Personal and Business Tax Planning highlights for 2010-2011

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Welcome to Kreston Dormers tax planning newsletter for the 2010 tax year. We recommend you peruse the newsletter as there are some important announcements that may affect you or your business. Please call your business adviser at Kreston Dormers on (02) 9874 8038 to discuss your tax planning needs or any other matter that is of concern to you prior to June 30th.

RESIDENTS PERSONAL TAX RATES AND THRESHOLDS

The following table summarises a resident's individual's marginal tax rates for the 2010-2011 income years.

Current Taxable Income ($ p.a.)	Rate %
Nil to 6000	0
6001 to 35 000	15
35 001 to 80 000	30
80 001 to 180 000	38
180 001 plus	45
LITO	$1,350
Effective tax free threshold	$15,000

From 1 July 2010 Taxable Income ($ p.a.)	Rate %
Nil to 6000	0
6001 to 37 000	15
37 001 to 80 000	30
80 001 to 180 000	37
180 001 plus	45
LITO	$1,550
Effective tax free threshold	$16,000

TAX WARNING - SUPERANNUATION

Please note that the 2010 concessional super contributions have been reduced by 50% from the 2009 year. If you have already made excess contributions over the limit you should contact your adviser immediately to discuss the tax implications on excess contributions.

ADJUSTED TAXABLE INCOME

Added back to a tax payer's taxable income will be total net investment loss, net rentral property loss, reportable employer superannuation contributions, reportable superannuation contributions and adjusted fringe benefits. This will be the tax payer's adjusted income and will be used to determine tax offsets and obligations for surcharges.

WELCOMED TAX INITIATIVES IN THE NSW 2010-2011 STATE BUDGET

	Two cuts to payroll tax – 5.5% from 1 July 2010 and 5.45% from 1 January 2011,
	Increase in payroll tax threshold from $638,000 to $658,000 on 1 July 2010,
	A Comprehensive Housing Supply Strategy that will introduce zero stamp duty for off-theplan purchases of new homes up to $600,000 (a potential saving of $22,490 per home),
	A 25% stamp duty cut on newly constructed homes,
	Zero stamp duty for over-65s who sell their family home or downsize to a newly constructed home worth up to $600,000,

FEDERAL BUDGET ANNOUNCEMENTS

	Creating a $260 million paid parental leave scheme to begin in 2011;
	$14.2 billion reform of the pension system including a rise in pension age to 67 with the pension for single people raised by $32.49 a week and couples increased by $10.14 a week.
	Cutting personal income tax by $9.8 billion;
	Investing $22 billion in national infrastructure including;
	Spending $8.5 billion on roads, rail and ports; with $2.16 billion for NSW.
	Investing $4.7 billion in a national broadband network;
	Increasing the Small Business and General Business Tax Break to 50% for eligible assets ordered between December 2008 and December 2009;
	Extending the First Home Buyers Boost for a further six months — including three months at the full rate, before stepping it down;
	Changes to superannuation including a reduction in the amount that can be salary sacrificed at a concessional tax rate.

FEDERAL BUDGET 2010-11 ROUND-UP FOR INDIVIDUALS

Key changes announced as part of the Federal Budget include:

Optional standard deductions for work related expenses

From 1 July 2012 the Government will provide individual taxpayers with an optional standard deduction of $500 in lieu of claiming work-related expenses and the cost of managing their tax affairs. The standard deduction will be increased to $1,000 from 1 July 2013.

NOTE

This measure is available to all taxpayers regardless of whether they have work related expenses or expenses related to managing their tax affairs.

In other words – under the current proposal any taxpayer can claim the standard deduction.

No taxpayers will be disadvantaged. Taxpayers with expenses above the standard deduction will be able to continue to claim those expenses when lodging their tax return under the existing rules.

WHAT IF MY EXPENSES ARE GREATER THAN THE STANDARD DEDUCTION?

All taxpayers will have the option to lodge an income tax return and continue to claim all their deductible expenses rather than the standard deduction being offered by the Government.

50% tax discount for certain interest income

From 1 July 2011, the Government will provide individuals with a tax discount equal to 50% on up to $1,000 of interest earned, including on deposits held with any bank, building society or credit union, as well as bonds, debentures or annuity products.

This means that for a person earning an average pre-tax interest rate of 6%, the discount would apply up to a savings balance of just over $16,500.

This change will result in some individuals and families becoming eligible for transfer payments or eligible for a larger transfer payment, such as Family Tax Benefit, Baby Bonus, Child Care Benefit, Education Tax Refund, Commonwealth Seniors Health Card (CSHC) and the Pensioner Supplement (which is linked to eligibility for the CSHC).

