considerations

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.

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. Pitcher Partners can assist you in reviewing this issue.

Professional practices (unincorporated and incorporated) 8B

The ATO has released a number of tax determinations72 concerning no-goodwill professional practices. The tax determinations restrict the situations where the ATO will apply its concessional tax treatment under IT 2540 for both incorporated and non-incorporated practices. Under IT 2540, the ATO does not apply CGT market value substitution rules where partners are admitted or retire for no consideration (i.e. a “no-goodwill” practice).

However, the ATO has controversially indicated that it will apply CGT market value substitution rules in a range of situations, including where at least one of the partners (in the partnership) or shareholders (in the incorporated practice) is not a natural person practitioner. This view could mean that the ATO may challenge whether capital gains tax is payable73 when a member joins or leaves the professional practice, or the member’s interest in that practice changes. Recent meetings with the ATO have indicated that its underlying concern is the ability to alienate income through the use of trusts. Accordingly, one strategy to mitigate risks associated with these issues may be to ensure that appropriate amounts of income are included in the principal’s tax return.

71 Taxpayer Alert TA 2013/3 72 TD 2011/26, TD 2011/D9 and TD 2011/D10 73 Or whether the Employee Share Scheme Rules apply, or a dividend is payable, in an incorporated practice situation.

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70 Year-end planning considerations

Where the professional practice owners do not entirely comprise natural person practitioners, you should consider the ATO’s recent view that tax may be payable where a member joins or leaves the professional practice, by virtue of the market value substitution rules being applied.

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. Pitcher Partners can assist you in reviewing this issue.

Varying distribution amounts to partners 8C

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 year74.

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 business75. Furthermore, a partnership agreement cannot exist or operate retrospectively76. 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 entitled77. Again, care needs to be taken to ensure that amendments do not crystallise capital gains tax events. Furthermore, the ATO does not accept variations where no partnership exists at common law78.

Year-end planning considerations

Where a partnership exists at common law, consider whether partnership distribution variations can be utilised before 30 June 2014 to vary distribution entitlements for various partners.

Equity contributions by a company 8D

An ATO fact sheet 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. Accordingly, care needs to be taken if the amounts are material.

74 TR 2005/7 75 IT 2316 and section 94 of the ITAA 1936 76 Waddington v O'Callaghan (1931) 16 TC 187 77 FC of T v Nandan 96 ATC 4095 78 TR 93/32 and FC of T v McDonald 87 ATC 4541

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Year-end planning considerations

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 chapter 8E

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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72 Capital gains tax 9

General 9A

Where amounts or proceeds are received by an entity, those amounts may be subject to the capital gains tax (CGT) provisions. Generally, CGT applies to the disposal of CGT assets acquired on or 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 rights79. 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 (e.g. main residence - refer to Chapters 9F and 9G).

The ATO has indicated that during the 2013/14 income year it will be conducting compliance activity on CGT events within the SME market.80

Year-end planning considerations

Review all proceeds received during the year, especially where those proceeds have not been included in assessable income.

A capital gains tax event may happen on entering into a contract (e.g. 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 2014 income year.

Consider whether there are any exceptions to the CGT provisions to exempt the capital gain or capital loss (refer to Chapters 9F and 9G).

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 9B

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 (e.g. the CGT concession stakeholder test).

The four concessions available are a 15 year exemption, a 50% active asset reduction, a retirement exemption and a replacement asset rollover.

79 CGT events D1 and H2 of the ITAA 1997 80 Compliance in focus 2013-14 | Australian Taxation Office

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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 (e.g. the retirement exemption within 7 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 Capital Gains Tax 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 Chapter 12E).

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

If a capital gain on a business related asset (including shares or units) is derived during the current income tax year by a taxpayer (or its affiliates / connected entities), consider whether the small business CGT concessions can be accessed.

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.

Where the taxpayer is seeking to utilise the retirement exemption, ensure that you lodge the required capital gains tax election form with the superannuation fund on or before the contribution is made.

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.

Ensure that choices are made by the relevant dates.

CGT discount 9C

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 period81. Not all CGT events qualify for a 50% discount.

