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Year-end tax planning tips

Year-end tax planning tips

The end of the financial year is fast approaching. We have therefore compiled a list of our top tips to assist with your end of financial year planning.

Donate – If you are going to donate to charity, now is the time.

Any donations of over $2 that you make to deductible gift recipients can be deducted this year. Remember, if you received something in return for the money (like goods purchased at a charity auction) you may not be able to claim a deduction for the full payment. There are special rules dealing with this situation that should be taken into account.

Work related deductions – you can claim a deduction for business expenses you have incurred that have not been paid by your employer.

However, you should be careful that what you are claiming is a legitimate business expense. For example, you are unable to claim the cost of dry cleaning the clothes that you wear to work unless it is protective clothing, a uniform required by the business, or occupation specific clothing.

To be legitimate, the expense must be for something that your job requires. Items like laptop bags have been under recent scrutiny recently because some handbags can be used to carry laptops. This does not mean that a designer handbag is suddenly deductible. It is really up to you to justify the deduction that you are claiming, so it is important to keep records of the item and its use.

Home office expenses – if you work from home as part of your employment, you may be able to claim items such as phone expenses, running costs for your home, and equipment.

Generally[1], if your home is a place of business i.e. a room dedicated to business and not easily converted to private use, for example, a dentist’s waiting room and consulting room, and you are entitled to claim a deduction for interest expenses or rent, then this will generally impact on your ability to claim the full main residence exemption from Capital Gains Tax when you sell the home.

Earning extra cash from AirBNB style services – The tax treatment of what you earn by renting all or part of your house through AirBNB and similar services is the same as any other residential rental property arrangement.

You must include the rental income in your income tax return, but you can also claim tax deductions for expenses associated to the rental, such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, and insurance. Expense claims need to be in proportion to the rental, that is, how much of the house is used and for how long. Also, beware that this type of activity can restrict your ability to claim the CGT main residence exemption when you sell the property if it is or has been your home.

Uber – If you drive for Uber or a similar service, the income you earn needs to be declared in your income tax return. Plus, you need to be registered for GST. You can claim expenses for your car that relate to transporting passengers (relative to the kilometres travelled with passengers).

Expense Claims under scrutiny – Expense claims that are currently in the Australian Taxation Office (ATO) spotlight include:

  • Travel expenses – Problems arise when people make claims for expenses that they did not actually incur. Typically, this happens when someone receives an allowance for travel but does not spend it (they might stay with family or friends instead). While the ATO publishes some reasonable rates each year for food and accommodation expenses, these only provide limited relief from the full record keeping rules. You cannot claim a deduction for the ATO reasonable rate amount if you spent less than this on food and accommodation.
  • Self-education expenses. Any study you claim as self-education must be connected to the income you are currently earning (either to maintain or improve your specific skills or knowledge) or is likely to result in increased income from existing income earning activities. Merely doing a course while working full time does not make the course deductible. Be careful of excessive claims for travel overseas and luxury courses. You need to prove that these expenses are essential to your current work;

You can no longer claim – Property investors can generally no longer claim the cost of travelling to and from your investment property.

General end of year tax strategies

Here is a quick rundown of general matters for consideration at year-end:

Can you defer income? – Some income is only taxed on receipt and, therefore it may be possible to arrange for this type of income to be received (or mature) after 30 June 2018. (Examples might include rent, interest and dividends).

Other income only becomes assessable when there is a legal right to sue for recovery of the debt. It may therefore be worth considering deferred completion of certain transactions until after 30 June 2018 (e.g. signature of licensing agreements, royalty contracts, delivery of major product installations etc.).

Can you accelerate deductions?

In general terms, businesses can claim income tax deductions for expenses incurred or paid prior to the end of the financial year (subject to certain prepayment restrictions).  To obtain a tax deduction in the 2018 financial year, consider accelerating / incurring regular expenses in June.

Write off bad debts

Now is the rime to review your trade debtors and identify any bad debts. A bad debt is deductible in the 2018 financial year provided to satisfaction of the following tests:  the debt must exist and be “bad” before writing it off; the debt must be actually “bad” before writing it off; the debt must be physically written off prior to 30 June 2018 and have been brought to account as income; the company must satisfy the continuity of ownership test or same business test; and a discretionary trust writing-off a bad debt must have made a “Family Trust Election”.

Salary Sacrificing (including Superannuation and Fringe Benefits)

If an employee has the option to direct any bonus entitlement or other earnings into a superannuation fund (i.e. salary sacrifice super contribution) the employer must ensure that the request is made in writing prior to the amounts being earned by the employee.

Bonus Payments

In order for accrued staff bonuses to be deductible in the 2018 tax year, the decision to pay the bonus and the determination of the bonus must be made and documented prior to 30 June 2018.  Similar tests must be satisfied for accrued director’s fees to be deductible.

Accelerate realisation of Foreign Exchange Losses

Consideration may also be given to be given to accelerating the realisation of unrealised foreign exchange revenue or capital losses before 30 June 2018.

Consider Prepayments

Small Business Enterprises (i.e. those with turnover under $10 million) or individuals with non-business expenditure such as property or investments are able to claim prepayments where the period of service does not exceed 12 months and ends in the next tax year (i.e. before 30 June 2019).

Stock

  • On the last day of trading for the financial year, you should undertake a physical count of all trading stock and work in progress and record the results (unless you have a reliable stock control system in place). An SBE is not required to undertake a stocktake where the difference between the value of opening trading stock at the beginning of the year and closing stock is estimated to be $5,000 or less.
  • In order to write-off obsolete / worthless stock prior to year-end it is necessary to either physically scrap the stock prior to 30 June 2018 or to identify such stock and set it aside for scrapping within a reasonable timeframe following the end of the year.
  • For income tax purposes trading stock may be valued at cost price, market selling value or replacement value. The appropriate choice of valuation of trading stock will depend on the business circumstances for the year.

Managing your effective tax rate

Individuals may be able to reduce their effective tax rate by levelling income peaks and troughs to avoid higher tax brackets; transferring deductions and losses to a higher income spouse or business entity or moving income and gains to a lower income spouse or business entity; deferring retirement or roll-over benefits until after 30 June; or realising capital gains in a low income year and/or realising capital losses to offset capital gains.

The above information is informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. Please contact the office for additional detail.

The material and contents provided are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone.

[1] Where you are using a desk in a room that is used as a living space, sunroom, bedroom or lounge room you will be able to claim 45 cents per hour that you use the home office desk etc.

 

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