EOFY – Strategies for the year ahead

Concessions for small businesses and no new taxes on super in the Federal Budget offers real financial planning opportunities for adviser businesses and their clients, Tim Howard writes. 

Recently, we have seen a number of concessions for small business pass Parliament, which may present real opportunities for you in your financial planning business as well as that of your clients.

With the Government again promising that there will be no new taxes on superannuation under the current Government, superannuation contribution strategies still remain one of the premier wealth accumulation and retirement planning strategies moving into the 2015/16 financial year.

Do not wait until June 2016 to start thinking about end of financial year planning strategies.

New financial year, new opportunities

Reduction in tax for small businesses

VIEW ALL

View all

From 1 July 2015, small business taxpayers operating via a corporate structure will have their corporate tax rate cut from the current 30 per cent to 28.5 per cent.

Importantly, this reduction only applies to companies which are carrying on a business, and as such the 30 per cent rate will continue to apply to companies with passive investments.

Eligibility for the reduction revolves around the small business meeting the less-than-$2 million turnover test, the same test which applies for the small business CGT concessions.

Where the level of turnover exceeds this amount, the standard 30 per cent corporate tax rate will continue to apply to all of the companies' taxable income, not just the amount in excess.

The manner of paying franked dividends to shareholders, however, remains unchanged with a maximum rate of franking credit able to be paid maintained at the current 30 per cent level.

From an advice point of view, careful planning will be required for those taxpayers who are nearing the $2 million threshold as it may change their rate of tax payable from one year to the next.

An additional concession is being provided to small businesses operating through an unincorporated business structure in the form of a five per cent discount on the tax payable (via a tax offset) on the business income they receive capped at $1000 per individual.

At the time of writing, this measure is currently in the House of Representatives.

Accelerated depreciation for small business taxpayers

The second measure which may benefit either your practice or your small business clients is the accelerated depreciation for small business taxpayers.

Like the reduction in the company tax rate for small business, this measure requires the taxpayer to have aggregated annual turnover not exceeding $2 million.

Under current rules, a capital asset which is acquired for less than $1000 can be fully written off in the year it is purchased rather than being depreciated over the life of the asset.

Small business taxpayers will now have the ability to claim an immediate tax deduction for each asset that cost less than $20,000 if purchased and installed ready for use between Budget night and 30 June 2017.

Assets which are valued at $20,000 or more can continue to be placed in the small business simplified depreciation pool and depreciated at 15 per cent in the first year and 30 per cent each income year thereafter.

Accelerated depreciation for primary producers

All primary producers will now be able to claim an immediate deduction for the capital cost of fencing and water facilities in the year they are purchased and deduct the cost of fodder storage assets over three years.

While initially slated to take effect from 1 July 2016, this measure has been brought forward to apply to any eligible capital expenses incurred since Budget night.

Importantly, unlike the accelerated depreciation for small business taxpayers, there is no turnover test for this measure.

In addition, farms with turnover of less than $2 million will qualify as a small business and are therefore also eligible to immediately write-off all asset purchases up to $20,000.

While this measure does not reduce the actual amount outlaid for these items, the accelerated depreciation will result in a greater tax benefit up front for primary producers, rather than having this benefit spread out over an extended period, in some cases up to 50 years.

Planning opportunities

By reducing the amount of tax payable upfront there may be new planning opportunities for eligible clients such as new or additional investment, debt reduction or boosting contributions to superannuation and retirement planning strategies.

The provision of budgeting guidance for your small business clients may also provide additional opportunities for advice.

Superannuation contributions planning strategies

Superannuation still remains one of the most tax effective ways for your clients to build their wealth and save for their retirement.

Whether it is around small business, concessional or non-concessional contribution strategies, laying the foundations early in the financial year can help you help your clients make the most of their pre-retirement planning.

SCENARIO 1: Making the most of your clients concessional contributions

The general concessional contribution cap for the 2015/16 financial year will remain at $30,000 and the unindexed transitional cap for those aged 49 years or over on 30 June 2015 continues at $35,000.

Therefore, there might be an opportunity for your clients to increase their contributions to super beyond what they were contributing last financial year.

Employees may be able to enter into a salary sacrifice agreement to forego some of their future salary or wages in return for their employer making extra super contributions on their behalf.

