Year-end tax
planning toolkit
Year-ending 30 June 2014
June 2014
The contents of this document are for general information only and do not consider your personal circumstances or situation.
Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been
summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners
representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage
arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, May 2014. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited
by a scheme approved under Professional Standards Legislation.
Contents
1
Introduction ................................................................................................................................................. 5
2
Summary checklist ....................................................................................................................................... 7
3
Income ....................................................................................................................................................... 19
4
Deductions ................................................................................................................................................. 28
5
Individuals .................................................................................................................................................. 37
6
Trusts ......................................................................................................................................................... 48
7
Companies ................................................................................................................................................. 58
8
Partnerships ............................................................................................................................................... 69
9
Capital gains tax ......................................................................................................................................... 72
10 Finance issues ............................................................................................................................................ 77
11 International tax ........................................................................................................................................ 81
12 Super and GST ............................................................................................................................................ 91
13 Integrity provisions .................................................................................................................................... 97
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5
1 Introduction
Welcome to the Pitcher Partners
30 June 2014 year-end tax planning toolkit.
1A
Year-end tax planning
As the financial year draws to a close, it is time to start thinking about whether your year-end tax planning is in order.
Tax planning not only requires consideration of income and deductions for the year, but also requires you to consider
whether your compliance requirements have been met. This includes whether appropriate elections are made within
the time requirements, the preparation and maintenance of appropriate documentation (such as trust minutes) and
forward planning of your tax affairs. Our tax toolkit is here to assist you in this process.
1B
What does this document do?
This document provides an outline of the tax issues that should be considered before year-end. This document has
been updated for new developments and (where relevant) the 2014/15 Budget announcements.
This toolkit is specifically tailored to address the taxation concerns of taxpayers in the middle market and includes
checklists covering both corporate taxpayers and private groups.
1C
What this document doesn’t do
This toolkit is not intended to be a comprehensive document covering all taxation issues that require consideration.
This is because every taxpayer’s circumstances are unique. Instead, this document is only intended to provide you with
a broad range of issues for consideration before the end of the financial year.
1D
Take care about tax planning
Tax planning may often result in a taxpayer paying less income tax in a given income year. It is noted that the definition
of a tax benefit under the tax anti-avoidance provisions is broad enough to cover a deferral of income tax. Therefore
the tax anti-avoidance provisions must always be considered as part of your year-end tax planning. Given that the
general anti-avoidance provisions have recently been expanded, taxpayers must always consider these provisions. We
have included a number of anti-avoidance or integrity provisions for your consideration in Chapter 13 of this toolkit.
1E
How will you find what you are looking for?
To assist you in quickly locating the area of tax that is relevant to you, this document has been subdivided into
chapters. The chapters either relate to a specific type of taxpayer (e.g. a company or trust) or to a specific tax topic (e.g.
capital gains tax). Furthermore, Chapter 2 of this toolkit provides a summary of all of the questions contained in
Chapters 3 to 13 of this toolkit. The following diagram provides a simplified outline of how this toolkit is arranged.
Pitcher Partners – Year-end tax planning toolkit
6
SUMMARISED YEAR-END PLANNING CHECKLIST
[Chapter 2]
Income
[Chapter 3]
Deductions
[Chapter 4]
CORE SECTIONS
Individuals
Trusts
Companies
Partnerships
[Chapter 5]
[Chapter 6]
[Chapter 7]
[Chapter 8]
ENTITY SPECIFIC QUESTIONS
Capital gains
tax
[Chapter 9]
Finance issues
[Chapter 10]
International
tax
Super
& GST
Integrity
provisions
[Chapter 11]
[Chapter 12]
[Chapter 13]
SPECIALIST TOPIC QUESTIONS
We trust you will find this document useful when considering your 30 June 2014 tax
planning. Please talk to your Pitcher Partners representative if you would like more
information or clarification of some of the issues raised in this document.
1F
Disclaimer
The contents of this document are for general information only and do not consider your personal circumstances or
situation. Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or
explanations have been summarised and simplified. This document is not intended to be used, and should not be used,
as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with
your Pitcher Partners representative to obtain advice in relation to your proposed transaction. Pitcher Partners
disclaims all liability for any loss or damage arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, June 2014. All rights reserved. Pitcher Partners is an association of independent
firms. Liability limited by a scheme approved under Professional Standards Legislation.
Pitcher Partners – Year-end tax planning toolkit
7
2 Summary checklist
2A
Enter your details
If you are completing this document as a checklist and wish to submit this back to your Pitcher Partners representative,
please complete your details in the following check boxes.
Enter entity name
Enter contact details
2B
Background
The following simplified checklist contains a high level summary of the planning items that are covered in more detail
in this toolkit. We have provided a reference link to the detailed discussion of each of these tax planning items.
We recommend that you work your way through this summarised checklist at first instance. Where items appear
relevant, those items should be “tagged” using the check boxes. The detailed item can then be reviewed in more detail
to determine whether the planning opportunity is relevant to your circumstances.
2C
Income
This section deals specifically with the treatment of income that you may have received or derived during the income
year and whether such income should be attributed to the 2014 income year or deferred to the 2015 income year
and subsequent years.
 Business income — If you derive business sales income, you may be able defer sales invoicing or bring forward
sales invoicing (in appropriate circumstances). — Chapter 3B
 Accrued / unearned income — If you record accrued or unearned income in your accounts, you may be able to
defer recognition of that income for tax purposes. — Chapter 3C
 Trade incentives — Discounts and other incentives on trading stock or services are typically brought to account in
a different income year for tax as compared to accounting. — Chapter 3D & 3E
 Disputed amounts — It may be possible to defer the recognition of disputed income amounts until you have
settled the dispute. — Chapter 3F
 Construction contracts — Where you enter into construction contracts that are not your trading stock, you may be
able to utilise one of the different methods of income recognition allowed by the ATO for tax purposes. — Chapter
3G
 Insurance proceeds — If you received insurance proceeds, you should examine whether the proceeds are in fact
assessable and when you need to bring the proceeds to account for tax purposes. — Chapter 3H
 Grants, bounties, subsidies — If you receive grants, bounties or subsidies, you should examine whether they are in
fact assessable and when you need to bring the proceeds to account for tax purposes. — Chapter 3I
 Disaster relief money — Exemptions may be available for disaster relief money received. — Chapter 3J
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purposes as interest is typically assessable on a receipts basis. — Chapter 3K
 Dividend income — Dividends accrued may not be assessable at year-end if they are only declared by not paid.
Make sure you also take into account franking credits in your tax planning. — Chapter 3L
 Retail premiums — If you received a retail premium as a non-participating shareholder during the year, this
amount may be treated as an unfranked dividend. — Chapter 3M
 Trust distributions — Year-end tax planning should take into account the expected tax distribution that you may
receive from trusts (rather than the expected accounting / cash distribution amount). — Chapter 3N
 Rental / leasing income — Consider whether your rental income activities are passive (and therefore on a cash
basis) or constitute a business (and therefore possibly on an accruals basis). This can have an effect on the timing
of income brought to account. — Chapter 3O
 Foreign taxes — If you received foreign income subject to foreign tax, make sure you claim your foreign tax offsets
and ensure you gross-up the foreign income for planning estimates. — Chapter 3P
 Non-assessable amounts — Consider whether any income you have received this year can be treated as nonassessable. — Chapter 3Q
 Personal services income — If you provides services through a trust or company, there is a risk that the income
could be your personal services income and attributed to you directly. You should consider the personal services
income rules appropriately before year-end. — Chapter 3R
 Extraordinary items — If you have received extraordinary (or significant) receipts during the year, these items
must be examined closely from a tax perspective. — Chapter 3S
 Notes — Review notes taken in relation to the chapter. — Chapter 3T
2D
Deductions
This section deals specifically with the expenses that you may have incurred during the income year and whether such
expenses can result in a deduction for the 2014 income year or need to be deferred to the 2015 income year and
subsequent years.
 General rules — Consider all material expense items to determine whether there is any risk that certain items may
not be deductible (e.g. they are of a capital nature). You should ensure an appropriate review of all such expenses
to determine their deductibility and any opportunities that may exist for such expenses. — Chapter 4A
 Capital expenditure — If you have identified non-deductible capital expenditure, you should consider your ability
to claim a black—hole deduction over five years or (alternatively) include the costs in your cost base of an asset. —
Chapter 4B
 Bad debt deductions — If you have doubtful debts, you can possibly bring forward deductions if you are able to
write those amounts off as bad debts for tax purposes before 30 June 2014. — Chapter 4C
 Trading stock valuation — Where you hold trading stock, you can choose to value trading stock at year-end at
cost, market selling value, replacement value or obsolete stock value. This can have the effect of either bringing
forward deductions or shifting the amounts to the following year. — Chapter 4D
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8
 Interest income — For interest received around year-end, examine the timing of interest income closely for tax
9
 Depreciating assets (all entities) — If you have depreciating assets, there are a number of options that allow you
to accelerate depreciation claims for the current year. — Chapter 4E
 Depreciating assets (small business entities) — If you have depreciating assets and you are a small business entity,
further tax incentives can apply to provide a higher deduction claim for the current year. — Chapter 4F
 Project pools — If you have identified non-deductible capital expenditure, you should consider your ability to claim
the capital expenditure as a project pool cost over the life of the project. — Chapter 4G
 Internal labour costs — Where you internally construct assets, you may be required to capitalise labour costs for
tax purposes. This may defer deductions claimed (i.e. over the depreciable life of the asset). — Chapter 4H
 Employee bonuses — Consider whether your accrued employee bonus plan for 30 June 2014 can be treated as
deductible for the current year by changing aspects (e.g. approval timing) of your plan. — Chapter 4I
 Exempt income deductions — If you derive exempt type income, a number of your expenses are likely to be nondeductible. This should be reviewed to determine the correct position. — Chapter 4J
 Foreign exchange — Consider whether the (tax) foreign exchange provisions will give rise to significant
adjustments at year-end. Consider if there are any opportunities to reduce compliance under the provisions by
making certain elections before year-end. — Chapter 4K
 Gifts and donations — Review your deductions (or proposed deductions) for gifts and donations and their impact
on your tax losses. — Chapter 4L
 Prepaid expenditure — There are still some opportunities for some prepayments to be fully deductible upfront if
they: are made by individuals and small businesses; or represent excluded expenditure for all other taxpayers. —
Chapter 4N
 Service fees — If there are management fees and service fees charged between your group entities, you should
ensure all paper work or agreements are put into effect before year-end and that the fees are commercially
justifiable. The ATO has been targeting these items in recent years. — Chapter 4O
 Capital support payments — The ATO takes the view that capital support payments made by a parent to its
subsidiary will be on capital account and non-deductible. Accordingly, consider whether it is better to structure the
arrangement as an appropriate arm’s length service fee. — Chapter 4P
 Trade incentives — if you provide discounts and trade incentives on your sales, these items are generally
deductible at a different time for tax as compared to accounting. — Chapter 4R & 4S
 Tax losses for infrastructure projects — If you are involved in large scale infrastructure projects, new provisions
have been introduced that may allow certain entities to recoup early stage losses for approved projects. —
Chapter 4T
 Notes — Review notes taken in relation to the chapter. — Chapter 4U
2E
Individuals
This section considers specific year-end taxation issues associated with individuals.