Superannuation - minor amendments

The Government will make a number of minor amendments to improve the operation of the superannuation legislation, with intended effect from the 2010-11 income year.

The amendments will include:

	permanently allowing a claim for a deduction for eligible contributions to be made to successor superannuation funds;
	increasing the time-limit for deductible employer contributions made for former employees;
	clarifying the due date of the shortfall interest charge for the purposes of excess contributions tax;
	allowing the Commissioner of Taxation to exercise discretion for the purposes of excess contributions tax before an assessment is issued; and
	providing new arrangements for public sector defined benefit schemes which fund benefits through "last minute contributions".

Superannuation co-contribution - pause to the indexation of the income

The Government will freeze for 2010-11 and 2011-12 the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down.
Under the superannuation co-contribution scheme, the Government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for people with incomes of up to $31,920 in 2009-10 (with the amount available phasing down for incomes up to $61,920). This measure will freeze these thresholds at $31,920 and $61,920 for two years.

Permanent reduction to the superannuation co-contribution

The Government will permanently retain the matching rate for the superannuation co-contribution at 100% and the maximum co-contribution that is payable on an individual's eligible personal nonconcessional superannuation contributions at $1,000.

Superannuation

The Government has decided to implement four changes to superannuation.
The first two changes apply to superannuation concessional contributions. The Government will introduce a new concessional contribution threshold for low superannuation balance workers aged 50 and over and it will also create a new Government contribution for workers who earn less than $37,000 a year. The second group of measures impact on the superannuation guarantee charge scheme (SGC).

SGC cut-out age extended to 75

The entitlement age for the SGC will be lifted for workers, with the cut-out age limit increasing from 70 to 75 years of age. This change will commence on 2013/14 and will align the SGC cut-out age with voluntary and self-employed contributions.

SGC increased to 12%

The Government has announced that it will increase the SGC to a maximum of 12% by the 2019/20 financial year. The charge will increase in increments as outlined in the table below.

Income year	SGC annual rate	Increase from previous year
2009-10 to 2012-13	9%	None
2013-14	9.25%	0.25%
2014-15	9.5%	0.25
2015-16	10%	0.5%
2016-17	10.5%	0.5%
2017-18	11%	0.5%
2018-19	11%	0.5%
2019-20	12%	0.5%

New concessional contribution cap for mature low super balance workers

The concessional contribution cap will be doubled for eligible workers who are 50 years of age and older. Workers who are aged 50 or older and who have superannuation balances of under $500,000 will be able to make contributions of $50,000 per year (indexed annually according to Treasury).

The Government has referred to the measure as a "catch-up". This low balance cap applies from 1 July 2012 and effectively replaces the current transitional cap for workers aged 50 and older which expires on 30 June 2012.

Additional Government contribution for low income workers

A new Government contribution will apply to low income workers from 1 July 2012. The Henry Review recommended taxing all superannuation contributions as individual's assessable income and providing an offset.

However, the new contribution is an offset that applies only to workers earning $37,000 or less. The contribution is calculated by applying a matching rate of 15% on concessional contributions made, with a maximum rebate of $500. This means that concessional contributions made by low income workers above $3,333 will receive no additional rebate amount.

FEDERAL BUDGET ROUND-UP FOR BUSINESS

Some business related Budget measures that may be of interest to businesses are outlined below.

Changes to CGT to make it easier for businesses to restructure

The Government will introduce legislation to make amendments to the CGT provisions to improve the ability of businesses to restructure.

The Government will:

	extend the CGT rollover for the conversion of a body to an incorporated company;
	make the share sale facility exclusion more broadly available for CGT rollovers; and
	allow CGT demerger relief for certain demerger groups that currently cannot access the relief.

The three measures will apply to CGT events happening after 7.30 pm (AEST) on 11 May 2010.

In relation to the second amendment, the Government will allow Australian interest holders access to a broader range of CGT rollovers where an entity restructures using a share or interest sale facility for foreign interest holders. Currently, where a business restructures and it uses a share or interest sale facility for foreign interest holders, Australian resident interest holders are unable to access some CGT rollovers.

The share sale facility exclusion that currently operates in limited circumstances for Authorised Deposit-taking Institutions will be extended to operate more broadly for other entities and for other relevant CGT rollovers.

In relation to the third change, the Government will amend the CGT demerger relief provisions to allow another member of a demerger group to qualify as the head entity of the group where the existing head entity cannot demerge its interests in the demerger group. The measure will correct a defect in the current legislation that prevents demerger groups from accessing demerger relief where the group includes a corporation or a complying superannuation entity.

Look-through treatment for earnout arrangements

The Government will allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007.

Earnout arrangements are used to structure the sale of a business (or business assets) to manage uncertainty about the value of the business. Under the earnout arrangement, an earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business.

