The financial year ending 30 June 2008 is nearly upon us and we recommend to clients that attention is given to certain areas of their accounting and taxation records at this time of the year.

Read more...

Superannuation

To obtain a tax deduction for the year ended 30 June 2008 please ensure that:

After paying the final payroll for the financial year but prior to the 30 June 2008 ensure that all superannuation payments have been made, cheques drawn and remitted, and entered on your MYOB accounting system (or alternate accounting system) and dated prior to the 30 June 2008. 

If you do not wish to make the superannuation payment and be eligible to claim a tax deduction (for this final quarter) in the financial year ending 30 June 2008, then your superannuation contributions are required to be made no later than 28 July 2008. If the superannuation payment is made by 28 July 2008, a tax deduction will be claimable in the financial year 30 June 2009. Please note that any superannuation payments made after 28 July 2008 which relates to the year ended 30 June 2008, will not be deductible. 

When entering into your accounting system, payments should be allocated to the superannuation payable account. This account should be balanced to zero after all cheques have been drawn and entered. Please ensure that if your employees do not have a superannuation fund that one is opened immediately on their behalf so that your year end obligations are able to be met. Please note that the SGC Superannuation rate remains at 9% for the year ending 30 June 2009 and that your accounting system should reflect this. 

As previously notified superannuation contributions are required to be made on a quarterly basis. Sufficient superannuation contributions will have to be made for each quarter by the following dates.

Superannuation Self Managed Funds

If you have a Self Managed Superannuation Fund and wish to maximise you tax deductibility in the current financial year and achieve a long term investment strategy in providing for your retirement you may wish to consider contributing to your superannuation fund the maximum allowable contribution. The Superannuation Fund, provided that it is a regulated fund will be liable to pay tax at the rate of 15% on the contribution while if you have made this contribution from a corporate entity then you may be entitled to a tax deduction at a minimum of 30%. 

For more information on this procedure please contact this office. 

Superannuation deduction limits based on the age of the employee for 2008 is as follows:

GST

The Australian Taxation Office is becoming more active in the Audit of Small Business BAS/GST Returns

It is extremely important that you peruse all transactions made in your books of account and confirm that GST has been claimed on all expenses (where applicable) and included in all sales invoices. 

Clients should be aware that they must be in possession of a Tax Invoice for all transactions in excess of $75.00 (exclusive of GST) and that all invoices must be available to the Australian Taxation Office upon an audit taking place.

Furthermore it is essential that the vendor supplying an invoice has a properly drawn Tax Invoice showing their ABN before you pay the account. 

Where a supplier’s invoice is in excess of $1000 your correct business name must appear on the suppliers invoice. The Australian Taxation Office has indicated that they will disallow GST Tax Credits when these conditions are not adhered to.  

Please note that overseas transactions will generally not attract GST however if you are uncertain of the GST treatment on any transaction it is important that you bring the transaction to our attention to determine if the transaction has been treated correctly.

Bank Reconciliations

When completing your Bank Reconciliation for your various bank accounts the normal procedure is to reconcile at the end of each page of the Bank Statement.   

At the 30 June 2008 upon receiving your bank statement please rule off the Bank Statement at 30 June 2008 and reconcile to this point before going any further.  

Complete your Bank Reconciliation and print the statement from your MYOB file or alternate accounting file. Store this reconciliation to provide to this firm with your year end information together with a photocopy of the 30 June 2008 Bank Statement. 

You can now complete the rest of the Bank Reconciliation process to the end of the Bank Statement page as usual.

PAYG Payment Summaries (Group Certificates)

The preparation of PAYG Payment Summaries will be carried out within 14 days of the year end and will be an automated function for those clients using MYOB. 

For this to take place it is absolutely necessary to ensure the following:

a)      All staff members have Tax File Numbers entered on the system

b)      All staff members have full addresses entered on the system

c)      All staff members have starting and ending dates if no longer employed on the system.

Please contact this office to carry out this process and do not attempt this function unless you have previously completed this. 

Year End Payroll Rollovers

Before paying the first payroll for the new financial year a Year End Payroll Rollover must be completed. A staff member from our office will attend to this process when completing the 2008 PAYG Payment Summaries.

Income Tax Rates for Individuals - 1st July 2008

In the recent Federal budget, changes were made to the rates of tax applicable to income and therefore a new tax schedule for income derived after 1^st July 2008 will become effective.  

A physical copy of the new rates schedule may be obtained from this office. 