 Tax rates — The overall tax rate for 30 June 2014 will be up to 2.5% lower as compared to 30 June 2015 (due to
the increase in the Medicare Levy to fund Disability Care of 0.5% and the Temporary Budget Repair Levy of 2.0%
for income over $180,000). For an individual resident taxpayer, $141,800 of taxable income (which equates to a
fully franked dividend of $99,260) provides an average tax rate of 30% for 30 June 2014. — Chapter 5A
Pitcher Partners – Year-end tax planning toolkit
opportunities that may reduce this levy. — Chapter 5A
 Private health insurance rebate — Please note that the private health insurance rebate is now adjusted for on the
lodgement of your income tax return. This can either increase or decrease the total amount payable on lodgement
of your individual return. — Chapter 5B
 Rebates and offsets — A large number of different rebates and offsets are available to reduce taxable income. You
should consider the availability of these items for the current year. — Chapter 5C
 Work expenses and substantiation — Ensure you have documentation to substantiate claims of $300 or more.
You should understand what claims are covered by the substantiation requirements. — Chapter 5D
 Specific occupations under ATO target — The ATO are targeting work expenses claimed by: (a) those working in
the building and construction industry; and (b) sales and marketing managers for 30 June 2014. They are also
targeting amounts reported under the Taxable Payments Annual Report in the construction industry and internet
sales income that is not being disclosed. — Chapter 5E
 Work related car expenses — Ensure that you record your odometer readings for 30 June 2014 and consider a logbook for your car (to maximise options for car expense deductions). — Chapter 5F
 Work related travel expenses — Examine whether any additional travel (local, interstate, overseas) expenses are
deductible for the 30 June 2014 income year and ensure you have satisfied the substantiation requirements. —
Chapter 5G
 Work related clothing, laundry and cleaning — Consider whether you can claim a deduction for the cost of buying
or cleaning: occupation specific or protective clothes; or unique, distinctive uniforms. — Chapter 5H
 Other work related expenses — Consider the deductibility of other work related expenses including home office
expenses, occupancy expenses, work related development and support, tools and equipment and overtime meal
allowance expenses. — Chapter 5I
 Specific industries — If you work in a specific industry, you should consider the ATO’s guide on work related
expenses that applies to that industry. — Chapter 5J
 Self-education expenses — Review whether education expenses are deductible and apply the non-deductible
threshold of $250 to appropriate expenses. — Chapter 5K
 Work related expenses you cannot claim — Review whether there are specific rules that will deny a deduction for
your work related expenses. — Chapter 5L
 Prepaid expenses — Consider whether you can prepay certain expenses before 30 June 2014 to bring forward
deductions to the current income year. — Chapter 5M
 Salary sacrifice — Ensure that you have appropriately considered the requirements for an effective salary sacrifice
arrangement (e.g. into superannuation). Consider whether salary sacrifice opportunities may exist to apply a lower
rate of FBT for the period of 1 July 2014 to 31 March 2015 in lieu of the higher marginal income tax rate due to the
Temporary Budget Repair Levy. — Chapter 5N
 Employee share schemes — If you have received shares as an employee, you need to consider the employee share
scheme provisions and whether an amount will be assessable to you. — Chapter 5O
 Foreign employment income — You will need to review the income tax and FBT consequences where you have
performed foreign employment. — Chapter 5P
 Non-commercial losses — If you carry on business in your own name, losses related to the business activities may
not be deductible under the non-commercial loss provisions. — Chapter 5Q
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10
 Medicare levy — As part of your ordinary tax planning, understand your Medicare levy and consider any
11
 LAFHA changes — If you have received a living away from home allowance (LAFHA) during the 30 June 2014
income year, you should consider a review of these amounts (due to the significant changes that occurred on 12
October 2012). — Chapter 5S
 Notes — Review notes taken in relation to the chapter. — Chapter 5T
2F
Trusts
This section considers specific year-end taxation issues associated with trusts.
 ATO compliance activity — The ATO is continuing its trust compliance activities during the current income year.
You should therefore carefully review all of your trust requirements before year-end. — Chapter 6A
 Trustee tax rate — To avoid a trustee tax rate of 46.5%, ensure that you make beneficiaries entitled to all of the
income of the trust before 30 June 2014 (or an earlier time if required by the trust deed). — Chapter 6B
 Trustee resolutions — Distribution resolutions or distribution plans must be completed before year-end (or earlier
if required by the trust deed) and evidenced. — Chapter 6C
 Meaning of income — Review the trust deed to determine how income is defined to ensure the distribution
resolutions are effective in distributing all trust income (to avoid a trustee assessment). You will also be required to
disclose income per your deed in your 30 June 2014 tax return. — Chapter 6D
 Distribution of timing differences (general) — The ATO has been focusing compliance activity on taxpayers taking
advantage of timing differences between a trust’s net income for tax purposes and its income for trust purposes by
using a corporate beneficiary to avoid top-up tax in the hands of individuals. Care needs to be taken if you expect
taxable income to exceed accounting profit. — Chapter 6E
 Distribution of timing differences (Unit trusts) — As beneficiaries of unit trusts can be taxable on a distribution of
timing differences, consider whether it may be possible to align tax and accounting by defining income as “taxable
income” for the current income year. — Chapter 6F
 Trust to company distributions — Ensure that you have appropriately considered Division 7A where your trust
distributes (directly or indirectly) to a corporate beneficiary — Chapters 6G and 7E
 Trust to trust distributions — Consider the rule against perpetuities to ensure that trust to trust distributions are
not invalidated. — Chapter 6H
 Eligible beneficiaries — Make sure that the beneficiaries you have identified are eligible under the trust deed
before finalising your trust resolutions. — Chapter 6I
 Trust streaming — Legislation only specifically allows streaming for capital gains or franked dividends. You should
ensure you comply with these rules if you wish to stream for the current year. — Chapter 6J
 Capital gains versus revenue gains — If you have derived substantial capital gains, you need to consider the ATO’s
ruling that may seek to treat those gains on revenue account (and not subject to a 50% discount). — Chapter 6K
 Trust losses and bad debts — Trust losses and bad debt deductions may be denied if a family trust election is not
made, or if the trust loss provisions are not otherwise satisfied. Consider these rules if you are expecting to make a
tax loss or if you are recouping tax losses. — Chapter 6L
 Franking credits — If you receive dividends through the trust, franking credits may not flow through the trust
unless the trust makes a family trust election. — Chapter 6M
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of losses in a trust may create taxation issues if a family trust election is not made. — Chapter 6N
 Interest expenses and distributions — Interest deductions may be denied where finance is used to fund
distributions to beneficiaries. You may consider alternatives to help protect interest deductions. — Chapter 6O
 Family trust elections — Critically review your family trust election requirements for the year to ensure you
protect bad debts, carry forward losses and franking credit flow-through. Make sure all new trusts have made an
election to be within the family group. — Chapter 6P
 TFN withholding — The trustee must obtain TFNs from beneficiaries before 30 June 2014, which have not
previously been reported, to avoid penalties. This needs to be reported to the ATO by 31 July 2014. — Chapter 6Q
 Review trust deeds — Consider reviewing your trust deed before year-end to ensure that the deed is still
appropriate for the type of distribution resolutions that you now want to make / may want to make in the future.
— Chapter 6R
 Superannuation deductions — Consider carefully the deductibility of payments for superannuation contributions
made for directors of a trustee company. — Chapter 6S
 Trust distributions to a superfund — Non-arm’s length income derived by a superfund (which may include
discretionary trust distributions or private company dividends) can be taxed at 45% in a superfund. — Chapter 6T
 Notes — Review notes taken in relation to the chapter. — Chapter 6U
2G
Companies
This section considers specific year-end taxation issues associated with companies.
 Payment of dividends — If the company has current year losses, or prior year retained losses, a dividend paid by
the company may not be frankable unless you fall within the ATO’s guidelines. — Chapter 7A
 Franking distributions — You should appropriately manage your franking account balance to ensure that you do
not create a franking deficit at year-end (and incur franking deficits tax). — Chapter 7B
 Distribution statements — If you have paid (or will pay) dividends for the current year, you need to ensure
compliance with the distribution statement requirements (otherwise the dividend will not be frankable). —
Chapter 7C
 Debt that can be treated like equity — All loans made to companies should be reviewed to ensure that they are
on terms that allow them to be treated as debt for tax purposes and are not inadvertently treated as equity (and
thus interest will be non-deductible). — Chapter 7D
 Division 7A — You should review Division 7A before year-end to ensure that you do not inadvertently trigger a
deemed unfranked dividend to a shareholder or associate for any loans, payments or debt forgiveness transactions
provided by the company. — Chapter 7E
 Company losses — If you are utilising prior year tax losses, or have tax losses in the current year, you will need to
consider the carry forward tax loss provisions. — Chapter 7F
 Loss carry-back provisions — The Government intends to repeal the loss carry-back provisions for 30 June 2014.