As salary sacrifice agreements need to be established before the entitlement to be sacrificed is earned, the earlier in the new financial year your clients put an agreement in place the more effective and flexible it can become.

Clients who are substantially self-employed or self-funded receiving income from sources such as business income, interest, dividends, rent, partnership or trust distributions or capital gains may be able to claim a tax deduction for personal contributions they make to super.

A concessional contribution strategy can not only help provide a boost to retirement savings but may also reduce the tax your clients would otherwise pay.

Case Study: Amanda, 39-year old employee

Amanda is 39 years old and is employed earning $90,000 per annum before tax, excluding her employer's super guarantee contributions.

If Amanda decides to salary sacrifice $10,000 of her pay to super this financial year she will save $2400 in tax, with this tax saving boosting her superannuation balance (see table below).

Amanda’s case study

Assumptions: These figures are estimates only based on 2015/16 income tax rates inclusive of the Medicare Levy.

It is important to keep in mind that any amount an employee salary sacrifices to superannuation can be treated by their employer as meeting the employer's liability to pay the corresponding amount as superannuation guarantee.

Employers are also entitled to calculate an employee's super guarantee liability on their post salary sacrifice salary.

Case Study: Jonathon, 52-year old self-employed individual

Jonathan is a 52-year-old self-employed sole trader running a distribution business. Based on current contracts he anticipates earning $120,000 per annum after business deductions and before personal income tax in the 2015/16 financial year.

Jonathan decides he wants to maximise his concessional contributions to super this financial year, so he makes a $35,000 personal deductible contribution when his cash flow allows, before year end. This strategy will save Jonathan $8400 in tax, with this saving boosting his superannuation balance (see table below).

Jonathan’s case study

Assumptions: These figures are estimates only based on 2015/16 income tax rates inclusive of the Medicare Levy.

*Subject to a further $1000 tax offset should the tax discount for unincorporated small businesses pass Parliament (Tax Laws Amendment (Small Business Measures No.3) Bill 2015).

You need to meet eligibility criteria to claim a tax deduction for a personal superannuation contribution, which includes but is not limited to aged based conditions, obtaining less than 10 per cent of your assessable income (including reportable fringe benefits and super contributions) from earnings as an employee and completing the application to claim the deduction in the required form within the required timeframe.

SCENARIO 2: Making the most of your clients' non-concessional contributions

The non-concessional contributions cap increased to $180,000 in the 2014/15 financial year and will remain at this level for 2015/16.

This means the bring-forward rule where those who are aged 64 or less on 1 July in the year of contribution can ‘bring-forward' up to three years' worth of non-concessional contributions remains at $540,000.

Case Study: Jan turning 65

Jan will turn 65 on 25 February 2016. She intends to continue to work full time in the immediate term, however is planning to retire on her 66th birthday after she has contributed as much as possible to super for her retirement.

Jan currently has $190,000 in cash she wishes to contribute to super. Jan also has an investment property which she does not want to sell until October 2016 as her sister currently resides in the property.

She estimates the net proceeds from the sale of the investment property will be around $350,000.

As this is the last year Jan can trigger the bring-forward, let us compare the difference between triggering versus not triggering, and what effect that has on her ability to contribute (see table below).

Jan’s case study

* Although Jan can contribute up to $350,000 in the 2016/17 financial year, no one single contribution can exceed $180,000 under the fund capped contribution limit. For example, she could contribute one amount of $180,000 and a second amount of $170,000 from October 2016 to reach her remaining cap of $350,000.

^ As Jan has not triggered the bring-forward in the previous two financial years, being 65 on 1 July, she is no longer eligible to utilise this provision, so she is limited to making contributions of $180,000 per year while she continues to meet the work test.

Always keep in mind the preservation rules when contributing to super and the restrictions around the timeframe your client may have to access their benefit.

Conclusion

While the Budget presented a number of new opportunities for small business taxpayers, a number of announced measures have not yet entered or are still making their way through Parliament.

Many of the main social security changes such as the eligibility periods for portable payments, the child care subsidy and changes to the asset test thresholds and taper rates are not due to take effect until between 1 January and 1 July 2017.

Appropriate planning for and timing around super contributions still remain as excellent end of year planning strategies, especially when planning begins at the start of the new financial year.

Tim Howard is a technical adviser at BT Financial Group.

CPD points available with this Toolbox article.