Clients that use MYOB payroll will have their tax rates updated when our staff member prepares the 2008 PAYG Payment Summaries. This will take place before the first payroll for the new financial year is due.

Trade Debtors

A full list of your Accounts Receivable should be printed and reviewed to ensure that all debtors have been correctly recorded and that all debtors are recoverable. Any Debtors that are not recoverable should be written off. (refer note on Bad Debts) 

Bad Debts

After reviewing the Accounts receivable listing any doubtful or bad debts should be written off to obtain the income tax deduction and GST credit.  

This should be recorded in MYOB by entering a negative sale amount including GST to the card of the debtor with a denotation of “written off uncollectible” and coded to the general ledger card “Bad Debts”.  

Once this is entered the negative sale should be applied using “settle returns & credits”.Please ensure that the settle returns & credits are dated prior to the 30 June 2008. 

Trade Creditors

A full list of your Accounts Payable should be printed and reviewed to ensure that all creditors have been included and recorded correctly including any GST component.  

A comparison of the MYOB report should be made to the actual supplier invoices to ensure that entries have not been entered twice or omitted.  

Occasionally an invoice has been paid and entered by way of the spend money facility and not removed from the accounts payable ledger.

Stocktaking

For those businesses that carry stock or work in progress please undertake a full stocktake as at 30 June 2008 showing items, quantity on hand and cost price.  

The cost price should reflect the amount you have paid at the time of acquisition and not the current replacement price. 

This stocktake should be documented and a copy provided to this office at the time your year end financial statements are prepared.

Fixed Assets

It is important to gain maximum deductibility in the form of depreciation and to do this a list of all Plant & Equipment purchased and Fixed Assets acquired since 1 July 2007 should be prepared and provided to this firm showing Acquisition Date, Cost and Description of each item.  

A list of all items sold during the year should also be prepared and made available to this firm.

It is suggested that you peruse your General Ledger in the fixed assets area and print the ledger card for the period 1 July 2007 to 30 June 2008. Please ensure that all assets have been entered in the Fixed Assets ledger to enable depreciation to be calculated correctly.

Advanced Receipts

If your business has received monies on account of future sales such as deposits on sales these monies should be coded to a liability account called Customer Deposits and not treated as sales until the service or the goods have been delivered. 

Other Documentation Required

The following items are required at the time this firm prepares your year end financials to take up the correct accounting entries and provide maximum deductibility. 

• Contract on Purchase or use of Plant & Equipment, Motor Vehicle etc. eg Hire Purchase Contracts, Lease Contracts or Chattel Mortgage
• Contracts on Sale of the above items 

Personal Items

To assist in the preparation of personal Income Tax Returns please gather and provide the following information:

Income:

1. PAYG Payment Summary from all employment
2. Interest received or credited to your private bank accounts
3. Shares – Sell contracts relating to disposal of shares (also provide the corresponding Buy contract to determine Capital Gain or Loss on sale of share)
4.  Share Dividend - Advice slips showing dividend and dividend credits
5. Rent from Investment Property – details to provide:
• Rental income received
• Interest charged on money borrowed for the rental property
• Expenses schedule relating to the rental property
•  Sale of any property – discuss with our office what is required 

Expenses:

1. Private Health Insurance Statement
2.  Bank charges on private bank accounts
3. Donations made
4. Work related expenses – subscriptions, telephone, diary, home office
5. Work related self-education expenses – fees (cannot claim HECS fees), books, stationery, travel,  and consumables
6. Income Protection Insurance Premium
7. Medical Expenses – if you believe your out-of-pocket medical expenses (after Medicare and private health fund claims) is in excess of $1500 you should obtain a 2007/2008 Claims Statements from Medicare and any private health fund. 

Superannuation Co-Contributions

What is the Super Co-contribution?

It means that if your total income is $28,980 or less in a year of income, the Government will put into your super account $1.50 for every $1.00 you put into your superannuation, up to a maximum co-contribution of $1,500 per year.

When you earn more than $28,980 but less than $58,980 in an income year, your Super Co-contribution will be adjusted based on your income and how much you personally contribute. For example, if you are eligible and your income is $42,000 a year and you make personal super contributions of $1,000 during that year, you will be entitled to a Super Co-contribution of $849.

You do not need to apply for the Super Co-contribution. If you are eligible, all you need to do is make personal super contributions to your superannuation fund and lodge an income tax return.You must also ensure that your superannuation fund has recorded your Tax File Number.