However, if you expect to have a tax loss for the current year and you paid tax in the 2012 or 2013 income year,
you could be entitled to self-assess a refund of your previous year’s tax by carrying back the current tax loss (until
the law changes). — Chapter 7G
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12
 Injection of income — If there is more than one trust in your group, trust to trust distributions to take advantage
13
 Share capital transactions — If your share capital account has moved for the current year, you should examine
those movements very carefully. They may result in an unfranked dividend or untainting tax liabilities. You may be
able to correct these if identified before year-end. — Chapter 7H
 Tax consolidation — choice to consolidate — If you are making a choice to consolidate, you need to keep a
separate hand written choice. You will also need to consider whether tax funding and tax sharing agreements are
put in place before (or close to) year-end. — Chapter 7I
 Tax consolidation — change in members — If members have joined or left during the income year, you are
required to notify the ATO within 28 days. You are also required to update your tax funding and tax sharing
agreements. — Chapter 7J
 Tax consolidation — updating tax costs — If entities have joined a tax consolidated group during the year, you
should ensure that you have recalculated the tax cost base of assets and liabilities, as this could materially impact
your 30 June 2014 tax calculation. — Chapter 7K
 Tax consolidation — disposal of entities — If entities have left a tax consolidated group, the cost base of the
shares needs to be recalculated based on the underlying tax cost of assets and liabilities of the leaving entity. This
can have a material impact on any capital gain or loss on sale of the leaving entity — Chapter 7L
 Research and development (R&D) — Consider the effect of the R&D tax incentive provisions on your R&D
deductions for 30 June 2014. — Chapter 7M
 R&D — ineligible companies — If you carry on R&D activities and you have aggregated assessable income of $20
billion or more, legislation has been introduced that will deny an R&D tax incentive claim for 30 June 2014. —
Chapter 7N
 R&D — feedstock adjustments — If you claim R&D related to feedstock expenditure, you may be required to
include an adjustment in your assessable income. — Chapter 7O
 Reportable tax positions — Consider whether you need to prepare the reportable tax position schedule in the tax
return. To avoid disclosures, you may need to ensure that you have appropriate opinions on material tax issues.
Consider implementing an appropriate tax risk management procedure. — Chapter 7P
 PAYG instalments — Determine whether the PAYG instalment for the fourth quarter for 30 June 2014 can be
varied. — Chapter 7Q
 Director penalty regime — Ensure that you are up to date with super and PAYG payments and consider
implementing control procedures dealing with the director penalty regime. — Chapter 7R
 Notes — Review notes taken in relation to the chapter. — Chapter 7S
2H
Partnerships
This section considers specific year-end taxation issues associated with partnerships.
 Professional practices with trusts as partners — The ATO is reviewing professional practices that report a trust as
a partner in the tax return. There may be ways in which to mitigate this risk. — Chapter 8A
 Professional practices (unincorporated and incorporated) — If your professional practice has a practicing member
that is not a natural person, the ATO has indicated that it will not stand by its “no goodwill” view for incoming and
leaving members. There may be ways in which to mitigate this risk. — Chapter 8B
 Varying distributions — For common law partnerships, consider the ability to vary distribution entitlements before
30 June 2014. — Chapter 8C
Pitcher Partners – Year-end tax planning toolkit
company and the Division 7A treatment of such contributions. — Chapter 8D
 Notes — Review notes taken in relation to the chapter. — Chapter 8E
2I
Capital gains tax
This section considers a number of year-end considerations for capital gains that may have been derived during the
income year.
 General — Ensure that you have considered all contracts and capital receipts for the year to determine whether a
capital gain or loss has occurred. — Chapter 9A
 Small business CGT concessions — Where you conduct a business (either directly or indirectly), consider your
ability to reduce capital gains under the small business concessions. — Chapter 9B
 CGT discount — Consider whether assets disposed of were held for over 12 months and thus qualify for the CGT
discount. If the amounts are material, you may need to review whether the ATO may treat the amounts as being
on revenue account (and not eligible for the 50% discount). — Chapter 9C
 CGT discount (non-residents) — Non-residents individuals no longer qualify for the CGT discount. The provisions
may allow for a full or partial discount in certain cases. Taxpayers should consider obtaining a market valuation of
their taxable Australian property held at 8 May 2012 or assessing the discount available based on the days on
which they were an Australian resident compared to the total period of ownership of the asset. — Chapter 9C
 Earnout arrangements — The capital gain on the sale of a CGT asset can be deferred if you qualify for the earnout
rules. — Chapter 9E
 CGT exemptions and rollovers — Consider the many CGT exemptions and rollovers that may apply to reduce your
capital gain or loss. — Chapter 9F
 Main residence exemption — Ensure you have applied the main residence exemption correctly for any sale of
residential property and adjacent land. — Chapter 9G
 Notes — Review notes taken in relation to the chapter. — Chapter 9H
2J
Finance issues
This section considers a number of year-end considerations for financial transactions and financial type entities for
the income year.
 Loan rationalisation and debt forgiveness — You may wish to consider rationalising inter-entity loans at year-end,
to simplify loan arrangements and Division 7A compliance. However, consider the tax consequences that may
occur on a loan rationalisation or debt forgiveness during the year. — Chapter 10A
 Interest deductibility — If you have significant interest or debt deduction costs during the year, you should closely
consider whether you are precluded from deducting such amounts. — Chapter 10B
 Capital protected borrowings — Interest deductions may be denied in respect of the funding of capital protected
shares, units or stapled securities. — Chapter 10C
 TOFA — general — On an annual basis, you need to consider whether the TOFA provisions will start to apply to
your entity or group of entities. — Chapter 10D
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14
 Equity contributions — You should appropriately consider equity contributions made to a partnership by a
15
 TOFA — elections — TOFA can provide taxpayers with a number of elections that allow tax to be aligned with
accounting for financial instruments. If such elections are of interest, they need to be made before year-end. —
Chapter 10E
 TOFA — consolidated groups — If your group is subject to TOFA, and an entity has joined your tax consolidated
group, make sure that you have applied the special TOFA rule to liabilities of the joining entity (which treats such
amounts as assessable). — Chapter 10F
 TOFA — compliance issues — If your group is subject to TOFA, the ATO is conducting compliance activity for the
current income year. Accordingly, you should ensure you are comfortable with your TOFA positions. — Chapter
10G
 Notes — Review notes taken in relation to the chapter. — Chapter 10H
2K
International tax
This section considers a number of year-end considerations where you have international transactions, or inbound or
outbound investments.
 Non-resident individual tax rates — We have outlined the tax rates for individuals for the 30 June 2014 income
year. — Chapter 11B
 Tax residency and source — You should carefully consider whether the relevant entity is a tax resident for the
current year, and (where non-resident) whether foreign sourced income should be excluded. — Chapter 11C
 Temporary resident exemption — If you are a foreign citizen and an Australian resident, consider whether you can
apply the temporary resident exemption and reduce your taxable income. — Chapter 11D
 Change in residence — A change in residence may have significant tax implications and may also require elections
to be made. You should consider your residency status for the income year. — Chapter 11E
 Foreign accumulation funds — If you own any non-controlling interests in foreign companies or trusts, you should
consider how you will be taxed on those investments. — Chapter 11F
 Controlled foreign companies — You should consider whether the controlled foreign company provisions will
result in an accrual of underlying income in your foreign investment, even if your individual interest is a minority
interest. — Chapter 11G
 Transfer pricing — New transfer pricing provisions apply from 1 July 2013, which can apply to reprice all of your
international dealings. The provisions also require documentation to be in place by lodging your tax return. It is
therefore critical to ensure that you review your transfer pricing policies and documentation. — Chapter 11H
 International dealings schedule — Completion of the international dealings schedule for the 30 June 2014 tax
return should be consistent with your transfer pricing documentation for the current year. It is therefore critical to
ensure transfer pricing documentation is in place. — Chapter 11I
 Conduit foreign income — If the Australian company is a conduit between foreign entities, the conduit foreign
income provisions may allow unfranked dividends to be paid to non-residents tax free if you meet certain
conditions in the relevant income years. — Chapter 11J
 Foreign income tax offsets — Consider your FITO position for 30 June 2014 to determine whether there are any
excess FITOs that will be wasted. Strategies can be put in place to help reduce FITO wastage. — Chapter 11K
 Non-resident distributions — Consider whether distributions from non-residents (including capital reductions) can
or have been made to an Australian entity in a tax-free manner. — Chapter 11L
Pitcher Partners – Year-end tax planning toolkit
Australian assets without tax consequences. However, non-residents and temporary residents are no longer
eligible for the 50% CGT discount. — Chapter 11M
 Deductions in earning foreign income — Deductions may be denied where a foreign operation in the group
produces exempt or non-assessable non-exempt income to the group. This may be relevant if you carry on a
branch (or hold shares in a subsidiary) in a foreign country. — Chapter 11N
 Deemed dividends — Related party transactions may result in deemed unfranked dividends where benefits are
provided by a CFC to a shareholder or associate of the shareholder (similar to Division 7A). — Chapter 11O
 Thin capitalisation — If you are an inbound or outbound entity, the thin capitalisation provisions may deny
interest deductions. You should consider reviewing your thin cap position before year-end. You should also start to
consider the significant changes that will apply from 1 July 2014 to the thin capitalisation provisions which (in most
cases) will make it harder to claim interest deductions. Addressing your tax gearing ratios before 30 June 2014 may
place you in a much better thin capitalisation position for the 30 June 2015 year. — Chapter 11P
 Withholding tax and deductions — If you pay interest, royalties or other income subject to withholding tax, noncompliance with the withholding tax provisions may result in deductions being denied for the income year. —
Chapter 11Q
 Non-resident beneficiaries — If you stream classes of income to non-residents (e.g. interest) you should consider
the ATO’s views on streaming and the risk that the current provisions may not support streaming such income. —
Chapter 11R
 Non-resident trusts — If you have an interest in a foreign trust for the 30 June 2014 income year, you may need to
disclose income in your tax return under the accrual provisions. — Chapter 11S
 Offshore assets and ATO disclosure opportunity (Project DO IT) — If you have offshore assets or investments that
you have not previously disclosed to the ATO, you should consider taking advantage of the current ATO offshore
asset voluntary disclosure initiative to avoid steep penalties and the risk of criminal prosecution for tax avoidance.