The CGT discount may no longer be fully available for non-resident and temporary resident individuals where CGT events occur on or after 8 May 2012, to the extent that the individual was a foreign resident or a temporary resident at any time after that date. The changes will also apply to any resident taxpayer who inherits property from someone who was a foreign or temporary resident at any time from 8 May 2012. However, special rules can apply to allow for a full or partial discount in certain circumstances. For example, a market valuation obtained for the asset as at 8 May 2012 can (in some cases) protect the CGT discount on the unrealised capital gain as at that date. However, to apply this method, a choice needs to be made by the taxpayer. Alternatively, the CGT discount may be available on a day’s basis to the extent the individual was an Australian resident over the period that the asset was held.

Finally, the ATO may also seek to classify capital gains as being on revenue account in certain cases (see Chapter 6K). Where this occurs, the discount will not be available.

81 TD 2002/10

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74 Year-end planning considerations

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.

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).

Non-resident and temporary resident individuals no longer qualify for discount capital gains. However, special rules may allow for a full or partial discount in certain circumstances (either on an Australian resident day’s basis or in some cases using a market valuation as at 8 May 2012).

CGT and international tax 9D

Special rules apply to in-bound investments by non-residents and outbound investments made by residents into non-resident countries. Refer to Chapters 11L and 11M for further details.

Earnout arrangements 9E

Earnout arrangements are commonly used when selling private businesses or assets used in a business. On 14 December 2013, the Government announced that it will be proceeding with the previously announced earnout amendments, where the CGT provisions will apply to ensure that earnout payments (as defined) will be attributed to the underlying assets82. These measures could allow for CGT to be payable based on capital proceeds received, rather than the market value of future capital proceeds.

These measures have been earmarked to apply from 17 October 2007. The ATO has indicated that it will administratively allow taxpayers to lodge returns based on the proposals83. Therefore, a properly constructed earnout arrangement may allow for the deferral of a portion of taxation on the capital proceeds on the sale of a CGT asset until such proceeds are received.

Year-end planning considerations

Consider whether the sale of any CGT assets for the income year require consideration of the announced earnout provisions, which may result in a deferral of the capital gain.

CGT exemptions and rollovers 9F

A number of CGT exemptions can apply to reduce capital gains and losses derived during an income year. The following table provides a non-exhaustive list of a number of those 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

82 Treasury discussion paper, 12 May 2010 83 CGT: Look-through treatment for earnout arrangements, ATO

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• Certain payments for compensation and damages84

• Transfer of stratum units to occupiers

• Certain testamentary gifts

• Marriage or relationship breakdown settlements

• Main residence exemption

• Rollover for assets compulsorily acquired / lost / destroyed

• Scrip for scrip rollover relief

• Demerger relief

• Splitting of assets and merging of assets

• Cars, motor vehicles and valour decorations

• Assets used to produce exempt and NANE income

• Depreciating assets used for producing income

• TOFA financial arrangements

• Capital losses by a lessee where the asset is non-income producing

• Forex hedging gains or losses on liabilities

• Forex hedging gains or losses on pre-CGT assets

• Capital gains or losses on certain boats

• CGT events on death

• Rollover for the change of an unincorporated body to an incorporated company

Year-end planning considerations

Where you have significant capital gains, consider if any exemptions or rollovers will reduce your capital gains or losses for the income year.

Main residence exemption 9G

If a taxpayer sold his/her dwelling in the 2014 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, for example: where there was an absence during the ownership period; adjacent land (whether up to two hectares or more) is being sold with the main residence; compulsory acquisitions of the main residence and/or adjacent land have occurred; where the residence was used for a period to derive income; when there are two properties that are both used as a main residence; and 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 2 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.

84 On 14 December 2013 the Government confirmed that it would proceed with a previous announcement that if you have received compensation or insurance payments since 1 July 2005 through a trust, you may be eligible for CGT exemptions.

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76 Year-end planning considerations

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 chapter 9H

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Finance issues 10

Loan rationalisation and debt forgiveness 10A

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 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

Consider rationalising all group loans prior to year-end to simplify the loan structure and the management of Division 7A loans around the group.

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 10B

Interest expenses can form a major part of deductions for an income year. Where this is the case, you should consider closely the deductibility of the interest and any tax planning items that may be available for prepaying interest (see Chapter 4N). Questions concerning the deductibility of interest can occur where:

• 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 unpaid present entitlements.

• 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 Chapter 7D).

• The loan is used to finance an asset that is provided to a related party at less than market rates.

• You do not satisfy the thin capitalisation provisions (see Chapter 11P).

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 Chapters 4N and 5M).

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78 Year-end planning considerations

Consider whether there will be any issue with interest deductions claimed for the year.