The Australian Taxation Office will use the information from your Income Tax Return and the information supplied by your Superannuation Fund to work out whether you are eligible. The Australian Taxation Office will then make the Super Co-contribution to your superannuation account and an advice will be forwarded to the taxpayer.

Are you eligible for the Super Co-contribution?

To be eligible for the Super Co-contribution you need to meet certain requirements. Broadly, you need to:

• have made or make personal contributions to your super;
• earn less than $58,980 a year before tax (total income, not household income);
•  receive 10% or more of your income from eligible employment, running a business or a combination of both;
•  be under 71 years of age;
• be a permanent resident of Australia; and
• lodge an income tax return for the year of income. 

Some Tax Tips and New Legislation

New Legislation

From 1 July 2008, the Government will raise the income threshold for the surcharge from $50,000 to $100,000 for singles, and from $100,000 to $150,000 for couples. Individuals and families on incomes above these thresholds and who do not have private hospital cover, may have to pay the Medicare Levy Surcharge.  The surcharge rate is 1% of your taxable income (including any reportable fringe benefits).

Business income is assessable in the year in which it was earned (derived). The Australian courts have held that income which is assessable on an accruals basis is derived when a recoverable debt is created such that the taxpayer is not obliged to take any further steps before becoming entitled to payment.

One exception is where amounts are received in advance of goods or services being supplied (as in the case of Arthur Murray NSW Pty Ltd v. The FCT (1965) 114 CLR 314). Under the Arthur Murray principle, income may not be assessable until the services are rendered.

Consequently, a higher annual deduction can be claimed.

Other than for small business and non-business taxpayers, the entitlements to accelerated depreciation (for post-20 September 1999 plant) and to outright deductions for expenditure of less than $300 on plant have been removed.

Small business taxpayers that elect to be part of the simplified tax system (STS) (having turnover of less than $1 million and depreciable assets with adjustable values of less than $3 million) pool their assets for depreciation purposes. Assets with an effective life of less than 25 years are included in a pool, which is written off at 30%, and the remaining assets are included in a pool written off at 5%. The rate is halved in the first year that assets are allocated to a pool, so there may be some advantage in acquiring plant at the end of the relevant tax year, as there would be an entitlement to an immediate 15% or 2.5% write-off. Items costing less than $1,000 are deductible immediately.

In addition, taxpayers earning predominantly non-business income are entitled to an immediate $300 write-off.

For other taxpayers, assets costing less than $1,000 can be grouped into a low value pool. If one asset is included in the pool, then all assets subsequently acquired costing less than $1,000 must be included in the pool. The pool is written off using a write-off rate of 37.5% (diminishing value). Any additions to the pool during the year are depreciated at 18.75% regardless of when they were acquired. The $300 write-off is no longer available.

Prior to year end it is advisable to review unwanted and obsolete plant and physically scrap it where appropriate, to bring forward any deductions for losses on disposal.

Asset registers should also be reviewed for assets that can be depreciated rather than written off under the capital allowance provisions for income-producing buildings. For example, demountable partitions should be classified as fixtures and fittings and not form part of capital expenditure on the building.

Taxpayers must use the effective life of an asset to determine the applicable depreciation rate. For plant acquired after 11.45 a.m. AEST on 21 September 1999, the effective life of the asset may be calculated more than once if circumstances cause a previous estimate to become inaccurate. It may be prudent to reconsider effective lives as part of the annual tax planning process.

A fresh calculation can result in an increased or decreased rate of depreciation however, it must be based on market or technological developments or other changes in circumstances connected with usage. In determining the effective life of an item of plant, the methodology explained in Tax Ruling TR 2000/18 is useful. 

Derivation of assessable income depends upon the nature of the income involved and whether the taxpayer returns income on a cash or accruals (earnings) basis. Deferring derivation provides an opportunity to reduce the assessable income of the current year. The timing of derivation is considered below.

For tax purposes, trading stock can be valued at its cost, its market selling value or its replacement price. Any of these values can be used for each individual item of stock, regardless of the value used for accounting purposes. Using the most appropriate valuation for tax purposes can assist in deferring profits to a later year or in bringing assessable income into a current year, if this is appropriate due to tax rate changes or tax loss issues.

Each taxpayer should also review closing stock to consider whether obsolete items should be scrapped.