— Chapter 11T
 Investment manager regime — If you are a non-resident widely held fund or an Australian investment manager,
broker or custodian, you should consider the possible application of the new IMR regime which can exempt certain
Australian passive income from Australian tax. — Chapter 11U
 Managed investment trust fund payments — The withholding tax rate on fund payments to non-residents during
the 2014 income is equal to 15% for EOI countries and 30% for non-EOI countries. A special rate of 10% applies to
certain energy efficient buildings funds. — Chapter 11V
 Notes — Review notes taken in relation to the chapter. — Chapter 11W
2L
Super and GST
This section considers a number of year-end considerations for Superannuation and GST.
 Deductions for contributions — You may be able to claim a deduction for superannuation contributions by paying
the amounts to the fund (i.e. received by the super fund) before year-end. — Chapter 12A
 Super guarantee — Ensure that you have complied with the superannuation guarantee requirements, especially
for bonuses paid and payments made to contractors, consultants or members of the board who are not paid via
the payroll. — Chapter 12B
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16
 Non-residents and asset sales — Non-residents and temporary residents can dispose of certain (e.g. non-land rich)
17
 Contribution caps — Make sure you have complied with the annual concessional and non-concessional
contribution caps. New rules apply to related party asset transfers to super from 1 July 2013. — Chapter 12C
 Non-concessional contribution caps — Please note that the non-concessional contribution limit increases to
$180,000 p.a. and $540,000 over a fixed three year period from 1 July 2014 for individuals under the age of 65.
Consider whether you should defer making such contributions until after 1 July 2014. — Chapter 12C
 Personal contributions — Consider whether the individual is eligible to make a deductible concessional
contribution before 30 June 2014 and ensure notice requirements are met within time. — Chapter 12D
 Excess contributions — When reviewing your superannuation strategy for year-end, carefully consider whether
payments are within your contributions cap. — Chapter 12E
 Increase in contributions tax for higher income earners — The contributions tax increases from 15% to 30% for
individuals who have income of more than $300,000. Individuals should consider this when making contributions
for the 2014 year. — Chapter 12F
 Employment termination payments — If you have received an ETP during the 30 June 2014 income year, you
should review changes to the concessional taxation treatment of such payments. — Chapter 12G
 Legal settlements on employee termination — Consider whether amounts received in respect of legal costs
incurred in disputes concerning the termination of employment can be treated as an eligible termination payment
(which may be subject to concessional treatment). — Chapter 12H
 GST adjustments for bad debts written off — If you write off a bad debt during the year, you may need to make a
GST adjustment in the relevant BAS. — Chapter 12I
 Accounting for GST on a cash or accruals basis — If you currently account for GST on a cash basis you should
consider whether you still satisfy the eligibility requirements for cash basis accounting. — Chapter 12J
 Financial acquisitions threshold — If you make financial supplies, you should consider whether you have exceeded
the financial acquisitions threshold and whether you can claim full input tax credits. — Chapter 12K
 GST adjustments for change in use — If you have changed the extent to which an acquisition or importation is
used for a creditable purpose, you should consider whether a change in use adjustment is required in the BAS for
the period ended 30 June. — Chapter 12L
 Reporting requirements for construction — If you are in the building and construction industry, you need to
consider the reporting requirements for payments made to contractors before 30 June. Pitcher Partners has
software that enables direct upload for ATO reporting. — Chapter 12M
 Notes — Review notes taken in relation to the chapter. — Chapter 12N
2M
Integrity measures
This section considers a number of integrity measures that should be considered with your year-end planning.
 General anti-avoidance (Part IVA) — You should consider Part IVA in relation to any material tax planning strategy
that may be implemented for the 30 June 2014 income year, including the new changes which extend the scope of
Part IVA from 16 November 2012. — Chapter 13A
 Promoted schemes at year-end — Be careful of schemes that are promoted to taxpayers to reduce their taxable
income for the income year. Consider the ATO guidance on what to look out for. — Chapter 13B
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carefully the application of the anti-avoidance provisions that may deny deductions incurred by one of the related
parties. — Chapter 13C
 Wash sales — Consider the ATO’s view on wash sale arrangements where assets are disposed of for a loss or gain
and substantially the same assets are re-acquired. — Chapter 13D
 Franking credit trading arrangements — You should review any arrangements that purport to provide a return
that is calculated with reference to franking credits as such arrangements may fall foul of the franking credit
benefit provisions. The ATO has released a ruling where it will seek to apply the anti-avoidance provisions to such
arrangements. The Government has also announced changes from 1 July 2013 dealing with double benefits on
franking credit arrangements. — Chapter 13E
 Trust streaming to exempt entities — Consider the impact of the anti-avoidance rules on distributions from trusts
to exempt entities. — Chapter 13F
 Trust distributions — The ATO is soon to release a fact sheet that could indicate that it may apply the trust
stripping provisions more broadly to family trust arrangements. Care needs to be taken where income is
distributed to a beneficiary, where it is unlikely that the beneficiary will ever call on the funds (or be paid those
funds). — Chapter 13G
 Notes — Review notes taken in relation to the chapter. — Chapter 13H
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 Related party transactions — Where tax planning arrangements involve related party transactions, consider
19
3 Income
3A
General rules on income
A taxpayer is required to include all income derived for an income year in their assessable income. Generally speaking,
business activity income is typically brought to account on an accruals basis, while passive income and personal
services income are typically brought to account on a cash basis. However, as outlined below, some types of passive
income have their own special timing rules. Furthermore, taxpayers in the business of deriving passive income (e.g. a
finance entity) would need to bring such income to account on an accruals basis.
3B
Business income
The accruals method is generally used to include income that has been derived from the sale of goods, commodities or
from business activities.
Where income is from a professional practice, it is not always clear whether such income is from personal services or
1
from a business activity . This issue should be reviewed on an annual basis.
A taxpayer will typically derive business income when an invoice has been raised, or where the taxpayer is legally
entitled to the amount. All trade debtor amounts at year-end are generally included in the assessable income of a
taxpayer deriving business income. Taxpayers should also carefully consider accrued income accounts to determine
whether such amounts are assessable income at year-end (see Chapter 3C).
Year-end planning considerations
 Determine whether you have brought income to account in the correct year. Some income is brought to account
on a cash basis (e.g. interest), while other income is brought to account on an accruals basis (e.g. business income).
 Consider whether you issue invoices in June 2014 that relate to work that is completed in the 2015 income year.
3C
Accrued and unearned income
Taxpayers carrying on a business may often record income as either accrued or unearned. You should carefully
consider the tax treatment of those types of income, as the tax treatment will not always follow the accounting
treatment.
Accrued income
It may be possible to defer the recognition of accrued income to the following income year. Special consideration
should be given to such amounts identified for accounting purposes where an invoice has not been issued. Such
income may, or may not, be derived for tax purposes depending on the legal entitlement to the amounts at the time.
For example, work in progress amounts will not generally give rise to assessable income until there is a recoverable
debt. If, under a contract or arrangement, a recoverable debt may be created without the need to bill the client, then
2
the amount will generally be derived once the work is wholly completed . Furthermore, the accounting basis for
accruing income can sometimes be held to be acceptable. The ATO place a lot of emphasis on these two factors and
3
may seek to tax unbilled income in various cases even if an invoice has not been issued . As a final note, construction
contract income may be derived on a different basis than on a billings basis (see Chapter 3G).
1
TR 98/1: Income tax: determination of income; receipts versus earnings
TR 93/11, para 6
3
See ATO ID 2012/15
2
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An exception to the ordinary derivation rule can occur where amounts are received or receivable in advance of goods
or services being supplied or provided (i.e. unearned income amounts).
Generally, if a contract or arrangement requires that the fee be paid in advance, the income is derived in the income
year in which the work is completed (or the part of the work) to which the fee relates (even if invoiced). On the other
hand, if the client simply pays early, the fee income is generally only derived when a recoverable debt arises or would
4
have arisen if the client had not paid early . The tax treatment also considers the accounting and commercial
treatment of the relevant income. Accordingly, if one is seeking to defer such income, it is prudent to record such
income as “unearned” in the accounts (subject to limitations imposed by accounting standards).
Note that not all unearned income will qualify for deferral. There have been many cases where the principle has been
distinguished. Where this amount is material, you should consider this opportunity further.
Year-end planning considerations
 Identify whether an amount of accrued income or unearned income has been recorded in the accounts in a prior
year, or is expected to be recorded, in the accounts at 30 June 2014.
 Determine whether such amounts have been derived for tax purposes and whether a tax adjustment should be
made for the 30 June 2014 balance.
3D
Trade incentives (purchase of stock)
Trading stock acquired may be subject to a trade incentive (e.g. volume rebate, trade discount, promotional rebate
etc.). This discount amount may either give rise to assessable income to the purchaser, or can reduce the cost of
5
trading stock , depending on the nature of the trade incentive.
For unconditional trade incentives (e.g. a 10% unconditional rebate for all stock purchased) relating directly to the
purchase of trading stock, the amount is treated as a reduction in the cost of trading stock. However, other incentives
generally do not reduce the purchase price, but are treated as income at the time when the incentive is provided. For
example, conditional incentives, promotional incentives, and volume rebate or trade discounts.
In this case, the purchase of trading stock is to be recorded at the full (undiscounted) price (see Chapter 4R).
Accordingly, these discounts can be deferred until derived by the taxpayer and do not have to be included in income at
year-end.
Year-end planning considerations
 Identify whether your business receives conditional discounts or trade incentive discounts from your suppliers. If
so, you may be able to defer recognition of this income for taxation purposes.
3E
Trade incentives (sale of stock)
Where you sell trading stock and offer trade incentives, the treatment of the discount component predominantly
follows the treatment in Chapter 3D.
