BDO’s Automotive team encourages you to review the following tax planning opportunities which are worth considering before 30 June – now is the time for tax planning!
This article has been prepared prior to the Federal Budget and accordingly you should determine if the Budget changes any of these tax planning initiatives. You should also seek your own advice from your usual tax advisor who will understand your business and personal circumstances more intimately.
A summary of general tax planning initiatives follows. Please note that they are a mix of both opportunities and important administrative matters:
- Trust distribution
- Division 7A loan and unpaid present entitlement
- Change in company tax rate
- Trading stock – demonstrator, used and parts
- Bad debts
- Defer sales/revenue
- Bring forward expenditure
- Prepayments
- Accrued expenses
- Building Depreciation
- Fixed assets and depreciation
- Fringe Benefits Tax
- Superannuation
- Should you vary the PAYG Instalments?
Trust distribution
Under the current tax law, a trust must have distributed its annual income to beneficiaries on or before 30 June each year. Any undistributed income will be taxed in the hands of the trustee at the highest marginal tax rate.
Effective the year ended 30 June 2012, the Australian Taxation Office withdrew the previous concession of allowing trust distributions to be made within two months after the end of the income year in order to avoid the trustee being taxed.
Accordingly, it is critical for a trustee to have considered the income of the trust and made a resolution to distribute the income to beneficiaries on or before 30 June each year to properly discharge the fiduciary duties of their trustee role.
Division 7A loan and unpaid present entitlement
If your group has any Division 7A loans and/or unpaid present entitlement (under a sub-trust arrangement or otherwise), the minimum repayment requirement will need to be satisfied each year.
Under the Division 7A rules, any loan owed by a shareholder, or an associate of a shareholder, to a private company may give rise to a deemed dividend, unless the loan is put on a commercial footing under a written loan agreement. These rules also apply to any loan owed by a shareholder, or an associate of a shareholder of a private company to which a trust has previously made a trust distribution that has remained unpaid as an unpaid beneficiary entitlement (UPE).
Further, the Commissioner of Taxation is also of the view that a UPE may be caught by the Division 7A rules unless it is converted to a compliant Division 7A loan or treated as a sub-trust.
Change in company tax rate
The Government has announced that the company income tax rate will be reduced by 1.5% to 28.5% from 1 July 2015.
Accordingly, there may be advantages for some shareholders if a company with sufficient franking credits pays franked dividends before 1 July 2015.
Trading stock – demonstrator, used and parts
The tax legislation provides that closing trading stock can be valued at the end of every year using one of the following three methods:
- Cost
- Market selling value
- Replacement value.
Usually, the most tax effective outcome is that which provides the lowest value.
For used and demonstrator vehicles the most tax effective method is usually replacement value which is ascertained by way of an independent valuation using either a:
- ‘Suitably qualified arms length’ (TR93/209), ‘truly independent’ (IT2648) valuer
- Recognised industry guide, for example Red Book (not permitted for Demonstrators)
Care should be taken to ensure that the valuations meet the strict requirements of the tax legislation outlined above, as the deduction derived from this valuation normally represents the largest single tax adjustment.
Note that it is not necessary to ‘book’ the adjustment through the accounting records, and in fact we recommend that you don’t. Your accountant can include the deduction for tax purposes only.
For parts and accessories the most tax effective method is again achieved through valuation at replacement value. Our view is that replacement value equates to cost, for parts less than 12 months old, and nil for parts with no movement greater than 12 months.
Remember to have your Parts Manager print the aged stock report on 30 June, normally in conjunction with the physical stocktake, as many DMS’s cannot subsequently produce an accurate report to reflect the aged stock as at 30 June.
Bad debts
A tax deduction is available for a bad debt if:
- Reasonable action has been taken to seek recovery, and
- The debt is physically written off by year end.
Remember to claim back GST previously remitted in respect to that sale. Have you forgotten to claim back any GST on debts previously written off?
Defer sales/revenue
Industry practice is to bring forward the sale of vehicles to an earlier month, at least in an accounting sense, despite not having delivered the vehicle by the end of the month. Motivations include the manufacturer incentives for achieving targets and/or the Sales Managers’ motivation to increase their bonus. You should also recognise that this practice ‘brings forward’ the income tax, GST and LCT liabilities to the earlier year where it occurs in June.
Bring forward expenditure
Consider bringing forward certain tax deductible expenses before year end and access the available tax deductions.