Consumable stores can usually be expensed for tax purposes provided the level of stores maintained is ordinarily used within three months (Tax Ruling IT 333). Otherwise, consumables are deducted for tax purposes on a usage basis.

On the personal taxation front, those contemplating retiring should defer retirement (and receipt of related benefits) until after year end, when their income (and marginal tax rate) may be lower. 

Bonuses

Taxpayers should ensure that where a bonus has not been paid at year end, they are able to demonstrate that they were definitely committed to the expense at that time. Typically this would require there to be a legal obligation at that time. Critical indicators of this include the following:

• The bonus entitlement is included in contracts of employment.
• By year end the taxpayer had decided on the amount of the bonus, or an agreed formula or process to be followed to determine the amount.
• If there is an agreed formula or process, it is not subject to management discretion that can be exercised after year end.
• Where necessary, a binding board resolution has been made.   

• Some strategies to minimise Capital Gains Tax (CGT) include:
• Defer a disposal to a subsequent year.
• Defer a disposal to ensure that an asset has been held for at least 12 months, to potentially benefit from the 50% discount.
• Match gains and losses to avoid carrying forward a capital loss.
• Utilise the CGT small business and retirement concessions. 

There is current legislation in place that requires special treatment of loans made to individuals from private companies. This includes “drawings” made by associated individuals and entities and requires the establishment of Loan Agreements, repayment schedules and interest payable on the loan amount.

If your company has made loans of this nature it is important that agreements are in place to safeguard these loans, otherwise the adverse treatment by the ATO of these types of transactions will create a further tax impost over and above normal Income Tax. Please bring these loans to our attention so that appropriate documentation is prepared.

In order to obtain a deduction for superannuation, the taxpayer must have ‘paid’ the superannuation by year end. A mere accrual of the liability or a book entry is not sufficient.

If a physical payment is not made by 30 June 2008 a deduction will not be able to be claimed in the 2008 Income Tax Return the deduction will only be able to claimed in the 2008 Income Tax Return if the superannuation contribution has been paid by 28 July 2008 (see below).

A liability for the superannuation guarantee charge (SGC) arises where an employer does not contribute the prescribed minimum level (9% for 2007/08) of superannuation contributions within the relevant time frame. Employers have until 28 July 2008 to make the required contributions for the current year. This is a critical date as there are no provisions in the Superannuation Guarantee Assessment Act, nor any discretionary powers vested in the Commissioner, that allow for an extension of time.

Where there is a shortfall in the required superannuation support, the shortfall, as well as interest and an administration charge, becomes payable on 14 August of the same year. The shortfall is credited to a superannuation fund on behalf of the employee. The shortfall is not deductible by the employer, whereas contributions are deductible in the year paid.

Accordingly, all superannuation contributions relating to the 2008 income year must be made at the latest by 28 July 2008 in order for a deduction to be available (otherwise, the non-deductible SGC applies).

An age-old question arises in relation to repairs: when is a repair a ‘deductible repair’ and when does it become an item of capital? The term ‘repair’ is described in Tax Ruling TR 97/23 as ‘the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense)’. The continued existence of the property is assumed.  

In relation to repairs, the income/capital issue generally involves three areas:

• initial repairs;
• the replacement of a subsidiary part or the replacement of the entire item; and
• repair versus improvement (i.e. restoration of the item’s former state or an improvement in its functionality).

Initial repairs, improvements and the replacement of the entire item are not deductible, but may qualify for a periodic write-off under the capital allowance provisions. In addition, the expenditure may form part of the cost base of an asset for capital gains tax purposes.

In the year ending 30 June 2003 a new consolidations regime applied. The legislation requires that a company and all its 100% owned subsidiaries (including fixed trusts) can elect to be treated as a consolidated group.

On the formation of a consolidated group, the head company will be deemed to have acquired all of its subsidiaries’ assets. The deemed cost of a subsidiary’s assets will be the cost of the membership interest in the subsidiary, plus its liabilities pro-rated across all of its assets, subject to some specific modifications. In order to determine the appropriate pro-rata amounts, however, it may be necessary to obtain market values for assets held at 1 July 2002, subject to proposed limited safe harbour rules and a transitional rule that will allow existing tax values to be used for groups formed before 1 July 2003.

It also seems likely that losses carried forward by different members of the consolidated group will be subject to more onerous recoupment rules than those currently applicable. Accordingly, consideration should be given to bringing forward income or deferring deductions to use up as many losses as possible prior to the introduction of the consolidation rules. Asset valuations may also be required, to determine the rate at which carry forward losses can be utilised by the consolidated group.