That is, for unconditional trade incentives relating directly to the sale of trading stock, the amount is treated as a
reduction in the sales proceeds. This treatment is allowed for tax purposes if the trade incentive is virtually certain,
effectively allowing an upfront deduction for the discount provided.
4
5
TR 93/11, para 8 and Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314. See also TR 2014/1, para 5.
TR 2009/5
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20
Unearned income
21
An incentive that is not directly related to the sale of trading stock or is not virtually certain, such as conditional
incentives and promotional incentives will be treated as a deductible amount when the incentive is actually provided.
Accordingly, the sales income must be recorded as the gross (undiscounted) price for tax purposes.
Year-end planning considerations
 Identify whether your business provides unconditional discounts or trade incentive discounts to your customers. If
so, you may be able to reduce the income recorded for taxation purposes by the discount component.
3F
Customer disputed amounts
When accounting for income on an accruals basis, income that is subject to a dispute with the customer may be
6
deferred until the dispute is settled . Generally, this treatment will need to be consistently applied in the accounts of
the taxpayer.
Year-end planning considerations
 If you have an unsettled dispute in relation to an amount of income from a customer that relates to a sale in the
2014 income year, you may be able to defer the recognition of income until settlement of the dispute in the
subsequent year.
3G
Construction contracts
The ATO administratively provides taxpayers with a number of methods for bringing to account construction contract
income where construction activities are carried on by a taxpayer that is separate to the land-owning taxpayer (i.e. the
taxpayer does not hold trading stock or a revenue asset).
The various methods available include the basic approach (billings method) or the estimated profits basis (the
7
accounting method) . While the method chosen must be applied consistently, each method can result in income being
recognised in very different periods. For example, the billings method may allow for deductions to be claimed upfront
whereby income would only be assessable once a recoverable debt is created (e.g. on issue of an invoice). On the other
hand, the estimated profits basis may recognise income during the project as it is completed (even where no amount
has been billed).
In this regard, the ATO requires not only consistency of treatment for all years during which a particular contract runs,
but consistency of treatment for all similar contracts entered into by you and by all entities that are part of your
8
group .
6
BHP Billiton Petroleum (Bass Strait) Pty Ltd v FCT 2002 ATC 5169
IT 2450
8
IT 2450, para 13
7
Pitcher Partners – Year-end tax planning toolkit
22
Year-end planning considerations
 Where you entered into a long term construction contract during the year that does not relate to your trading
stock, you should consider the various methods (i.e. basic approach and the estimated profits basis) to determine
the effect each method has on your the taxable income for 2014 (subject to the consistency requirement).
 If a construction contract does relate to the construction of trading stock for you, consider the possibility of
splitting the construction entity and the stock holding entity going forward.
3H
Insurance proceeds
The treatment of insurance proceeds will depend on the reason for the payment. If insurance proceeds directly
compensate for the loss of income that would otherwise have been assessable (e.g. income protection insurance) or
compensate for the loss of revenue assets (e.g. trading stock), such proceeds may be regarded as ordinary income.
Where such amounts are not ordinary income, specific statutory provisions may include such receipts as income where
9
10
they relate to trading stock or where they relate to a loss of an amount of income .
Where these provisions do not apply and insurance proceeds relate to the loss or destruction of a capital gains tax
11
asset or a depreciating asset, the amount may be taken to constitute proceeds on the disposal of those assets . Where
the proceeds do not constitute ordinary income or statutory income, the receipt of insurance proceeds can be an
12
“assessable recoupment” .
It is noted that the relevant provisions mentioned above also have their own timing rules for when insurance proceeds
13
are to be brought to account . Where the loss event, claim and insurance receipt straddle the year-end, you should
consider the applicable provision closely to determine when the gain must be brought to income.
Year-end planning considerations
 Where the loss event, claim and insurance receipt straddle the year-end, you should consider the applicable
provision closely to determine whether the gain must be brought to income in this year or in a later income year.
 Where an asset has been lost or destroyed, you may be able to claim a loss in respect of the asset and you may be
able to claim rollover relief if the proceeds are used to acquire a replacement asset.
 The current Government confirmed that it would proceed with changes that will allow CGT exemptions to apply to
compensation or insurance payments received through a trust from 1 July 2005.
3I
Grants, bounties and subsidies
14
The treatment of Government grants or subsidies is complex and will depend on the nature of the grant . An amount
will be treated as ordinary income where the amount is for the expected reduction in income, to assist with operating
costs, to compensate for a loss of profits or to evaluate the entity’s current operations.
Where the amount is not ordinary income, but rather a bounty or subsidy in relation to your business that is of a
15
capital nature, the amount will constitute statutory income when received . Amounts received in relation to
commencing a business activity or acquiring new assets may also be assessable depending on the circumstances.
9
Section 70-115 of the ITAA 1997
Section 15-30 of the ITAA 1997
11
TD 31 and ATO ID 2011/82
12
Sections 20-20 and 20-30 of the ITAA 1997
13
For example, section 15-30 requires the amount to be received.
14
TR 2006/3
15
Section 15-10 of the ITAA 1997
10
Pitcher Partners – Year-end tax planning toolkit
23
The timing of the amount as income will again depend on the nature of the amount, however generally the amounts
are included on a receipts basis. Where the grant is conditional, it is possible to defer bringing the amount to income
until the conditions are satisfied. If an amount is repaid, the recipient can also treat the original receipt as non16
assessable and not exempt income (NANE) .
You should also ensure you have considered the operation of the provisions relating to insurance (Chapter 3H) and
disaster relief (Chapter 3J) closely.
Year-end planning considerations
 Where Government grants have been received, determine whether such amounts will be assessable income or
whether an exemption may apply.
 Examine whether it is possible to defer the recognition of the income amount under a grant, for example, where
the receipt of the grant can be deferred or where there are conditions imposed on amounts already received.
3J
Disaster relief
There are a number of grants that have been provided to individuals, small businesses and primary producers in
relation to natural disasters that are not taxable. Furthermore, the NSW and Victorian floods in 2012 were declared a
17
disaster, to ensure people in communities affected by the floods could receive tax deductible donations .
There are also special rules that may apply where the receipt is disaster relief money (received from charities, to which
local, State or Federal Government or their agencies have made payments). In some cases, such amounts may not
18
constitute income to the taxpayer . Furthermore, rollover relief may apply for certain pre-CGT assets replaced after a
19
natural disaster .
On 14 December 2013, the Government announced that it would not be proceeding with the prior announcement that
from 1 July 2011, taxpayers would be able to choose a CGT exemption for assets that are lost, destroyed or disposed of
to an Australian Government agency for replacement assets as a consequence of a natural disaster. Those taxpayers
who have already acted on the basis of the previous announcement will however, not be required to amend their
assessments as a result of this change in policy.
Finally, the ATO has released guidelines that allow concessions to taxpayers affected by disasters where they are
20
required to reconstruct records or make reasonable estimates .
You should also ensure you have considered the operation of the provisions relating to insurance (Chapter 3H) and
grants, bounties and subsidies (Chapter 3I) closely.
16
Section 59-30 of the ITAA 1997
Assistant Treasurer, Media Release, No 3, 9 March 2012
18
For example, TD 2006/22
19
Section 124-95(6) of the ITAA 1997
20
PSLA 2011/25
17
Pitcher Partners – Year-end tax planning toolkit
 Consider whether special tax treatment may occur for money that has been received relating to a natural disaster
or assets replaced due to a natural disaster.
 Consider whether you can access the ATO’s concessions for reconstructing records or making reasonable estimates
for your income or deductions.
3K
Interest income
Interest income is usually included on a cash basis. The timing of derivation will typically be when the interest income is
received or applied for the benefit of the taxpayer. However, if the receipt of interest is within your ordinary activities
(e.g. the taxpayer is a financial institution, or the interest is charged on trade debts), interest income will generally be
included in assessable income on an accruals basis. Furthermore, deferred interest can be accrued under the TOFA
provisions, which can apply where accrued interest is not received for 12 months (e.g. on a discounted bond -see
Chapter 10D).
You should consider reviewing interest income to determine whether amounts “accrued” can be deferred to the 2015
income year.
Year-end planning considerations
 Review interest income and determine whether any “accrued” interest can be deferred until the 2015 income
year.
3L
Dividend income
Dividends are included in assessable income when they are paid (which includes the crediting of the dividend by the
company). This is irrespective of whether the share investment activities of the taxpayer constitute a business or not. If
any part of the dividend is franked, that amount will also constitute assessable income. You should closely consider the
timing of dividends that you receive around year-end — especially where the dividends received are under a dividend
reinvestment plan.
We note that the meaning of dividend is broad and that the taxation provisions can also deem you to have derived
dividends in many other cases (e.g. from a share buyback or in respect of a loan from a private company under Division
7A -see Chapter 7E).
Year-end planning considerations
 Consider the timing of dividends received around year-end. This should include a review of dividends under
dividend reinvestment plans or private company dividends. Depending on the payment date of the dividend, the
amount may either be income of the 2014 or 2015 income year.
 Consider whether you have participated in a share buyback plan and whether any amount of the buyback is
considered a dividend for taxation purposes.
3M
Retail premiums
Retail premiums are amounts paid to non-participating shareholders that do not take up rights to subscribe for shares
offered by a company. The amount of the premium is the difference between the clearing price (i.e. the price at which
these unexercised rights are offered to institutional investors) and the offer price (i.e. the price at which existing
Pitcher Partners – Year-end tax planning toolkit
24
Year-end planning considerations
25
shareholder can take up these rights). A retail premium to a non-participating shareholder may constitute a dividend or
21
ordinary income. However, where the payment is treated as a dividend, it will be treated as unfrankable .
Year-end planning considerations
 Consider whether you received a retail premium during the 2014 income year in relation to shares that you have
held during the year. Note that the ATO do not allow franking credits to be utilised in respect of such amounts.
3N
Trust distributions
A beneficiary is taxable on their share of the underlying taxable income of a trust. Where you have received a trust
distribution for 30 June 2014 (or will be entitled to receive trust distributions by year-end) you should estimate the
amount of the taxable distribution in your year-end tax planning. Where this amount is uncertain, you should consider
contacting the trustee for an appropriate estimate of this amount.