Currently, an earnout right is treated as a separate CGT asset - see draft Taxation Ruling TR 2007/D10. This treatment can result in anomalous outcomes for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement, such as by reducing access to the CGT small business concessions.

This measure will ensure that the CGT treatment of earnout arrangements does not create an impediment to the efficient market for the sale of businesses or business assets.

HENRY REPORT HIGHLIGHTS

The following are the highlights of the Government's response.

	A Resource Super Profits Tax will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia's nonrenewable resources;
	The States and Territories will be provided with new, ongoing infrastructure funding, with an initial total amount of $700m in 2012/13;
	A refundable resource exploration rebate will be provided to companies, set at the prevailing company tax rate, for exploration expenditure carried out in Australia from 2011/12;
	The company tax rate will be reduced to 29% from 2013/14, and to 28% from 2014/15;
	The company tax rate for "eligible small business companies" will be reduced to 28% (previously 30%) from 2012/13
	The immediate write-off for assets of small businesses will be extended to assets valued at less than $5,000 from 1 July 2012;
	The superannuation guarantee charge (SGC) will be increased by annual increments until it reaches the plateau level of 12% by 2019/20;
	The entitlement to the SGC will be broadened by lifting the maximum age threshold from 70 to 75 years of age;
	The concessional contributions cap will be raised to $50,000 per year for workers who are 50 and over and who have superannuation balances of under $500,000; and
	A new Government superannuation contribution will be created which will pay up to $500 for workers with adjusted taxable incomes of up to $37,000.

Small business write-off changes

The capital allowances provisions will be changed in order to allow small businesses:

	to write off immediately assets valued at under $5,000 (compared with the current $1,000 limit); and
	to write off other assets (ie assets valued at over $5,000) in one depreciating pool at the rate of 30%.

Currently, depreciating assets may be allocated to 2 different depreciating pools. This will not apply to buildings.

The revised rules will apply from 1 July 2012.

Resource Super Profits Tax

A Resource Super Profits Tax (RSPT) will be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation of Australia's non-renewable resources.

The RSPT will replace the crude oil excise, and operate in parallel with State and Territory royalty regimes. Projects within the scope of the Petroleum Resource Rent Tax (PRRT) will have the option of opting into the RSPT or staying in the PRRT. The election into the RSPT will be irrevocable.

Under the RSPT a refundable credit for royalties paid to State and Territory Governments will be available. The refundable credit will eliminate investment distortions associated with the state royalty systems and ensure there is no 'double taxation' of resource profits.

Under the RSPT the Government will guarantee to contribute 40% of the investment cost of a resource project.

The Government will consult extensively with stakeholders on the design of the RSPT. The consultation will also cover the need for exemptions from the RSPT where, due to compliance costs, there is no net benefit to society in applying the RSPT. This may occur in respect of low value minerals or micro businesses.

Future reforms indicated

The Government has promised that in the coming months it will have more to say on a number of areas considered by the Henry Review.

The business related recommendations to be considered include:

	the collection of information required for determining tax liabilities and transfer entitlements from third parties, including employers, Government agencies, financial institutions, and share and property registries (Rec 125);
	the development of a single client account for tax and transfer financial information, for example by linking records and existing client identifiers (Rec 130);
	pursuing further approaches (extending and building on Standard Business Reporting) to reduce the compliance costs associated with business interactions with Government (Rec 126); and
	Small businesses should be assisted in becoming business ready when they commence business (Rec 127).

TAX PLANNING CHECKLIST

Small Business Entity Rules

The Small Business Entity rules apply to a sole trader, partnership, company or trust which has a 3-year average group turnover of less than $2M.

Trading Stock Rules for Small Business Entities

Small Business Entities do not have to account for changes in trading stock or do a stocktake for tax purposes where the difference between the value of the opening stock and a reasonable estimate of the closing stock is $5,000 or less.

Prepaid Expenses

A small business entity taxpayer can claim an immediate deduction for certain prepaid business expenses that satisfy the 12- month rule.

Deductions

Prepayments – Small Business Entity

Small business entity taxpayers are entitled to a deduction where the relevant services will be wholly provided within 12 months of the date of expenditure, such as office supplies, stationary, rent, advertising etc.

Interest On Investment Loans

Taxpayers who have borrowed money for a non-business investment (eg rental property) can check with their lenders to see if they can prepay interest prior to 30th June, 2010.

Self-Employed Persons

Self-employed persons can obtain a superannuation deduction on the same basis as that adopted for employees.

Notification of intention to claim deduction

To be eligible for a deduction for a personal superannuation contribution, the individual must give a notice to the fund trustee of their intention to claim a deduction and must receive an acknowledgment of receipt of the notice.