If you are considering a prepayment of interest, ensure that the prepayment will be deductible as intended (see Chapters 4N and 5M).

Capital protected borrowings 10C

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 (e.g. 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 2014. This should be considered where a deductible prepayment of interest is being considered close to year-end.

Year-end planning considerations

Consider closely 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.

The Taxation of Financial Arrangements (TOFA) — general 10D

The Taxation of Financial Arrangement (TOFA) provisions apply to “financial” arrangements, such as loans, derivatives, foreign currency etc. 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 (e.g. has deferred interest and has an issue life of greater than 12 months)85. A small taxpayer can also elect to apply the TOFA provisions.

TOFA applies an accruals regime, so that gains (e.g. interest income) and losses (e.g. interest expense) are accrued where they are sufficiently certain. Accordingly, TOFA can change the basis for assessing returns to taxpayers. TOFA applies to new arrangements from 1 July 2010 for most taxpayers, unless the taxpayer has previously made an early election (i.e. to apply the rules from 1 July 2009) or made a transitional election to bring existing arrangements within TOFA. Transitional elections needed to be lodged with the ATO.

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.

85 Section 230-455 of the ITAA 1997

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Year-end planning considerations

Consider whether TOFA applies mandatorily to your entity for the 30 June 2014 income year and the impact it may have on financial type arrangements (e.g. loans, bank accounts, swaps, debts, deferred settlements, etc).

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 (e.g. preference share deductions).

TOFA — elections 10E

The TOFA provisions allow taxpayers to make a number of elections that align their taxation outcomes with their accounting outcomes. These elections include: an election to allow small taxpayers to be taxed under TOFA; an election to use the tax hedging provisions; an election to use the fair value accounting method; an election to use the forex retranslation accounting method; 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 2011 income year, the election would also apply to the 2012 and subsequent income years) and require a number of conditions to be satisfied (e.g. audited accounts).

Where such elections have not previously been made, elections will need to be made by 30 June 2014 if such elections are to apply for the 30 June 2014 income year. Accordingly, this means your consideration of TOFA should be performed before this date.

Year-end planning considerations

TOFA allows a number of elections to align tax with accounting. Such elections need to be made before 30 June 2014.

TOFA — consolidated groups 10F

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

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 10G

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 (i.e. the validity of elections made under TOFA, compliance with the hedging method recording requirements and the appropriate application of the TOFA tax-timing methods).

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80 Year-end planning considerations

Ensure that you have appropriately considered your TOFA positions for the 30 June 2014 income year as the ATO are conducting compliance activity through TOFA questionnaires.

Notes relating to items in this chapter 10H

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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International tax 11

General 11A

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 important 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 in-bound and out-bound taxation issues for the income year. Where foreign tax may be payable, it is always prudent to seek foreign income tax advice.

Non-resident individual tax rates 11B

The following table outlines the tax rates that apply to non-resident individuals for the 30 June 2014 and 2015 income years. There are no differences to the tax rates for these income years but the Temporary Budget Repair Levy of 2.0% for income over $180,000 will apply for the 2015 income year. As noted at Chapter 5B, non-residents are not required to pay the Medicare 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

Tax residency and source 11C

On an annual basis, entities should consider their tax residency. 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 (e.g. for branch profits, non-portfolio dividends, etc.). 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 determination86 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 double tax agreement.

86 TD 2011/24

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82 Year-end planning considerations

You should carefully consider whether the relevant entity is a tax resident for 30 June 2014 and the tax implications that may follow.

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 exemption 11D

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 double tax agreements, this could result in the individual’s worldwide income being taxed in Australia.

An exemption 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) is not an Australian resident within the meaning of the Social Security Act 1991. Where the provisions are satisfied, exemptions are provided for most foreign income (other than employment income), for most capital gains (except for taxable Australian property), for interest withholding tax on interest paid to foreign residents and there is a relaxation of some record keeping rules.

According to a taxation determination87, 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).

Year-end planning considerations

If you are a citizen of a foreign country and visiting Australia, you should consider whether this will make you a resident of Australia.

Where you are a resident of Australia, you should consider whether there is an opportunity to apply the temporary resident exemption to your income for 30 June 2014.

Where you are a citizen of New Zealand, consider the potential impact TD 2012/18 may have on your temporary resident status.

Changing residence 11E

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 double tax agreement).

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.

87 TD 2012/18

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Year-end planning considerations

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.

