It’s time to practise what you preach

Tony Fittler

It’s that time of year when planners are urging their clients to take action to minimise their tax liabilities and maximise the benefits of superannuation reforms. But how many will take the time to ensure they look after their own business and personal end-of-year needs properly?

There are a number of tax and accounting issues that financial planning businesses should consider before June 30, 2007.

Personal tax considerations

Changes to the marginal tax rate thresholds from July 1, 2006, increase the incentive for tax planning. We tell our clients this but do we do it ourselves?

Who in your family holds income-producing investments? Are there opportunities for income-splitting? Have you considered investing via a family trust?

What about the timing of franked dividends from the business? The new tax thresholds can make a big difference. So can giving dividends to family members who are either on low rates of tax, or who are eligible for personal superannuation deductions.

Planners know about the window of opportunity that the new superannuation rules give to those approaching retirement, but have they taken time out to see how they can maximise their own undeducted or salary-sacrificed contributions to super this year?

Realisation of capital gains

It could be prudent to defer the realisation of capital gains. Understanding whether you qualify for the 50 per cent discount for assets held for more than 12 months can be critical to the amount of the Capital Gains Tax (CGT) liability.

If capital gains have been realised prior to June 30, 2007, ensure any unrealised capital losses are also realised in the same tax period.

Think about your own affairs as well as those of your clients and take your own advice.

Simplified Tax System

Businesses with an annual turnover of $1 million or less, and depreciating assets of less than $3 million, are eligible to enter the Simplified Tax System (STS). The turnover threshold will increase to $2 million from July 1, 2007.

The benefits of entering the STS include:

~ while income and expenses may be accounted on a cash basis, recent amendments now allow the use of the accrual system;

~ prepayments, subject to service period not being greater than 12 months, are deductible;

~ plant and equipment purchased for less than $1,000 is 100 per cent deductible in that tax year; and

~ plant acquired for more than $1,000 can be depreciated at higher rates than non STS tax payers, that is, 15 per cent in the first year and 30 per cent thereafter.

CGT concessions on sale of business

Changes have been made to the CGT concession that eligible small businesses can access.

The controlling individual 50 per cent test has been replaced with the new significant individual 20 per cent, which can be satisfied directly or indirectly through one or more interposed entities and allows up to five taxpayers, or four taxpayers and their spouses to benefit from the concessions.

Business owners also need to ensure that their company satisfies the other conditions, that is, that the asset was active (as defined) just before the CGT event; and that the net value of assets owned by each shareholder does not exceed $5 million, but if so, they can pay no tax on the sale of their shares.

Service trusts

As part of their tax planning strategies, many firms set up service trusts, which provide services to the company (for example, labour and administration) in return for payments that can be expensed by the company before tax (thereby reducing profit and paying less tax). The trust marks up the price of the services it bills for in order to make a profit, which is then distributed back into the trusts of the partners of the company.

There are additional reasons for using a service trust, such as:

~ protection of the business assets from liabilities that may arise in the course of the business;

~protection of the business from liabilities such as those arising from industrial disputes;

~efficient distribution of income from the business; and

~better tax planning for succession planning purposes

The Australian Taxation Office (ATO) has reduced the tax-effectiveness of service trusts. In order to minimise the risk of audit, businesses should review their service trust arrangements and where they do not meet basic criteria, put changes in place to align practices with those accepted by the ATO and outlined in TR 2006/2.

In particular, the ATO has suggested indicative rates of mark up in areas such as labour hire arrangements, recruitment, expense payments, equipment hire and rental.

The ATO has imposed a deadline of April 30, 2007, for businesses to amend their arrangements to comply with the guidelines.

Review accounts

There are a number of other areas that a financial planner can look at to minimise (or, if it suits them, to maximise) profits this financial year, which will affect tax to be paid. It is also a good idea to check current arrangements made with the business to see the impact on this year’s accounts. Such a review should take place with the accountant soon so that appropriate adjustments can be made in the current financial year.

This includes answers to questions such as:

~ Do you have a loan from the business? If so, ensure it will not be considered a dividend by the ATO;

~ Are your GST records and payments accurate and up-to-date? Do you need to make adjustments?;

~ Have you made intra-group transactions? If so, are they accounted for correctly, particularly the GST?;

~ Is it possible to make prepayments to give the business a deduction in the current year?;

~ Do you have old office equipment that can be written off and should you be buying new equipment this financial year?; and

~ Are there other assets that you can dispose of to provide capital losses?

Tony Fittler is managing partner and taxation consultant with HLBMann Judd Sydney.