Year-end planning considerations
 As part of your tax planning and tax estimation, estimate the amount of taxable trust distributions that you will
receive (or be entitled to receive) at year-end. This may not be the same as the cash amount or cash entitlement
from the trust.
3O
Rental or leasing income
Income from renting or leasing a property will generally be included in assessable income when the rent or leasing
income is actually received (i.e. on a cash basis). However, such income may be treated on an accruals basis if the
taxpayer is considered to be in the business of renting or leasing. You should therefore consider whether “accrued”
rental income needs to be included in your 30 June 2014 taxable income.
Year-end planning considerations
 Consider whether rental or lease income “accrued” at 30 June 2014 can be deferred for taxation purposes (e.g.
where a cash basis is an appropriate method for the taxpayer).
3P
Foreign taxes paid on your behalf
Where foreign taxes have been withheld from an amount of income you have earned, you are required to gross-up
your income for tax purposes. You may then be able to claim a foreign income tax offset (FITO) for the amount of
22
foreign taxes paid . Refer to Chapter 11K for considerations relating to FITOs.
Year-end planning considerations
 In considering your budgeted 30 June 2014 taxable position, you should consider any foreign income that you may
derive (grossed up for foreign taxes paid on your behalf).
3Q
Income that is not otherwise assessable
A number of provisions treat receipts as not being assessable income. Examples include non-portfolio foreign dividends
derived by companies, first home saver account income, mutual receipts received from members, income derived by
21
22
TR 2012/1
This amount is ordinary income under section 6-5 of the ITAA 1997
Pitcher Partners – Year-end tax planning toolkit
Year-end planning considerations
 Consider whether any income you have derived during the income year should be excluded being either exempt or
not assessable.
3R
Personal services income
Personal services income (PSI) is income that is mainly a reward for an individual’s personal efforts or skills for doing
work or producing a result. For example, this may include income from professional services.
If an individual operates through a trust, company or partnership, the PSI regime may apply to attribute such income to
the individual. Furthermore, deductions claimed in respect of PSI may also be limited. The results test, unrelated clients
test and business premises test are common tests used to determine whether a taxpayer is conducting a personal
services business (PSB). A taxpayer that conducts a PSB does not fall foul of the PSI rules.
However, even if the PSI rules do not apply, the ATO has indicated that it could still seek to apply Part IVA where
services income is not derived personally (e.g. where the amounts are derived through a trust or company and are not
“distributed” to the individual during the year of income). In particular, the ATO are actively considering this issue with
respect to professional service firms where it believes insufficient income is being distributed to the principal or
included in their assessable income.
Year-end planning considerations
 Where you have provided services and you have operated through an entity (e.g. a trust or company), you need to
consider the possible application of the PSI rules before 30 June. These provisions could have a material impact on
your assessable income and deductions claimed.
 If you operate in professional services through a trust or company, you need to consider the extent to which
income should be distributed to you for 30 June 2014.
 You should consider whether it is worthwhile obtaining a private ruling from the ATO on the application of the PSI
rules or Part IVA to your arrangements.
3S
Extraordinary items
Where extraordinary or abnormal amounts have been received during the income year, you should consider whether
such amounts are assessable and (if so) the timing of the assessment (e.g. the sale of a business / asset or the
settlement of a legal dispute). Due to the size and nature of such amounts, these will typically come within ATO
scrutiny. You should consider whether the amounts represent ordinary income, statutory income, capital gains or
exempt amounts.
Year-end planning considerations
 Where you have received extraordinary and abnormal receipts during the income year, you should ensure that
such amounts have been appropriately reviewed for tax purposes.
3T
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
26
temporary residents, certain windfall amounts, subsequent unfranked dividends to offset a Division 7A dividend,
certain income derived by foreign residents subject to withholding tax (see Chapter 11L) and amounts remitted as GST.
27
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28
4 Deductions
4A
General rules of deductibility
A taxpayer can only claim a general deduction for losses or outgoings that are incurred in that year, where the purpose
23
is to earn assessable income or in carrying on a business of earning assessable income .
No deduction is available for expenses that are not related to earning assessable income, are of a capital nature, are of
a private nature, or are incurred in earning exempt type income. A taxpayer will incur expenses in the 2014 income
year if an amount is actually paid or where the taxpayer becomes definitively committed to pay the amount.
However, where the general rule is not satisfied, a deduction may be available under a specific provision that allows
the deduction.
24
A taxpayer must keep all relevant documentation and evidence to prove that the expense has been incurred . It is
noted that only the taxpayer actually incurring the expense can claim a deduction.
Year-end planning considerations
 Review all your expenses and payments during the year to determine whether you may be able to claim a
deduction for the expense.
 Determine whether the expense can be claimed in the current year (e.g. whether you have made a payment,
incurred an obligation, or prepaid amounts).
 Keep documentation so that you can prove that you have in fact incurred the expenses before year-end.
4B
Capital expenditure
Expenses should be reviewed annually to determine whether the amounts are capital in nature and therefore nondeductible. This may include a review of legal expenses, repairs and maintenance expenditure, restructuring costs,
equity raising costs and the cost of acquiring or developing capital assets.
Where capital expenditure costs are non-deductible, you should consider whether the cost can (instead) be included in
25
the cost base of a capital gains tax asset or claimed over five years under the business black-hole provisions .
Year-end planning considerations
 Review expenditure incurred during the year to determine whether the amounts are capital (e.g. repairs and
maintenance, legal costs, or restructuring expenditure incurred during the year).
 Where costs are capital (and otherwise non-deductible) consider whether the amount can be included in the cost
base of an asset or alternatively deducted under the black-hole expenditure provisions over five years.
4C
Bad debt deductions
A taxpayer can only claim a deduction for bad debts if the debts: (i) are written off as bad before year-end; and (ii) have
previously been included in the taxpayer’s assessable income. A taxpayer must keep written records to prove that such
debts have been written off as bad before year-end. However, it is not necessary to physically post any journal entries
23
Section 8-1 of the ITAA 1997
See for example Re Sobel Investments Pty Ltd and FCT [2012] AATA 180 and AAT Case [2012] AATA 174
25
Section 40-880 of the ITAA 1997 and TR 2011/6
24
Pitcher Partners – Year-end tax planning toolkit
29
before year-end. Care needs to be taken to ensure that the original debt is being written off (for example, issues may
arise if you have capitalised the debt or interest into another loan).
Taxpayers that carry on finance activities may wish to consider opting into the TOFA provisions, which can also provide
an appropriate treatment for bad debts for financing arrangements.
On 6 November 2013, the Government announced that it would not be proceeding with the previous announcement
that deductions would be denied where a taxpayer writes off a related party bad debt. If you have acted on the basis of
the previous announcement, you may be entitled to favourably adjust this item and claim an amount for the prior year
deduction.
Year-end planning considerations
 Before year-end, review the debtor’s ledger and write off any bad debts to ensure that the amounts can be
deducted for the 2014 income year. Keep written records approving the write-off.
 Be careful in capitalising doubtful debts (including interest) into other loan accounts, as this may give rise to a new
debt and may jeopardise a bad debt deduction.
 If there are doubts on claiming the bad debt, consider whether the TOFA provisions may provide a more
appropriate outcome.
 If you did not claim a “related party” bad-debt deduction in a prior period (based on the previous Government
announcement), you may be able to adjust this position and claim an amount for the prior year item.
4D
Trading stock valuation
Trading stock can be valued using different methods for taxation purposes, being cost, market selling value or
replacement value. The only requirement regarding changing methods is that the closing stock value at the end of one
tax year must become the opening trading stock value for the next year. The provisions allow a choice to be made for
each individual item of trading stock.
Changing the valuation method at year-end for tax purposes can either bring forward or defer an amount of your
26
taxable income. Furthermore, a lower value can be used where stock is obsolete , giving rise to tax deductions for the
taxpayer.
With effect from 1 July 2010, foreign investments that are trading stock that previously constituted Foreign Investment
Funds (FIFs) can now also be valued at the market selling value on an investment-by-investment basis.
Year-end planning considerations
 Consider the possibility of valuing trading stock at either market selling value, replacement value or identifying
obsolete stock at year-end.
 Where the entity holds foreign investments as trading stock, consider whether the market selling value method
can be used on an investment-by-investment basis to bring forward unrealised losses on such investments.
4E
Depreciating assets (all entities)
A taxpayer can claim a deduction for the decline in value of an asset it holds if that asset is a depreciating asset that is
27
installed ready for use or already used for any taxable purpose over the effective life of the asset . For assets acquired
during the 2014 income year, the effective lives are set out in Taxation Ruling TR 2013/4 (applicable from 1 July 2013).
26
27
TR 93/23
The amount of the deduction is reduced if the asset is held for a non-business purpose.
Pitcher Partners – Year-end tax planning toolkit
In reviewing your year-end deductions, there are a number of concessions that may bring forward deductions. A
number of these are identified in the following checklist questions.
Year-end planning considerations
 Ensure that you review your depreciation schedules and consider writing off obsolete and scrapped items by 30
June 2014 (in order to claim the remaining written down value).
 Consider self-assessing the effective life of depreciating assets, but note that this is an item that must be disclosed
in tax returns.
 Note that you are able to use a 200% multiple of the straight line depreciation rate for assets by electing to use the
diminishing value rate for assets acquired after 10 May 2006.
 An outright deduction can be claimed for depreciable assets costing less than $300 where they are not used in a
business.
 Depreciable assets costing less than $1,000 can be allocated to a low value pool. The depreciation rates applicable
to the pool are 18.75% in the first year and 37.5% in following years. The choice to use a pool is irrevocable.
 Note the ability to allocate the cost of developing in-house computer software (e.g. website expenditure) to a
software development pool and depreciate such expenditure at a rate of 40% in the subsequent year.
