Investment Allowance

The new investment allowance is now law. It broadly provides for an additional one off deduction for certain new depreciating assets acquired with the principal purpose of being used in a business carried on by the tax payer. The allowance is in addition to any “ordinary” depreciation claimed.

Types of business and the eligible claim.

1. Deductions increased to 50% for Small Business Taxpayers

Small business entities (usually business groups with an annual turnover of less than $2 million) are entitled to claim the additional investment allowance at the rate of 50% of the cost of eligible assets for the whole period of the investment allowance i.e. assets acquired between 13 December 2008 and 31 December 2009, installed by 31 December 2010. This increased rate was recently announced in the 2009-2010 Budget. The minimum investment for small business entities to take advantage of the investment allowance $1,000 per asset.

2. Other business Taypayers

Other business taxpayers (broadly businesses with an annual turnover of $2 million or more) are entitled to claim the additional investment allowance for the cost of eligible business assets as follows:

1. 30% allowance for assets acquired (or commenced construction) between 13 December 2008 and 30 June 2009. The asset must be used (or installed ready for use) by 30 June 2010.
2. 10% allowance for assets:

• Contracted for (or construction commenced) prior to 30 June 2009, but are used (or installed ready for use) between 1 July 2010 and 31 December 2010.
• Contracted for (or construction commenced) between 1 July 2009 and 31 December 2009, and are used (or installed ready for use) before 31 December 2010.

The minimum investment for ordinary businesses to take advantage of the investment allowance is $10,000 per asset.

3. Other important matters regarding investment allowance

• The new allowance does not apply to intangible assets acquired such as software, licenses, website development etc.
• Aggregating asset purchase investments. The asset investment threshold for items is $1,000 for small business entities (SBE) and $10,000 for other business entities. If you purchase an item for $800 in 08/09 year and are a SBE then you cannot claim the investment allowance but in July 09/10 you spend a further $200 to modify the item then in 09/10 the SBT could claim 50% on the $1,000 total cost.
• Batches and sets – aggregating identical/substantially identical asset. The explanatory memorandum says this is possible to exceed the threshold. A set will generally be assets which are dependent on each other and designed to be used together such as a computer server and several desktop terminals and a printer. A batch would mean identical or substantially similar items bought in quantities and an example would be purchase of 15 new beds in a motel that each cost $1,000 but 15 total $15,000 and if purchased prior to 30 June 2009 would be eligible for either 50% claim or 30% claim depending on size of the taxpayer.
• Investment commitment time – what is required. The commitment time is important in determining the eligibility for the claim. What appears to be required is something binding on the purchaser and this would require an offer to purchase and an acceptance by the supplier of the offer. A purchase order completed and sent to the supplier which is accepted by the supplier would appear to suffice.
• Assets must be purchased by a chattel mortgage or commercial hire purchase finance contract not a lease to be an eligible claim by the acquiring business.

Action: As the 30 June 2009 deadline for the 30% claim draws nearer it is important to be aware of the finer details of the allowance to ensure as many eligible asset purchases made before year end are eligible for the tax break. Discuss with our advisers as to whether you are a small business entity or your turnover exceeds $2 million and therefore you are only eligible for the “other business” claims of 30% or 10%.

Superannuation Contributions

Concessional contributions (previously known as deductible contributions)

The concessional contributions caps will be lowered from 1 July 2009 to $25,000 pa (indexed) for people under age 50 and $50,000 pa (not indexed) for people aged over 50.

The cap for people over 50 will be lowered further on 1 July 2012 to $25,000 pa (or indexed amount at that time) so everyone, regardless of age, will have the same concessional contributions cap.

Concessional contributions are most commonly those paid into superannuation by an employer or where an individual claims a deduction.

Salary Sacrifice Arrangements

Income that is salary sacrificed as additional superannuation contributions is counted towards the concessional contributions cap. The 9% superannuation guarantee is also counted towards this cap.

If you are salary sacrificing into super, ensure that your sacrificed amount together with your employer’s 9% contributions does not make you breach the cap.

Employers are entitled to a deduction for any contribution they make for an employee, so it is the employee’s responsibility to ensure their cap is not breached and it is the employee who will pay the additional tax on excessive contributions.

If you rely on the “10% rule” in order to make personally deductible contributions, note from 1 July 2009 salary sacrificed contributions will be included as employment income for this purpose and thus reduce the likelihood of being able to contribute concessional personal contributions.

Excess Contributions

Exceeding the concessional contributions cap may result in additional tax levies at 31.5% on the excess.

Summary

If you are planning to increase your contributions this year ensure you do not exceed the contributions caps and your contributions are banked prior to 30 June 2009.

Review your salary sacrifice arrangements from your employer to ensure you do not breach the concessional caps in 08/09 year and also for the new year 09/10. Please contact your Macquarie Partners advisor to discuss your situation as required.

Action: f you have the money and can salary sacrifice (income not yet earned) to your fund then use the higher concessional contributions caps for the last time in this year ended 30 June 2009. If a company makes a contribution on behalf of an employee and claims the tax deduction and has a taxable loss in this year it can carry forward the tax loss but if an individual is eligible to claim a personal superannuation contributions and the deduction creates a personal tax loss then he or she are unable to carry forward the tax loss so it is necessary in these circumstances to maximise income in 08/09 year to take full advantage of the higher superannuation concessional contributions caps.

Superannuation Income Streams

The pension drawdown relief which halved the minimum pension (income stream) in 08/09 year is to be continued for 09/10 year to allow people to maintain or build up their account balances in a superannuation fund and relieves the need to sell investment assets and realise losses in a depressed market.

Action: eview your income needs for 09/10 year and ensure it exceeds 50% of your minimum pension percentage of account balance at 30 June 2009.