Under the general deductibility rules, you are entitled to a tax deduction as soon as the expense has been incurred, regardless of when the physical payment is actually made. For example, a tax deduction would be available when you purchase workshop or office supplies before year end regardless of which period they are paid.
Notwithstanding the above, it should be noted that expenditure for services may not be immediately tax-deductible even where incurred. The rules governing prepayment for services are discussed below.
Prepayments
Generally, the tax deduction for a prepayment for service (as opposed to physical items such as workshop supplies) will need to be spread over the ‘eligible service period’ associated with the expenditure.
For instance, if a $12,000 insurance premium paid at the end of May and relating to the 12 months following will entitle you to a tax deduction of just $1,000 for that year. The remaining $11,000 will need to be claimed in the following year.
However, there are a few exceptions relevant to Dealers which may give rise to an immediate deduction on the full prepayment amount:
i. The expenditure is less than $1,000 (GST exclusive)
ii. The expenditure is required by law (eg Workcover)
iii. The expenditure is incurred under a contract of service (wages for example).
Accrued expenses
Identify all expenses to which you have definitively committed (ie, the expenses have been incurred) at year end, even though they may not have been physically paid for until later. These expenses may be tax deductible and you should consider recording them as ‘accrued expenses’ in the accounts so that they can be identified by your accountant. Some of the expenses that are commonly accrued include:
- Advertising
- Bank charges
- Commissions/bonuses
- Electricity
- Fringe Benefits Tax (FBT)
- Interest
- Payroll tax
- Rent
- Telephone
- Salaries and wages.
Building Depreciation
Engaging a quantity surveyor who prepares Capital Allowance (building depreciation) and Tax Depreciation Reports (plant and equipment depreciation) may significantly maximise the deductions available.
Of significance is that the quantity surveyor will seek to identify items of plant and equipment that can be separately depreciated at rates higher than 2.5 per cent.
The quantity surveyors reports can provide higher deductions regardless of whether the facilities were recently constructed, purchased or have been owned for some time.
Fixed assets and depreciation
Assets that have little or no resale value may be scrapped by year end.
This will also enable you to claim their tax written down value as a tax deduction.
Depreciation is calculated with reference to the effective life of each asset for which the ATO provides guidance. It can be calculated using a number of methods as follows:
- Diminishing value – provides a greater deduction in the earlier years
- Prime cost – or straight line, provides an equal depreciation for each year.
Assets which cost less than $1,000 can be allocated to a low value pool and depreciated at 18.75 per cent in the first year acquired and 37.50 per cent for subsequent years.
Fringe Benefits Tax
The Fringe Benefits Tax (FBT) regime contains a number of exemptions for benefits that may be provided FBT exempt to employees while the cost of providing such benefits continues to be 100 percent tax deductible to the employer.
These include:
- Mobile phones
- Personal digital assistant
- Protective clothing
- Briefcase
- Calculator
- Tools of trade
- Laptop computer
- An employee’s subscription to a
- professional journal
- An employee’s airport lounge membership
- An employee’s membership for a corporate credit card.
To qualify for the FBT exempt treatment, the relevant item provided must be used by the employee primarily for work-related purposes and only one of each item may be provided to each employee in a given FBT year. A full tax deduction is available for these benefits provided to employees subject to the qualifications above.
Superannuation
Given the low tax environment under which complying superannuation funds operate, there are specific contribution limits that govern both the maximum and minimum amount of superannuation contributions that can be made to superannuation funds.
The opportunities available regarding superannuation are very specific to the facts of each individual’s personal circumstance and accordingly we have not attempted to provide a complete overview. However you should consult and consider the opportunities and compliance matters relevant to the circumstances of you and your business. Those matters will include superannuation guarantee requirements, the maximum concessional and non-concessional contributions and transition to retirement (TRIS) or pension strategies. This area in particular is one which may be impacted by the Federal Budget in May.
Should you vary the PAYG Instalments?
Your current instalments are based on the taxable income you achieved in the 2014 financial year. Compare your 2015 financial year result to that of the previous, consider the instalments you have made for the previous three quarters, any significant tax adjustments (for example the used and demonstrator valuations) and consider if it would be prudent to vary the June quarter instalment down.
Note that the ATO can potentially apply general interest charges where variations result in actual tax paid of less than 85 percent of actual tax payable
If you would like to discuss any tax planning opportunities or important administrative matters do not hesitate to contact your usual BDO advisor or Mark Ward on either
(07) 3237 5744 or mark.ward@bdo.com.au.
Mark Ward
Partner, Automotive – BDO