4F
Depreciating assets (small business entities)
Special depreciation concessions apply to an entity that is considered a small business entity. Generally, this is defined
as a business with aggregated turnover of less than $2 million. The turnover test includes the turnover of connected
entities and affiliated entities. If you are a small business entity, please ensure that you have considered the following
concessions. If you are not a small business entity (but qualify for being so), you should consider the following
concessions in order to determine whether you should make an election for the 2014 income year.
It is noted that the existing legislation currently provides for a number of benefits, including an immediate write-off for
assets costing less than $6,500.
The Government has introduced a Bill to modify these benefits from 1 January 2014 and replace them with an
immediate deduction for assets cost less than $1,000.
However, the Bill did not pass the Senate and was defeated on 25 March 2014. Until such legislation passes, taxpayers
are still entitled to claim a deduction under the current law. If the proposed amendments become law, taxpayers who
have claimed deductions on the basis of the (now) current law will need to amend their assessments.
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When a taxpayer eventually disposes of such an asset, a balancing adjustment occurs to determine if the asset has
been over-depreciated (in which case the extra depreciation is included in assessable income) or under-depreciated (in
which case you can deduct the shortfall depreciation from assessable income).
31
Year-end planning considerations
 Consider the following concessions if you are a small business entity or if you qualify as being a small business
entity. The following concessions are based on the current Government’s proposals to amend the depreciation
rules from 1 January 2014 - which have yet to be enacted.
 Assets costing less than $6,500 (the “asset threshold”) can be written off immediately if they were installed ready
for use before 1 January 2014.
 Assets costing less than $1,000 (the “asset threshold”) can be written off immediately if they are installed ready for
use on or after 1 January 2014.
 For depreciating assets that cost more than the asset thresholds above, small businesses will be able to depreciate
these assets at a rate of 15% initially and 30% in following years using the pooling method.
 Prior year-long life pooled assets can be pooled and depreciated at a rate of 30%.
 An accelerated initial depreciation deduction of $5,000 will be provided for motor vehicles acquired on or after 1
July 2012 and before 1 January 2014 (with the remaining cost being depreciated under the pool rates). Motor
vehicles acquired after 1 January 2014 will be depreciated in the same way as other depreciating assets.
4G
Project pools
Where expenditure is of a capital nature and is not incurred to acquire a depreciable asset, it may be possible to
28
depreciate the capital cost over the life of the project under the project pool provisions .
Costs that can be deductible under this provision include community infrastructure costs, certain site preparation costs
for depreciating assets, project feasibility costs, environmental assessment costs, amounts to obtain information for
projects, amounts in seeking to obtain intellectual property rights, amounts in relation to ornamental trees or shrubs,
29
mining expenditure , and transport capital expenditure (including costs associated with transport facilities,
earthworks, bridges and tunnels that are necessary for that facility).
Year-end planning considerations
 Consider whether you incurred any capital expenditure that will be considered a “project pool” amount. Such costs
may be deductible under the project pool provisions over the life of the project.
4H
Capitalised internal labour costs
Where a taxpayer internally constructs assets and incurs direct labour costs, the ATO holds the view that such costs
30
should be capitalised in a consistent manner as required under AASB 116 Property, plant and equipment .
28
Section 40-830 of the ITAA 1997
ATO ID 2012/17 – subject to any impact of the proposed changes to mining information contained in the 14 May
2013 Budget announcement.
30
ATO ID 2011/43
29
Pitcher Partners – Year-end tax planning toolkit
 If you construct depreciating assets and would be required to capitalise such costs under AASB 116, you should
consider whether such costs need to be capitalised for tax purposes.
4I
Employee bonuses
A taxpayer can only claim a deduction for employee bonuses in the 2014 income tax year if the taxpayer incurred such
expenses before year-end. The bonus will be incurred if the company has definitively committed itself to the payment
31
32
(for example by passing a properly authorised resolution ) or by incurring a quantifiable legal liability to pay a bonus .
Therefore, if a taxpayer does not determine and authorise a bonus to be paid until after the end of the income year,
such amounts may not be considered incurred and deductible in the 2014 income year. Accordingly, a properly
executed bonus plan may bring forward deductions to the 2014 income year. You should also consider the related
party deduction provisions where the bonus is not paid until the subsequent year (see Chapter 13C).
Year-end planning considerations
 If you pay employees bonuses, you should review the relevant plan and approval process to determine whether
you qualify for a deduction for the accrual in the 30 June 2014 income year.
4J
Earning exempt type income
Expenditure incurred to earn exempt or non-assessable non-exempt (NANE) income is generally not deductible, except
33
where the amount incurred is interest in relation to certain foreign NANE dividend income or where the expense
34
relates to the earning of attributable CFC income .
The Government is currently considering a targeted integrity rule that may deny interest deductions claimed in deriving
certain foreign NANE dividend income.
Where the expenditure is an indirect expense (e.g. it is an overhead cost), you should consider whether a portion of
35
such expenditure should be treated as non-deductible .
Year-end planning considerations
 Where exempt or NANE income is earned by an entity, ensure that you have reviewed the deductibility of all
expenses as such costs will generally not be deductible.
 If you incur general overhead costs, you may be required to apportion those between assessable income and your
activities that produce NANE income.
4K
Foreign exchange gains and losses
Where TOFA does not apply to an arrangement (see Chapter 10D), foreign exchange gains and losses are taken into
account for tax purposes when rights or obligations are realised (called forex realisation events). In calculating the
foreign exchange gains and losses, generally spot exchange rates are required to be used which (due to the prescriptive
rules) may not align with accounting rates used.
31
Taxation Ruling IT 2534
Merrill Lynch International 2001 ATC 4541
33
Section 25-90 of the ITAA 1997 and FCT v Noza Holdings Pty Ltd & Anor [2012] FCAFC 43
34
Section 23AI(2) of the ITAA 1936
35
Kidston Goldmines Ltd v FC of T 91 ATC 4538
32
Pitcher Partners – Year-end tax planning toolkit
32
Year-end planning considerations
33
Compliance saving elections may be available to help reduce compliance issues. For example, regulations have been
introduced to allow taxpayers to make a choice to use realisation spot rates that are more in line with the accounting
rates used at the time of realisation (for example, average rates).
Furthermore, a taxpayer may make elections to minimise compliance costs, such as: a functional currency election
(which allows taxable income to be calculated in the foreign currency); a forex retranslation election (which allows the
accounting method to be used); and a limited balance election (which allows foreign currency gains and losses to be
ignored on qualifying bank accounts that do not have a balance in excess of $A250,000).
These elections require conditions to be satisfied and need to be made by the relevant taxpayer within certain
timeframes.
Year-end planning considerations
 Have you had any significant foreign currency transactions that have occurred during the income year?
 Ensure that your 30 June tax calculations include adjustments for unrealised foreign exchange gains and losses.
 Consider whether elections should be made to simplify the calculation of realised foreign currency gains and losses
for the year.
 As TOFA applies in precedence, you should consider the TOFA implications for foreign currency transactions (see
Chapter 10D).
4L
Gifts and donations
A taxpayer is entitled to a tax deduction if a gift or donation of money or property is made (where it is valued at $2 or
more) to a deductible gift recipient, provided appropriate documentary evidence has been obtained.
A gift or donation cannot increase a taxable loss for the income year. However, a taxpayer may be able to elect to
36
amortise the gift or donation over a period of five years (for gifts of money or gifts of property of over $5,000 ). Such
an election must be made before you lodge your tax return for the income year in which the gift or donation was
made.
Consider whether you wish to establish your own charitable structure such as a PAF (Private Ancillary Fund), to which
tax deductible donations can be made.
Year-end planning considerations
 Retain all receipts in relation to gifts and donations in order to claim your deductions. Ensure that such gifts and
donations have been made to deductible gift recipients.
 Where a deduction for a gift or donation may create a loss, consider whether it is possible to spread the deduction
over a period of up to five years.
 Consider whether you wish to establish your own charitable structure such as a PAF to which tax deductible
donations can be made.
4M
Interest deductions
Refer to Chapter 10B under Finance Issues for consideration of the deductibility of interest costs.
36
Subdivision 30-DB requires any gift of property to be valued by the ATO
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Prepayments
34
4N
Where a taxpayer prepays expenditure, such expenditure is generally not deductible upfront (unless the amount is
regarded as “excluded expenditure”). Instead, prepaid expenditure is apportioned over the shorter of the eligible
service period or 10 years. Special rules apply to individuals and small business taxpayers that may allow an upfront
deduction (see Chapter 5M).
Excluded expenditure covers expenditure that is less than $1,000 (GST exclusive); payments that are required to be
37
made pursuant to a law or court order; and payments that are for salary or wages under a contract of service .
Year-end planning considerations
 Unless you are an individual or small business taxpayer, prepayments of expenditure will generally be amortised
over the lower of the eligible service period or 10 years - unless the amounts are excluded expenditure.
4O
Service and management fees to associated entities
38
Service and management fees paid to associated service entities may not always be deductible because :

The fees may be considered excessive.

The service entity has not performed the services independently of the taxpayer.

The arrangements may make no commercial business sense.

The services may not have been actually delivered.

There is no documentation of a management or service agreement.

The documents or arrangements are put in place after year-end.
The ATO has set out detailed guidelines in relation to the deductibility of such service fees in the medical profession
and in legal and accounting firms. You should closely consider the deductibility of service and management fees paid or
incurred to related party entities prior to year-end. Furthermore, where there is a timing difference between the
assessability of the income and deduction of the amount, integrity provisions may apply (see Chapter 13).
Year-end planning considerations
 Before year-end, you should review all inter-group service and management fees. You should ensure that
appropriate arrangements and documentation are in place and that they are commercially justifiable.
4P
Capital support payments
Where a parent entity makes payments to a subsidiary entity that has incurred a loss, these payments may constitute
“capital support payments” as defined by the ATO. The ATO has issued a determination indicating that these costs may
be on capital account and thus non-deductible to the parent entity. This can be compared to an appropriate service
charge fee (which would otherwise be deductible). Accordingly, care needs to be taken to the extent that payments
made by a parent entity are not for services but (instead) relate to providing support to the subsidiary entity for losses
incurred.