Finally, inter-group tax concessions have been repealed from 1 July 2002. These will include the inter-corporate dividend rebate, inter-group CGT rollover, tax loss transfers, excess foreign tax credit transfers and thin capitalisation grouping relief. Eligible taxpayers that are considering not consolidating should consider whether these concessions have been utilised — for example, by paying a dividend or transferring assets before that date.

New thin capitalisation rules now apply from 1 July 2001. These rules set a limit on the amount of total debt that can be used to finance an entity’s operations, denying an interest deduction on any excess.

Unlike the previous regime, which only applied to inward investment, the new rules also affect Australian entities which control foreign entities (deemed control may exist with as little as a 10% interest) or which have foreign permanent establishments. In addition, the new rules apply to the total debt of the Australian entity, not just its foreign debt.

To avoid the new thin capitalisation rules, taxpayers must satisfy either a safe harbour test, an arm’s length test or, for outward investment, a worldwide gearing test. The safe harbour test is likely to be the most commonly applicable. Very broadly, this test requires that debt must be no more than 75% of the entity’s net asset value, excluding certain equity in related entities and non-debt liabilities (e.g. most provisions). The test is extremely complex and should be carefully considered in each case. Grouping rules apply in some circumstances.

New rules apply which classify interest in companies as debt or equity. The rules determine, amongst other things, whether interest payments are deductible or frankable as a distribution of profits.

Equity interests are, broadly speaking, shares or other interests for which the return is contingent on the economic performance of the company. Debt interests are basically those for which the return is not contingent on the economic performance of the company and for which it is more likely than not that the ultimate return to the holder of the interest will be greater than the financial benefit (loan) received by the company.

Transitional rules apply to loans with an indefinite term made by an associate of a company on or after 21 February 2001. Such loans will be treated as debt up to 31 December 2002 and accordingly any interest paid on such a loan will be deductible to the borrower.

However, from 1 January 2003 such a loan may be treated as equity for tax purposes if the associate has discretion to set the timing and amount of principle and interest. Accordingly, any interest payment made on the loan may be non-deductible and frankable. Company groups therefore have until 1 January 2003 to ensure that loans repayable at call are treated as debt for tax purposes. To achieve that outcome, any interest-free loans should be for a period not exceeding 10 years. All loans and the relevant repayment terms should be clearly documented. 

• The criteria for deductibility of bad debts are as follows:
• The debt must be bad.
• It must be written off during the year of income.
• The amount must have been either:
• previously brought to account as assessable income; or
• in respect of money lent in the ordinary course of a money-lending business of the taxpayer.

In the context of tax planning, taxpayers should undertake a review of doubtful debts prior to year end and assess which debts may be written off as bad. Whether a debt is bad will depend on an objective analysis of each case. As a practical guide, the taxpayer must show that appropriate steps to recover the debt have been taken.

It should also be noted that trusts with bad debts must satisfy the trust loss rules.

Companies which have undergone a change in underlying ownership during the year will need to pass the same business test to recoup bad debts. 

For Work Related Expenses to be deductible, they must be incurred and directly related to your employment. All receipts must be retained if the claim is over $300 as you may be required to substantiate the expenses that you intend to claim. 

The ATO has warned that it now conducts data matching from government agencies to ensure full disclosure by taxpayers in their Income Tax Returns. Examples of cooperation between entities include State Revenue Office, Land Titles Office, Share Registries, Banks, etc. The message is clear, “do not understate your income”.  

The ATO has continued to impose fines and penalties on taxpayers that do not pay their obligations in a timely manner, ensure that you pay your Income Tax, GST, PAYG Withholding and all other statutory obligations within time otherwise expect a penalty.   

Family Trusts

Those clients using family trusts as their operating business entity should be aware that the budget has introduced further limitations on eligible beneficiaries thus reducing the effectiveness of averaging tax payable on income derived. Please contact this office for further information on the proposed legislation. 

Clients operating small businesses who suffer a loss must be aware that the loss suffered may not be tax deductible if the business is deemed not to be carrying out a commercial business. The loss will not be able to be offset against other income when the small business does not derive business income (turnover) of in excess of $20,000. 

As from 1/7/2007 self employed individuals are now eligible to claim superannuation contributions in full up to the aged based cap provided that their salary based income dose not exceed 10% of their total income.