Foreign accumulation fund (FAF) regime 11F

The foreign investment fund (FIF) rules have been repealed with effect from 1 July 2010. Foreign accumulation fund (FAF) provisions have been earmarked to replace the FIF provisions. However, to date there is no indication of an expected start date. We expect that the new provisions will target non-controlling interests in companies or trusts, where “interest like” returns are accumulated in the entity. It is noted that the ATO can target deferral opportunities obtained through foreign investment using its general anti-avoidance provision, Part IVA. Provided the investments are not covered by these integrity provisions, the lack of any FAF provisions can allow for the possible deferral of foreign income derived through a foreign entity.

Year-end planning considerations

You should consider how the absence of the FAF provisions may affect your tax position for 30 June 2014 and for investments to be made in 2014 and 2015.

Where your investment is in a foreign fund that is a trust, you should consider whether the deemed present entitlement rule in section 95A(2) may still attribute income to the beneficiary.

Controlled foreign company (CFC) regime 11G

The controlled foreign company (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.

While exposure drafts have been released on proposed CFC replacement rules, these rules have been put on hold by the current Government.

Year-end planning considerations

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.

Transfer pricing 11H

New transfer pricing provisions have been introduced with effect from 1 July 2013, which can apply to re-price all of your international dealings (loans, service fees, etc). The amendments 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 double tax treaties can operate independently of our unilateral domestic transfer pricing rules. These amendments are on top of earlier amendments and together they affect all taxpayers engaged in related party cross-border transactions (including permanent establishments). (Note, the first set of amendments applies retrospectively from income years commencing on or after 1 July 2004)

As there are no safe harbours contained in the new legislation, taxpayers may need to review their positions to ensure that they are not exposed (especially to the retrospective legislation which can apply from 1 July 2004).

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84 Under the new legislation, Australian taxpayers will be required to prepare transfer pricing documentation prior to lodging their income tax return. The ATO has released draft guidance on the documentation that should be prepared to be compliant with the provisions88. Where appropriate documentation is not prepared, penalties may apply if adjustments are made in respect of the transactions. Under the new provisions, the ATO now has an even greater ability to adjust transfer prices and to apply penalties if adjustments are made89.

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 International Dealings Schedule (see Chapter 11I), and the extended powers given by the amendments to the transfer pricing rules, the ATO will be in a strong position to challenge pricing methodologies adopted by taxpayers for their international related party dealings.

This is another area where taxpayers should expect an increased level of scrutiny, and thus should ensure that their transfer pricing documentation is both contemporaneous and robust. The 30 June 2014 income year is an ideal year to start ‘getting your house in order’. Pitcher Partners can assist you in this process.

Year-end planning considerations

If you have international dealings, you should ensure that you have appropriately considered the new transfer pricing provisions.

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 International Dealings Schedule for the 30 June 2014 income year.

International dealings schedule 11I

Entities with $2 million or more of related party dealings are required to complete an International Dealings Schedule (IDS) – which replaced the old Schedule 25A and Thin Capitalisation schedules. 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 2014 income year. Completion of this form should be done contemporaneously with preparing your transfer pricing documentation and (due to its complexity) cannot be left until the lodgement of your tax return.

Year-end planning considerations

Consider the information required to complete the International Dealings Schedule (IDS) for the 30 June 2014 income year well in advance to lodging your return. Ensure that your IDS response is consistent with your transfer pricing documentation.

Conduit foreign income 11J

The conduit foreign income (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 section 23AJ dividends (non-portfolio dividends), section 23AH profits (foreign branch profits) and Subdivision 768-G capital gains (non-portfolio participation exemption). 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

88 TR 2014/D4 and Draft PSLA 3673 89 Draft PSLA 3672

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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.

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

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 conduit foreign income exemption to reduce Australian tax paid.

Foreign income tax offsets 11K

Where the foreign income tax offsets (FITOs) 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 (e.g. 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

Consider your FITO position for 30 June 2014 to determine whether there are any excess FITOs that will be wasted. Strategies can be put in place to help reduce FITO wastage.

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 11L

Distributions from a non-resident entity may be exempt or non-assessable and non-exempt income of an entity. For example: branch profits received by a company (under section 23AH); dividends where there is an attribution account surplus (under section 23AI and 23AK); non-portfolio dividends received by a company (under section 23AJ); and capital gains made on the disposal of a non-portfolio active non-resident shareholding (under Subdivision 768-G). In order to qualify for these exemptions, certain conditions may need to be satisfied.

