Year-end tax planning is important for individuals and businesses at all levels.
Apart from the traditional approach — that is, deferring income and advancing deductions wherever possible — individuals should also look for opportunities this year having regard to the reduction in marginal tax rates and abolition of the superannuation surcharge from July 1, 2005.
In addition, this is a good time for businesses to review their operations and structure to ensure maximum efficiency moving into the new financial year. This is because for forward planning purposes, it will be easier to structure businesses or transactions appropriately prior to the start of a new financial year.
ATO compliance
In relation to compliance requirements, there are more areas where taxpayers can fall into hidden traps if they are not properly documenting various elections, loan agreements, distribution and dividend minutes, family trust elections and the like.
In regards to Australian Taxation Office compliance activities, investors should be fully aware that any aggressive activity not supported by relevant tax laws will be viewed unfavourably by the ATO.
Further, tax positions taken by taxpayers who regard them as “reasonably arguable” may still draw attention from the ATO.
Given the increasing ATO focus on reviews and audit activity, taxpayers should undertake tax planning on the assumption that they will be subject to an ATO review.
While year-end tax planning is relevant to all taxpayers, this article will focus on the issues concerning individual taxpayers, especially the changes introduced by the Government since the May 2005 Federal Budget in relation to 2005-06 income year.
Accordingly, taxpayers should focus on the changes announced by the Government in the past 12 months to maximise opportunities available, as well as attending to housekeeping issues to ensure tax compliance with relevant legislative requirements.
Income tax cuts
As announced in the 2005 Federal Budget, there are significant tax cuts to be phased in over the next two years, beginning from July 1, 2005.
A number of tax scale changes have taken effect from July 1, 2005 (see table).
Medical expense offset
From July 1, 2005, taxpayers will not be able to claim the medical expense offset in respect of:
~ medical expenses that are solely cosmetic (that is, the procedure is cosmetic by ordinary definition and no Medicare benefit is payable); and
~ dental expenses that are solely cosmetic.
Medicare: low-income thresholds
From July 1, 2004, the Medicare levy low-income threshold has been increased for individuals and families.
Currently, persons entitled to the Senior Australian Tax Offset (SATO) do not pay the Medicare levy until they have an income tax liability.
For 2005-06, as a result of the reduction in the lowest marginal tax rate, the low-income thresholds will be increased to $21,968 for individuals and $36,494 for couples who are entitled to SATO.
Medicare: levy surcharge
From the 2005-06 income year, there is a concessional treatment of lump sum payments in arrears in determining a taxpayer’s liability for the Medicare levy surcharge.
This will mean that certain taxpayers who are eligible for the lump sum payments in arrears tax offset (under section 159ZRA of the Income Tax Assessment Act (ITAA) 1936) and have a Medicare levy surcharge liability may receive a reduction in their surcharge liability.
Currently, a taxpayer is liable for the Medicare levy surcharge if their income exceeds the relevant threshold and they do not have private health insurance.
The concessional treatment will benefit low to middle income earners who are generally not liable for the Medicare levy surcharge but become liable in a particular year due to a large lump sum payment paid in arrears.
Family Tax Benefit changes
From July 1, 2006, the amount a family can earn each year before their Family Tax Benefit Part A (FTB(A)) starts to be reduced will be increased to $37,500.
Once the income of families with dependent children exceeds this threshold, their FTB(A) reduces from the maximum rate at a rate of 20 cents for every extra dollar of income, until the base rate of payment is reached. The threshold is currently $32,485 per annum, rising to $33,361 per annum on July 1, 2005.
Additionally, the Government will allow the Family Assistance Office (FAO) to automatically update the income estimates used in calculating fortnightly Family Tax Benefit (FTB) payments commencing from July 2006.
Further, the Government will allow tax refunds and family assistance reconciliation top-up payments to offset outstanding family assistance debts from July 1, 2006.
Under the current reconciliation process, tax refunds and reconciliation top-ups cannot be used to recover family assistance debt incurred in previous years. Under this measure, any monies remaining from a recipients’ tax return or FTB reconciliation top-up payment will be able to be used to offset family assistance debt related to previous years.
Mark Pizzacalla is partner-in-charge — tax consulting at HLB Mann Judd.
