Tax planning considerations amid budget changes

By Ben Lethborg - June 20, 2017

A number of our legal practice and practitioner clients have raised questions in relation to the most recent budget release and how they are impacted by the changes. We think this is a great opportunity to share with you tips on how best to prepare for tax planning including taking advantage of some recent budget changes.

Tax Planning Preparation

Firstly, we recommend the preparation of a preliminary estimate of your taxable income for the year ending 30 June 2017 to identify opportunities, forecast profits for the coming year and assist in cashflow management. “Planning” is the process of thinking about and organising activities required to achieve a desired outcome.  This is when we discuss your desired ‘goals’ and how you might achieve them. Structured tax planning also provides the opportunity to provide you with a ‘mini health’ check on your legal practice personal position and to forward plan your tax affairs.  

It is important to understand tax planning is more than consideration of income and deductions for the year. It is an opportunity to ensure you are up-to-date with tax governance given recent ATO activity within this area.  This means satisfying requirements including making elections within the time requirements and the preparation and maintenance of appropriate documentation such as trust net income resolutions. 

The items below should be considered on a practice and practitioner level as we head into the final month of the financial year:

Practice

Practitioner

Professional services income splitting guidelines – Practice profit sharing policies

 

Professional services income splitting guidelines – Personal tax implications

 

Year end tax forecasting to assist with cash flow management

 

Year end tax forecasting to assist with cash flow management

 

TFN withholding and trustee reporting for new equity partners

 

TFN withholding and trustee reporting for new beneficiaries of family trusts

 

Year end trust income distribution resolutions and dividend statements (where applicable)

 

Year end trust income distribution resolutions and dividend statements

 

ATO Service trust guidelines

 

Concessional and non-concessional superannuation contributions considerations

 

Accounts receivable review for bad debts

 

Personal concessional superannuation deductions for eligible spouses

 

Review of depreciation schedules for obsolete items and eligibility of small business concessions

 

Division 293 Higher Superannuation Tax

Timing of income i.e. timing of billings and work in progress

 

2% Temporary Budget Repair Levy removed in 2017/18

 

Variation of PAYG instalments

 

Shareholder loans, unpaid present entitlements and Division 7A

Budget Considerations

On 9th May 2017, the Federal Government announced Australia’s 2017-18 budget and has focussed on two main areas; to promote jobs and growth and address specific problems in the tax system. 

While it has provided some opportunities for our legal clients it has reduced the superannuation concessions which will lead to the need for legal practitioners to explore other strategies for future retirement savings.  Given some changes will occur from 1 July 2017, there is only a short window of opportunity to act.

Changes in tax rates

With the further reduction of company tax rates (from 28.5% to 27.5% from 1 July 2016), incorporated legal practices with a turnover of less than $10 million should consider how this will effect them. At a practitioner level, it is important to note the reduced corporate tax rates only apply to business entities. Where a corporate beneficiary is taken to be carrying on a business it will access the reduced corporate tax rate.  Whether a corporate beneficiary is carrying on a business is subject to some conjecture. Due to the uncertainty of the issue the ATO are developing a position in order to provide some clarity.

On a personal level there are changes in individual income tax rates and the removal of the temporary budget repair levy of 2% (effective 1 July 2017). Practices and practitioners should be clear on their current year income positions and how the debt levy will effect them.

Superannuation considerations

Concessional Superannuation Contributions are contributions you can make to your superannuation fund and claim as a personal tax deduction.  From 1 July 2017 the maximum amount of Concessional Superannuation Contributions will be reduced to $25,000 regardless of age.  Therefore, for the 2017 financial year the current rates still apply; if you are 49 years of age or over you can still contribute up to $35,000 and up to $30,000 if you are under the age of 49. This amount is tax deductible but is only available until 30 June 2017.  As part of tax planning preparation thus far, we are finding many of our legal practitioners taking advantage of this higher contribution.  It is important to understand that the contribution is only deductible once received by the superannuation fund (luckily we have ample time to organise) – if you have not yet considered this - don’t leave it to the last minute!

Non-Concessional Superannuation Contributions are where a deduction is not claimed.  Currently the maximum Non-Concessional Superannuation Contributions is $180,000 p.a. or $540,000 over a 3 year period for those under 65 years of age. From 1 July 2017 this will decrease to $100,000 p.a. or $300,000 over 3 years. Individuals with superannuation balances of more than $1.6 million will no longer be able to make non-concessional contributions after 1 July 2017. They will however, still be entitled to make concessional contributions of up to $25,000 p.a. 

Because the new rules apply from the 1 July 2017, the current rules still apply for the 2017 financial year. This provides our legal practitioners with great opportunity to maximise their limit of $180,000 or $540,000 under the ‘bring forward rule’ for those under 65. But they must make this contribution before 30 June 2017. This will also be the last opportunity for individuals, with superannuation balances of more than $1.6 million to make non-concessional contributions.

Tax debt reporting

It was announced that from 1 July 2017 the Australian Taxation Office (“ATO”) will be allowed to disclose to credit rating agencies the tax debt information of businesses that have not engaged with the ATO to manage their debts. The ATO will be reporting businesses with tax debts of more than $10,000 that have been outstanding for more than 90 days without a payment arrangement to credit reporting bureaus.  The new measure will have significant consequences as tax debt information reported by the ATO may remain on commercial credit files for five years, even if the debt is subsequently paid. Legal practices should ensure that any current ATO liabilities are paid in a timely manner or engage with the ATO to manage their debts via a payment arrangement.

In addition to the above, there were further superannuation reforms and changes to the small business tax concessions.  Further information can be found in our Pitcher Partners Federal Budget 2017-18 Update.

It is impossible to outline all of the tax planning considerations and all budget announcements. The items above cover some of the key considerations that we believe our legal clients should pay heed to.  If you have not started your tax planning preparations we strongly recommend you do!  If you need assistance, any Pitcher Partners’ representative would be more than happy to sit with you prior to 30 June 2017 to work through your desired ‘goals’ and forward plan your tax affairs.

DISCLAIMER: The information in this document is general in nature and does not constitute financial product advice.


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