Superannuation Co-Contribution Reduction

The government co-contribution will be reduced from $1,500 to $1,000 for year ended 30 June 2010. This serves as a reminder if your taxable income is less than $30,342 in 08/09 then contribute $1,000 as a non concessional contribution (personal non tax deductible contribution) and receive an additional $1,500 contribution from the government for 08/09 tax year. There is an additional test that 10% of your taxable income comes from employment or business income. Therefore this contribution is not available to taxpayers with only investment income.

Division 7A Companies and Trusts

This section of the Income Tax Act deals with loans from private companies to shareholder and their associated entities.

If your private companies have not implemented loan agreements with minimum interest charges, terms and annual loan repayments then the ATO can deem the amounts to be deemed dividends to the shareholders and taxable to the shareholder. This also applies to any loans to shareholders which are forgiven.

This provision can apply to distributions of trust income to companies where shareholders of the company are also beneficiaries of the trust and have overdrawn their personal income distributions and there is deemed to be a loan to the shareholders.

Action: Ensure trust beneficiaries   drawings do not exceed likely income allocation in 08/09 year if income is to be distributed to an associated company.

Undrawn Trust Entitlements

The ATO has indicated in speeches made recently they are reviewing arrangements where unpaid present entitlements of trust income are not being paid to associated companies over a long period of time. Traditionally both the taxpayers and the ATO have regarded these amounts as not being loans by the recipient company to the trust but there may be a challenge to this thinking by the ATO. If your trust has long outstanding unpaid trust distributions of income to corporate beneficiaries it may be time to address this matter with your Macquarie Partners advisor.

Prepayments

Unless you are a small business entity ( turnover less than $2 million) then no claim is possible for prepayments of expenses.

A small business entity can claim prepayments for expenses for a period not exceeding 12 months. A personal taxpayer can claim prepayment of expenses for up to 12 months. The typical claim is prepayment of interest on loans used to purchase income producing investments such as rented properties, managed investments and shares.

Debtors Review

As this has been a difficult business year it may pay to review your current debtors list and claim a bad debt deduction for bad debts written off prior to 30 June 2009.

To write off a debt there must be absolute certainty the amount will not be recovered. If the debtor is in the hands of administrator or liquidator, you must wait for a final dividend (if any) to be cleared.

Trading Stock

It may pay to consider the method of valuing trading stock at year end. Reducing your closing stock amount will reduce your taxable profit. Trading stock on hand at end of June can be valued, on an item by tem basis, either at cost, replacement value or market selling value. Obsolete stock can be valued at lower than cost or nil if it can be shown that there is no prospect of future sales so they will have to be sold at a lower price to move them.

Franked Dividends

If a company is considering paying a dividend for year ended 30 June 2009 it should check it has sufficient franking credits in the franking account to pay such franked dividends. This will usually require review of 2008 tax return and adding or subtracting tax paid or refunded in 08/09 year and should be checked with your advisor. There are consequences where a franking account is in deficit at year end and this should be avoided.

Service Entity Arrangements

The ATO continues to scrutinise service entity arrangements and has issued taxation Ruling TR 2006/2 dealing with deductibility of service fees paid to associated entities. Please check if your service fees are acceptable and paid in a commercial manner and the service entity provides appropriate services. We are able to assist with this calculation so please contract us if you are paying service fees to a related entity.

Trust Distributions

Trustees should ensure that any trust distributions are validly made in accordance with the terms of the trust deed by year end (or the time required by the deed if earlier)

A number of recent cases together with a released ATO decision impact statement (DIS Cajkusic v Commissioner of Taxation) have highlighted the importance of understanding the trust deed in relation to distributions and how they are treated for tax purposes.

Some principles which need to be borne in mind if resolving to distribute amounts for the 30 June 2009 income year are:

• Beneficiaries can only be presently entitled to the income of the trust. Understanding the deed and what is “income of the trust” is therefore critical to understanding which beneficiaries will be presently entitled to an amount of the trust.
• Present entitlement for tax purposes may require the trust to have a net distributable amount. If there are accounting losses for the year, or if prior year accounting losses are greater than the income of the trust for the current year, then there is uncertainty about whether this will disturb present entitlement for a discretionary trust. It may be possible to overcome this issue however where a related trust with surplus income distributes to the loss trust by 30 June 09.
• Where capital gains are to be streamed to certain capital beneficiaries , this may be achieved through a capital beneficiary agreement. The agreement must be completed and signed by the relevant parties not later than two months after end of financial year (PS LA 2005/1).

As the above indicates this can be a complex issue and we urge you to contact your Macquarie Partners advisor if clarification is needed.

Superannuation Guarantee Obligations

The superannuation guarantee (SG) refers to the requirements for employers pay 9% of their employees specified earnings base. From 1 July 2008, all employers must calculate their SG liability against an employees ordinary time earnings (OTE).

Where SG contributions for a given quarter were not paid within 28 days of the end of the quarter (ie for the quarter ending 30 June 2009 the payment due date is 28 July 2009) the employer is liable to pay a SG charge which is not deductible . This SG charge comprises the SG shortfall plus interest and an administration fee.

Employer Termination Payments

In the current economic climate some employers are considering changes to the staffing arrangements which may involve a restructure of the organisation and/or reducing the number of employees.

The tax consequences of any changes to current arrangements or implementation of redundancy/approved early retirement schemes need to be considered before the introduction of those arrangement/schemes. For example, any restructuring of an employee’s termination entitlements could result in the employee’s termination payments failing to receive concessional tax treatment.

Please consult your advisor prior to making payments to employees on redundancy in order to get the best tax result for the employee.