Year-end planning considerations

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 11M

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 double tax agreement 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 legislation has been introduced to remove

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86 the CGT discount for non-resident and temporary resident individuals on capital gains accrued after 7:30 pm (AEST) on 8 May 2012 on taxable Australian property (see Chapter 9C).

On 14 May 2013, the former Government announced changes to the land rich provisions, by including intangible assets (such as mining information and goodwill) connected to mining, quarrying or prospecting rights in the value of the taxable Australian real property (TARP) thus increasing the TARP percentage of a group. The current Government is deferring its decision as to whether to proceed with this announcement pending the outcome of ongoing litigation related to this issue.

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 double tax agreement should also occur in this alternative case90.

Year-end planning considerations

Where non-residents or temporary residents are considering a sale of Australian assets, you should consider closely whether such assets are non-taxable in Australia. This should include the announcement on 14 May 2013 which proposes changes to the land rich testing provision.

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 11N

Where deductions are incurred in earning exempt income or non-assessable non-exempt 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 assessable91. The second is in relation to debt deductions incurred in respect of previously attributed income and non-portfolio dividends paid to a company92. Note that interest deductions relating to branch income are not deductible. The Government is currently considering a targeted integrity rule that may deny interest deductions claimed in deriving certain foreign NANE dividend income.

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.

Year-end planning considerations

Where there is a foreign operation in the group that produces exempt or non-assessable non-exempt income to the group, closely consider whether any deductions incurred for the year will be denied.

Deemed dividends from non-resident CFCs 11O

Integrity provisions can operate to treat certain transactions made by a CFC as a deemed dividend to the shareholder or associate93. These provisions are similar to Division 7A, however they take precedent 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 year-end), the provisions can operate to deny access to the foreign income tax offset provisions and attribution credit

90 TD 2010/21 and TD 2011/25 91 Section 23AI(2) and 23AK(10) of the ITAA 1936 92 Section 25-90 of the ITAA 1997 93 Section 47A of the ITAA 1936

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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 circumstances94.

Year-end planning considerations

Closely consider related party transactions where benefits are provided by a CFC to a shareholder or associate of the shareholder.

Thin Capitalisation 11P

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 (e.g. 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 $250,000 or less for an income year. Draft legislation has been released, which will aim to increase the threshold to $2 million with effect from 1 July 2014.

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 3:1 is generally used to determine whether the rules are satisfied. This means that assets must be funded by at least 25% equity and no more than 75% debt. Where the safe harbour ratio is breached, taxpayers may be able to look at alternative methods of satisfying the thin capitalisation rules (e.g. the worldwide debt test).

There are a number of actions that may be taken to improve a taxpayer’s thin capitalisation position before 30 June 2014. These include refinancing interest bearing debt with certain complying non-interest bearing debt, injecting further capital into the taxpayer before 30 June 2014, or revaluing assets within the acceptable rules contained in the provisions. However, consideration should be given to integrity provisions (See Chapter 13) that may also need to be complied with prior to adopting such strategies.

Draft legislation has been released which will reduce the safe harbour gearing ratio to 1.5:1 from 1 July 2014, and will reduce the world-wide gearing ratio for outbound investors from 120% to 100%. However, inbound investors will also be given an opportunity to apply the world wide gearing ratio. Given that the safe harbour calculations rely on the balance sheet numbers as at 1 July 2014, it extremely important that the impact of these proposed changes is considered before 30 June.

94 Section 23AJ or 23AI of the ITAA 1936

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88 Year-end planning considerations

Perform high-level calculations to see whether debt deductions exceed $250,000 (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 $250,000 test) to determine whether the thin capitalisation rules are likely to apply.

Where the thin capitalisation measures are likely to apply, perform a high-level thin capitalisation calculation based on 31 May 2014 figures to determine whether there may be a denial of debt deductions for the 30 June 2014 year.

Consider various strategies to improve your thin capitalisation position before 30 June 2014, taking into account the various integrity provisions that apply.

Consider the significant proposed changes to the thin capitalisation regime. Due to the drastic nature of the changes, it is recommended that you consider your thin capitalisation position before 1 July 2014.

Deductions where withholding tax payable is not paid 11Q

For certain payments made to a non-resident (e.g. interest and royalties), 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 2014 income year.

