Australia: Tax planning for farmers
21 May 2014
Posted by: Author: Moore Stephens
Author: Moore Stephens
Tax Planning for Farmers
Tax planning is the process of organising the affairs of a taxpayer or a group of taxpayers so that, as far as legally or commercially possible, the liability of the taxpayer or group of taxpayers to income and other taxes is minimised.
Tax planning is not limited to complex, high risk or sophisticated arrangements. Taxpayers contemplating even the most ordinary transactions should give proper consideration to tax planning (and, in particular, to Capital Gains Tax issues) to ensure that they do not suffer adverse tax consequences. As we approach the end of the financial year, here are some reminders of areas that you can manage in order to get the best results.
- If you are certain of exceeding the medical expenses offset threshold in the current year, consider accelerating additional discretionary expenses into that year, if you consider you will not in any event reach the threshold in the next year. Also bear in mind that the offset may not be available in 2013/14 unless you were eligible in 2012/13.
- Consider making deductible gifts before year's end. However, the effects on liquidity, and the possible loss of interest on the accelerated payment, must be kept in mind. Note, too, that the gifts deduction is limited to the taxable income for the year, and cannot create a carry forward loss, so deferment of "excess" gifts may be appropriate in some cases.
- Where spouses are on different marginal rates, consider ensuring that all deductible gifts are made by the spouse in the higher tax bracket so as to maximise the benefit of the deduction.
- To qualify for the government superannuation co-contribution in the current year, a contribution must be made by 30 June and various other tests must be satisfied.
- A taxpayer who is considering retiring near year end may find it worthwhile to defer discretionary income until after 30 June. In that subsequent year, their income will normally be smaller and the marginal rate may therefore be less.
- When considering the timing of retirement, keep in mind the restrictions on the concessional treatment of employment termination payments that apply from 1 July 2012.
- Subject to cash flow considerations and anti-avoidance rules, consider deferring income to the following year, particularly if: (1) income for that year is likely to be lower; or (2) tax rates for that year are expected to be lower.
- In general, income is not derived until it has been earned by the provision of the relevant services. Service contracts should be reviewed accordingly.
- Interest income credited on the maturity of a fixed term deposit in June may be fully assessable in the current year, but may not be assessable until the following year if the term deposit matures in July.
- Where this is feasible, and subject to anti-avoidance rules, consider acquiring income-producing assets in the hands of a low income taxpayer rather than a high income taxpayer.
- If seeking to avoid having a private company loan treated as a dividend, there needs to be compliance with the requirements relating to minimum interest and maximum term of the loan.
- The special averaging rules applicable to Primary Producers can provide relief in years in which their professional income fluctuates above their average income.
- Primary producers may consider permanently withdrawing from their special averaging system where their income is consistently lower than their average income.
Capital gains and losses
- Consider realising a capital gain in a low income year rather than a high income year. However, as a capital gain accrues on disposal, simply deferring the derivation of the sale proceeds to a later year may not be effective.
- Where appropriate, consider realising capital losses by year's end so that they may be offset against realised capital gains of that year.
- Where appropriate, consider realising capital gains by year's end so that they may be reduced by current year capital losses (or unused capital losses from previous years).
Deductions, offsets and losses
- In general, deductions are not allowed where there is merely an accounting provision or reserve set up for estimated costs — the actual expense must be incurred.
- Ensure that documentary records of deductible expenses are in order, especially where specific substantiation requirements apply (e.g. in relation to cars).
- Ensure that deductible wages to spouses are actually incurred by year's end and that this is documented. Be aware that deductions are limited where the payment is considered unreasonable.
- Small business entities may be able to take advantage of special prepayment rules.
- Subject to cash flow considerations and prepayment rules, consider making deductible purchases by year's end in order to accelerate deductions.
- For taxpayers wishing to claim deductions for concessional superannuation contributions, or to qualify for the government's co-contribution, ensure that the payment is made (and received by the fund) by year's end. Bear in mind the annual caps that apply, and consider whether any excess contribution over the cap should be deferred.
- For taxpayers on higher incomes, consider the use of negatively-geared investments to generate excess deductions that can be offset against current year income.
- To be deductible, a bad debt may need to be actually written off by year's end.
- To claim a current year deduction for Directors' fees, the company should have definitively committed itself to the payment (e.g. by passing a properly authorised resolution).
- To claim a current year deduction for annual or long service leave, it is not sufficient for the employer merely to have made a provision in their accounts to cover the employees' entitlements.
- Be aware that capital allowances are not available for a year unless the asset has been used or installed ready for use, and the taxpayer's income-producing operations have commenced.
- Consider whether a family trust election needs to be made where the trust has made losses.
- Consider whether a loss claim may be affected by the non-commercial loss rules.
- Where a company is seeking to carry forward a prior year loss, pay attention to the requirements for the continuity of ownership test to be satisfied up to the end of the claim year.
- Tax agent fees are not deductible until they have been incurred, irrespective of the year of the tax return to which they may relate.
Depreciation and trading stock
- Consider opting for roll-over relief where there is a partial change of interests in a depreciable partnership asset.
- If seeking to vary the effective life of a depreciating asset, the choice should be made for the year in which the asset is first used or installed ready for use.
- Consider whether a change of stock valuation method is appropriate.
- Business deductions for stock will generally not be available until the stock is actually on hand.
- Ensure accurate numbers are compiled for livestock deaths, births, and rations.
- Ensure number of livestock on hand is known and accurate.
- If expecting a refund, lodge early and expedite assessment by lodging electronically.
- Where land is involved in the sale of a business, the timing of the settlement before or after year's end may affect land tax liabilities.
- Trustee resolutions will not be accepted as giving rise to present entitlements for an income year unless they are made by the end of that year. The two-month period of grace formerly allowed no longer applies.
- Consider the application of the trust streaming measures.
- Exercise caution in examining the tax and commercial bona fides of year-end investments in promoted schemes.
This article first appeared on mondaq.com.
- Take care not to exceed annual caps for concessional and non-concessional superannuation contributions.