Superannuation Contributions

Payments must be made prior to 30th June to claim the deduction in the current year. Salary Sacrifice Arrangements Salary sacrifice arrangements can be utilised to maximise superannuation contributions subject to the overall deduction limits. However, the adjusted taxable income will affect any super co-contribution entitlements.

Salary Packages

Ensure that salary packages for 2010/11 are negotiated and documented prior to 30th June, 2010.

Interest on Loan Funds

Interest can be claimed on loans taken out for business purposes or to buy properties and/or shares.

Directors' Fees

Ensure cheques are drawn prior to 30th June and that PAYG Withholding Tax is deducted.

Travel Deductions

	Overseas Travel –prepare a full itinerary & diary.
	Local Travel –more than 6 nights you are required to maintain a diary.

Taxation Advice

Fees payable to an accountant or registered tax agent for taxation advice can be claimed.

Expense Substantiation

Ensure that you can justify all employment related expense amounts incurred.

Depreciation

Review capital expenditure and ensure you claim depreciation at the highest legally allowable amount.

Entertainment

Entertainment is not deductible unless it is provided as a fringe benefit and Fringe Benefits Tax has been paid.

Working from Home Expenses

Expenses can be claimed for working from home (as distinct from having a home office). However, you could be subject to capital gains tax when you subsequently sell the property.

Value of Stock

Stock can be valued at different individual methods for each item of stock.

	Cost;
	Sales Value; or
	Lower of Market Value or Replacement Cost.

Company Loans

Loans to shareholders and their Associates must be documented in accordance with the legislation.

Deductions on Accruals Basis

Subject to tax return being lodged on an accruals basis.

Fringe Benefits Tax Payment

If a Fringe Benefit Tax instalment is due on 21st July, 2010, it can be accrued and claimed as a tax deduction in the year ending 30th June, 2010.

Commissions Owing

Where employees or another business is owed commission by your business that was due for services rendered up to 30th June, 2010, the accrued amount can be claimed as a tax deduction at 30th June, 2010.

Bad Debts

Actually write-off any bad debts prior to 30th June and prepare minutes authorising the write-off.

Interest

Any accrued interest outstanding on a business loan that has not been paid at 30th June, 2010 can be claimed as a tax deduction at 30th June, 2010.

Salaries And Wages

The accrued expense for the days that employees of an enterprise have worked, but have not been paid at 30th June, 2010, can be claimed as a tax deduction at 30th June, 2010.

Commercial Bills

Where the term of a Commercial Bill expires beyond the 30th June, 2010, the discount applicable to the period up to 30th June, 2010 can be claimed as a tax deduction.

Rent

If rent is in arrears, the part that is owed up to 30th June, 2010 can be claimed as a tax deduction.

Income Issues Bad Debts Recovered

If a debtor, who had been written off as a bad debt and claimed as a tax deduction for the amount of the bad debt, subsequently pays any part of the amount owing, you have to bring the amount paid to account as assessable income in the year of recovery.

Government Grants

If your business has received a grant from a government department, it is most likely paid to you on the basis that it is taxable income and therefore you need to disclose in your tax return the receipt of the government grant. If you are lodging your income tax return on a cash basis, this highlights the desirability of ensuring that all of the government grant funds have been expended on tax-deductible items prior to 30th June.

Employment Issues

PAYG / Payment Summaries

Payment summaries have to be prepared and forwarded to all employees by 14th July each year; annual report due 14th August to the ATO.

Payroll Tax (if you are liable)

You must prepare a reconciliation of total payroll for the year showing the total amount of payroll
tax payable and then reconcile this with the remittances that you have forwarded on a monthly
basis.

Work Cover

A Work Cover Declaration has to be lodged annually certifying wages paid for the year ending
30th June.

Superannuation Funds

	Contributions to and earnings of Superannuation funds are taxed at 15% of the contribution.
	For people 60 years of age or those who are over 60 and have started drawing a pension, payments from the superannuation fund are tax-free.
	Generally moneys invested in superannuation funds cannot be accessed until reaching the preservation age.

Don't get caught by the no-TFN contributions tax of 46.5%

Superannuation fund members must quote their TFN to their superannuation fund (if
they have not already done so), otherwise contributions made on their behalf will be
subject to a withholding tax of 46.5%.

Beware superannuation fund borrowing rules

Caution is needed because stringent rules must be met to allow SMSFs to borrow to
invest in property.

Disclaimer

This newsletter is distributed annually by Kreston Dormers Accountants and Business
Advisers to provide information of general interest to their clients. The content of this
newsletter does not constitute specific advice. Readers are encouraged to consult their
business adviser for advice on specific matters.