Year-end planning considerations

Ensure that you have complied with the withholding tax provisions so that deductions for payments to non-residents (e.g. interest and royalties) are not denied for the income year.

Non-resident beneficiaries 11R

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 conduit foreign income, special withholding tax rates may apply. Due to the decision in the Bamford case and the ATO’s view on streaming (refer to Chapter 6J), 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 rules, this may give rise to anomalous results95.

Legislation has been introduced denying the CGT discount to capital gains made by non-residents and temporary residents after 8 May 2012 (see Chapter 9C). The legislation specifically applies to capital gains on CGT assets distributed through a trust to a non-resident or a temporary resident beneficiary.

Year-end planning considerations

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.

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 (e.g. interest income and unfranked dividends), given the ATO’s views on streaming.

Under recent legislation, the CGT discount is 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

95 Refer to ATOID 2002/93 and 2002/94.

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temporary residents.

Non-resident trusts and other offshore assets 11S

An interest in a foreign trust may give rise to a number of taxation issues including the application of the transferor trust provisions, the proposed foreign accumulation fund (FAF) 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 2014 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: (a) non-resident relatives control a foreign trust (i.e. whereby the class of beneficiaries may be wide enough to encapsulate Australian residents); or (b) 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

Consider whether you have an interest in a foreign trust for the 30 June 2014 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 disclosure opportunity (Project DO IT) 11T

On 27 March 2014, the ATO announced an initiative to allow eligible taxpayers to come forward and voluntarily disclose unreported foreign income and assets. Under this initiative, the ATO will generally only assess the last four income years and has stated that it will only use the information for calculating how much tax should be paid. Essentially, the ATO has indicated that this will mean that it will not be seeking to apply fraud or evasion to the taxpayer and will not be seeking criminal prosecution.

Furthermore, the ATO has committed to remitting the tax shortfall penalty to 10%, (or in full where additional income is $20,000 or less in a tax year). Shortfall interest charges are to apply at normal rates.

In order to access these benefits, eligible taxpayers must come forward before 19 December 2014. If you are concerned about your treatment of foreign income in the past, Pitcher Partners can assist you in reviewing your position and whether you should consider this opportunity.

Year-end planning considerations

If you have offshore assets or investments that you have not previously disclosed to the ATO, you should consider taking advantage of the current ATO offshore asset voluntary disclosure initiative to avoid steep penalties and the risk of criminal prosecution for tax avoidance.

Investment manager regime (IMR) 11U

The Investment Manager Regime (IMR) will apply to widely-held managed funds resident in a country that is an information exchange country (IEC). To qualify for the IMR, foreign funds will be precluded from carrying on or controlling a trading business in Australia (which will be relevant for private equity type funds). For funds that qualify for the exemption, gains made on portfolio investments in “passive assets” will be exempt from Australian tax (excluding gains on certain land rich investments and amounts subject to withholding tax - e.g. if the amount is interest or dividend income).

The Government has continued to release amendments to the IMR. Due to the technical nature of the provisions, and the annual testing requirements, it is critical that compliance with these measures is continually reviewed and tested.

For example, there is a requirement that the fund be resident of an information exchange country, and also that the fund provide an information statement to the ATO in respect of an income year in order to qualify as an IMR foreign

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90 fund for that income year. Furthermore, a trust or partnership that is an IMR foreign fund must provide a written notice containing information in respect of its status as an IMR foreign fund for the income year to each of its foreign resident beneficiaries or foreign resident partners.

Year-end planning considerations

If you are a non-resident widely held fund or an Australian investment manager, broker or custodian, you should consider the possible application of the new IMR regime for 30 June 2014.

In light of the proposed changes to the IMR regime, you may wish to reconsider your ability to apply the IMR regime to the applicable foreign fund.

Managed Investment Trust (MIT) fund payments 11V

For the 30 June 2014 year, the withholding tax rate for fund payments made by a MIT to a resident of an Exchange of Information (EOI) Country is 15%, while it is 30% for all other non-EOI countries.

However, 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 exchange of information arrangements. The reduced withholding rate will only apply where construction of the building commences on or after 1 July 2012.

Year-end planning considerations

The withholding tax rate on fund payments to non-residents during the 2014 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 2014 income year.

Consider the ability to access the reduced 10% withholding tax rate for energy efficient buildings constructed after 1 July 2012.

Notes relating to items in this chapter 11W

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Super and GST 12Superannuation

Deductions for superannuation contributions 12A

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 Superannuation guarantee (SG) contribution rate for the 30 June 2014 financial year remains unchanged at 9.25% of an employee’s “ordinary time earnings”. 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 2014 the maximum salary base is $48,040 per quarter.

There are essentially two types of contributions. Concessional contributions are deductible to the payer and are taxable in the receiving superannuation fund at 15%. Non-concessional contributions 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

To claim a deduction for super contributions, they must be made (i.e. received by the super fund) on or before 30 June 2014.

Superannuation guarantee 12B

Employers have to make a contribution of 9.25% of each employee’s ordinary time earnings (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 superannuation guarantee charge - comprising of a superannuation guarantee shortfall, interest and an administration fee.

The rate of contributions under the superannuation guarantee increases 0.25% to 9.50% with effect from 1 July 2014. The 2014/15 Federal Budget proposed to delay legislated superannuation guarantee increases. The legislated and proposed future contribution rates are as follows:

From Minimum Legislated Contribution Minimum Proposed Contribution

1 July 2013 9.25% 9.25%

1 July 2014 9.50% 9.50%

1 July 2015 10.00% 9.50%

1 July 2016 10.50% 9.50%

1 July 2017 11.00% 9.50%

1 July 2018 11.50% 10.00%

1 July 2019 12.00% 10.50%

1 July 2020 12.00% 11.00%

1 July 2021 12.00% 11.50%

1 July 2022 12.00% 12.00%

In addition, from 1 July 2013 the upper age cut-off under superannuation guarantee is removed, i.e. super guarantee applies on eligible earnings regardless of the age of the employee/director.

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92 Year-end planning considerations

If you are an employer, ensure you pay the required compulsory superannuation guarantee on each employee’s ordinary time earnings within 28 days of the end of each quarter.

Consider if you have to make superannuation guarantee payments in respect of bonuses paid to employees and payments made to non-employees (e.g. contractors, consultants or members of the board who are not paid via the payroll).

Contribution caps 12C

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 annual concessional contribution cap for the 2014 income year is $25,000. Individuals aged 59 and over on 1 July 2013 have a concessional contribution cap of $35,000.

From 1 July 2014, the annual concessional contribution cap will increase to $30,000. Individuals aged 49 and over on 1 July 2014 will have a concessional contribution cap of $35,000 from 1 July 2014.

Currently the annual non-concessional contribution cap is $150,000. From 1 July 2014, the annual non-concessional contributions cap will increase to $180,000. Consequently individuals under the age of 65 can contribute up to $540,000 at any time across a fixed three year period from 1 July 2014.

Year-end planning considerations

Make sure you have complied with the annual concessional and non-concessional contribution caps.

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.

You may consider deferring non-concessional contributions to on or after 1 July 2014 - from which time individuals under the age of 65 may be able to contribute up to $540,000 (across a fixed three year period).

Personal superannuation contributions 12D

Individuals can make concessional contributions. 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.

There are penalties for breaching the relevant caps (see Chapter 12E).

Year-end planning considerations

Consider whether the individual is eligible to make a deductible concessional contribution before 30 June 2014 and ensure notice requirements are met within time.

Excess contributions tax 12E

From 1 July 2013 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 super fund or fully release the after tax excess concessional contribution from superannuation. In terms of non-concessional

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contributions, currently contributions made in “excess” of the non-concessional contributions cap are taxed at the top marginal rate plus Medicare (46.5%).

The 2014/15 Federal Budget proposed that for any “excess” non-concessional contributions made after 1 July 2013, the Government will allow individuals to withdraw the excess contributions and associated earnings. The earnings will be assessed as part of the individual’s assessable income and taxed at their marginal tax rate. If excess non-concessional contributions are left in superannuation they will be taxed at the top marginal tax rate.

Year-end planning considerations

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 12F

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 (superannuation guarantee 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 super lump sum, other than a death benefit, which you received that does not exceed the $180,000 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 super fund.

Year-end planning considerations

Individuals with income exceeding $300,000 pay an additional 15% contributions tax (i.e. 30%) on contributions for the 30 June 2014 year. You should take this into consideration when making super contributions prior to year-end.

Taxing of employment termination payments 12G

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 $180,000 will receive the ETP tax offset. Any amount of an ETP which takes the employee’s total income above the $180,000 cap will be taxed at the employee’s marginal tax rate, typically 46.5%.

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 $180,000 in 2013/14.

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94 Year-end planning considerations

If you have received an ETP during the 30 June 2014 income year, you should consider the taxation treatment of such payments.

Receipts from legal settlements on employment termination 12H

Amounts received in respect of legal costs incurred in a dispute concerning the termination of employment will not form part of an employment termination payment (ETP) where the amounts can be separately identified as relating to legal cost96.

However, the ATO holds that where the amount of the settlement is an un-dissected 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 under section 8-1, the settlement or award may also need to be included in the recipient's assessable income as an assessable recoupment97.

Year-end planning considerations

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 (which may be subject to concessional treatment).

Goods and Services Tax (GST)

GST adjustments for bad debt adjustments written off 12I

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.

Year-end planning considerations

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 12J

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. 96 TR 2012/8 97 Subdivision 20-A of the 1997 Act

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• 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.

• Regardless of your GST turnover, you are either an endorsed charitable institution, a trustee of an endorsed charitable fund, a gift-deductible entity or a Government school.

If you change from accounting for GST on a cash basis to a non-cash basis (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.

Year-end planning considerations

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 12K

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 financial acquisitions threshold (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.

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

If you make financial supplies, you should consider whether you have exceeded the financial acquisitions threshold in order to determine whether you can claim full input tax credits in relation to your acquisitions.

GST adjustments for changes in use 12L

Where you have changed the use of something that has been acquired or imported, you may have to make an adjustment in your business activity statement (BAS) for the period ended 30 June. Generally, you use goods or services for a creditable purpose 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

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96 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

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 12M

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 within 21 days after the end of the financial year (i.e. the report will be required by 21 July 2014). 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.

Year-end planning considerations

Consider reporting requirements to the Commissioner for payments made to contractors for the supply of building and construction services.

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.

Notes relating to items in this chapter 12N

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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Integrity provisions 13

Part IVA 13A

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 that simply defer the tax payable, where the commercial reason for entering into the arrangement is only an incidental purpose (e.g. split loan arrangements98) and where an Australian resident company uses a scheme to convert interest income which would be assessable, into NANE dividends99.

The Government amended Part IVA to broaden its application for schemes entered into or carried out after 16 November 2012. One of the main aims of the amendments is to increase the number of arrangements that result in a “tax benefit”. Accordingly, for any arrangements contemplated during the 2013/14 tax year, you should carefully consider whether Part IVA may apply to your arrangement.

Year-end planning considerations

You should consider Part IVA in relation to any material tax planning strategy that may be implemented for the 30 June 2014 income year.

Be aware that Part IVA has been amended in relation to schemes entered into or carried out after 16 November 2012 and that these amendments broaden the scope of the anti-avoidance provisions.

Promoted schemes 13B

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 common schemes that are promoted, what to look out for and what will attract the ATO’s attention as being tax ineffective arrangements.

Year-end planning considerations

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 13C

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 expenditure100 or may deny deductions where the income is also not brought to account in the same year101.

98 TD 2012/1 99 TD 2011/22 100 Section 82KJ of the ITAA 1936 101 Section 82KK of the ITAA 1936

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98 Year-end planning considerations

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 13D

The ATO may apply Part IVA to “wash sale” arrangements102 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 thereafter. 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

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 13E

A number of provisions can deny franking credits where an arrangement seeks to provide a franking credit benefit to a taxpayer103. 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.

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 benefits104. In addition, the Government has released legislation that will introduce a specific anti-avoidance provision targeting these arrangements.

Year-end planning considerations

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 13F

Two specific anti-avoidance rules have been introduced to prevent exempt beneficiaries being used to inappropriately reduce the amount of tax payable on the taxable income of a trust.

Under the first rule, 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 rule, 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.

102 Cumins v FCT [2007] ATC 4303, TR 2008/1 and TA 2008/7 103 For example Subdivision 204-D or section 177EA 104 TD 2014/10

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Pitcher Partners – Year-end tax planning toolkit

Year-end planning considerations

Consider the trust anti-avoidance rules that apply to distributions made to exempt entities.

Trust distributions and the trust stripping provisions 13G

The ATO has indicated that it will release a fact sheet on the application of the trust stripping provisions. These provisions can tax the trustee at 46.5% 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 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

The ATO are soon to release a fact sheet that could indicate 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 chapter 13H

Place any notes or additional information here for further reference with your discussion with your Pitcher Partners representative.

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 2014. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.