Year-end planning considerations
 The ATO takes the view that capital support payments made by a parent to its subsidiary may be on capital
account and non-deductible. Accordingly, consider whether it is better to structure the arrangement as an
37
38
Section 82KZL of the ITAA 1936
TR 2006/2
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appropriate arm’s length service fee.
4Q
Superannuation expenses
Refer to Chapter 12A for the superannuation issues to be considered before year-end. Also refer to Chapter 5 for issues
to be considered before year-end relating to superannuation payments from Trusts.
4R
Trade incentives (purchase of stock)
Refer to Chapter 3D of this document. An incentive that is not directly related to acquiring trading stock does not
reduce the purchase price. In this case, the purchase of trading stock is to be recorded at the full (undiscounted) price.
This may give rise to a larger upfront deduction.
Year-end planning considerations
 Review incentives on the acquisition of trading stock and determine whether the purchase price of trading stock
should be reduced for incentives provided during the income year.
4S
Trade incentives (sale of stock)
Refer to Chapter 3E of this document. An incentive that is not directly related to the sale of trading stock (or is not
virtually certain at the time of the sale) does not reduce the sales price. In this case, the incentive is treated as
deductible when the incentive is actually provided.
Year-end planning considerations
 Review incentives on the sale of trading stock and determine whether a deduction should be claimed at the time
of providing the incentive (rather than as an adjustment to the sales price).
4T
Tax loss incentive for designated infrastructure projects
The tax loss incentive for designated infrastructure projects came into effect on 11 July 2013 and aims to encourage
private investment in nationally significant infrastructure by providing eligible entities the benefits of: uplifting the
value of carry forward losses by the 10 year Government bond rate; and exempting the carry forward losses and bad
debt deductions from the continuity of ownership and the same business tests. The amendments will apply to the tax
losses for the 2012/2013 and later income years.
As there is a global expenditure cap of $25 billion, projects will need to be approved by a decision maker. Accordingly,
taxpayers will need to be able to identify potential qualifying projects and apply for this concession as soon as possible.
For taxpayers in the middle market, it is expected that it will be difficult to obtain approval for this incentive.
Year-end planning considerations
 If your entity is involved in large scale infrastructure projects, legislation for the tax loss incentive for designated
infrastructure projects has been introduced that will allow an incentive to recoup early stage losses for approved
projects.
4U
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
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Pitcher Partners – Year-end tax planning toolkit
37
5 Individuals
5A
Tax rates for 30 June 2014 and 2015
The following table outlines the tax rates that apply to resident individuals and non-residents for the 30 June 2014 and
2015 income years (excluding the Temporary Budget Repair Levy and the Medicare Levy - see below). There are no
differences to the tax rates for these income years.
Residents
Taxable Income
Tax Payable
0 — $18,200
Nil
$18,201 — $37,000
19% of excess over $18,200
$37,001 — $80,000
$3,572 + 32.5% of excess over $37,000
$80,001 — $180,000
$17,547 + 37% of excess over $80,000
$180,001+
$54,547 + 45% of excess over $180,000
Non-residents
Taxable Income
Tax Payable
0 — $80,000
32.5%
$80,000 — $180,000
$26,000 + 37% of excess over $80,000
$180,001+
$63,000 + 45% of excess over $180,000
Minors (other income)
Other income
Tax payable
0 — $416
Nil
$417 — $1,307
Nil + 66% of the excess over $416
$1,307+
45% of the total amount of income that is not excepted income
Medicare Levy
A Medicare levy of 1.5% is payable on taxable income for the year-ending 30 June 2014. If you do not have appropriate
private health insurance, then a Medicate levy surcharge of up to 1.5% can apply depending on your taxable income.
From 1 July 2014, the Medicare levy will increase to 2% to include the 0.5% levy to be used for funding the National
Disability Insurance Scheme. Non-residents are not required to pay the Medicare levy.
The following table applies for the year-ended 30 June 2014.
Base tier
Tier 1
Tier 2
Tier 3
Singles
$88,000 or less
$88,001—102,000
$102,001—136,000
$136,001 or more
Families
$ 176,000 or less
$ 176,001— 204,000
$ 204,001— 272,000
$ 272,001 or more
0.0%
1.0%
1.25%
1.5%
Surcharge rate
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The Medicare levy can be reduced for a number of reasons. These include: where your income is below certain
thresholds; you had a spouse (married or de facto); you had a spouse that died during the year and you did not have
another spouse before the end of the year; you are entitled to a child housekeeper or housekeeper tax offset; or were
a sole parent at any time during the income year and you had sole care of one or more dependent children.
Temporary Budget Repair Levy
A temporary budget repair (TBR) levy of 2% will apply for a three-year period from 1 July 2014 to 30 June 2017. The
levy applies to income in excess of: (i) $180,000 for resident and non-resident individuals; and (ii) $416 for minors.
From 1 July 2015 the TBR levy will also be accompanied by a decrease in the rate of franking credits provided on
dividends paid (reduced from 30.0% to 28.5%). Accordingly, the payment of a dividend after 1 July 2014 could result in
an overall increase in the personal top-up tax payable on a franked dividend from approximately 24% to 29% of the
cash component of the dividend received - i.e. compared to receiving a dividend on 30 June 2014.
It is further noted that the Fringe Benefits Tax (FBT) rate will increase to 49% from 1 April 2015, to match the highest
marginal tax rate with the TBR levy. However, this creates a mismatch for a nine-month period from 1 July 2014 to 31
March 2015. Accordingly, individuals with taxable income that is greater than $180,000 could consider salary sacrifice
arrangements for the period 1 July 2014 to 31 March 2015.
Comparison of income years and tax rates
As outlined above, over the next few years there are three main changes proposed that will have an important impact
on the amount of tax paid by individual taxpayers: the first being the Medicare Levy increase of 0.5% from 1 July 2014;
the second being the TBR levy of 2.0% from 1 July 2014 on taxable income over $180,000; and the third being the
reduction in the franking credit offset to 28.5% from 1 July 2015. The effect of these three changes is that additional
tax will be paid where income is derived in the later years (as compared to the 30 June 2014 income year).
In some cases the timing of income can be managed. For example, consider whether it is better to pay a dividend on or
before 30 June 2014 as compared to 1 July 2014. A fully franked dividend of $99,260 (grossed up to $141,800) paid to a
resident individual taxpayer, that has no other taxable income, will result in no additional tax payable in 2013/14
(including the Medicare levy) after taking into account the franking credit rebate. In 2014/15, this will decrease to a
fully franked dividend of $93,744 (grossed up to $133,920).
Gross taxable income of $141,800 in 2013/14 will result in tax payable of $42,540 (including Medicare levy) and an
average tax rate of 30.0% for an individual resident taxpayer. In 2014/15, to achieve the same average tax rate, a lower
dividend of $133,920 will result in an average rate of tax of 30.0% (or $40,176).
Where an individual taxpayer is on the top marginal rate, a dividend paid on or before 30 June 2014 will result in less
tax being paid of approximately 3.57% as compared to a dividend to be paid for the 30 June 2015 income year; and less
tax of approximately 5.10% as compared to a dividend to be paid for the 30 June 2016 income year.
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You may be exempt from paying the Medicare levy if you're a foreign resident, a resident of Norfolk Island, not entitled
to Medicare benefits or you meet certain medical requirements.
39
Year-end planning considerations
 Due to the 0.5% increase in the Medicare Levy and the 2.0% Temporary Budget Repair (TBR) Levy from 1 July 2014,
you should consider the impact of bringing forward income to the 30 June 2014 income year. This can include
bringing forward dividends to 30 June 2014.
 Up to 5.10% of tax can potentially be saved by bringing forward dividends to 30 June 2014 as compared to paying
dividends in later years.
 The tax free threshold for minors that earn taxable income (that is not excepted income) is $416.
 Salary sacrifice arrangements may provide a benefit to 31 March 2015, as the FBT rate will not be adjusted to
reflect the TBR Levy until that time.
 As a part of your ordinary tax planning, you should consider your position in relation to the Medicare levy and
whether you are entitled to any reductions or exemptions for the year.
5B
Private health insurance rebate
If you have private health insurance, the amount of private health insurance rebate you are entitled to receive (as a
reduction of your private health insurance premium) is reduced if your income is more than a certain amount. The
following table can be used to determine the premium reduction entitlement by income threshold for 2013/14
From 1 April 2014, all rebate percentages are adjusted annually by a rebate adjustment factor. This means the rebate
percentage for premiums paid before 1 April 2014 will be different to the rebate percentage for premiums paid on or
after 1 April 2014.
Status
Income thresholds
Base tier
Tier 1
Tier 2
Tier 3
Single
$88,000 or less
$88,001 — $102,000
$102,001 — 136,000
$136,001 or more
Family
$176,000 or less
$176,001 — 204,000
$204,001 — 272,000
$272,001 or more
Age
Rebate for premiums paid from 1 July 2013 — 31 March 2014
Under 65 yrs
30%
20%
10%
0%
65–69 yrs
35%
25%
15%
0%
70 yrs or over
40%
30%
20%
0%
Age
Rebate for premiums paid from 1 April 2014 — 30 June 2014
Under 65 yrs
29.040%
19.360%
9.680%
0%
65–69 yrs
33.880%
24.200%
14.520%
0%
70 yrs or over
38.720%
29.040%
19.360%
0%
The family income threshold is increased by $1,500 for each Medicare levy surcharge dependent child after the first
child.
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 Please note that the private health insurance rebate is now adjusted for on the lodgement of your income tax
return. This can either increase or decrease the total amount payable on lodgement of your individual return.
5C
Rebates and offsets
A number of rebates and tax offsets are available to taxpayers to reduce their taxable income. You should consider
whether any of the following offsets may have application to you for the 2014 income year.
Year-end planning considerations
 Mature age worker tax offset — available to taxpayers born before 1 July 1957 that are still in work. This offset
will not be available from 1 July 2014.
 Low income rebate — due to the change in marginal rates, the low income rebate will remain at $445 for the
2013/14 income year, with a further reduction to $300 for the 2015/16 year.
 Income received in arrears — the rebate may be available if you receive income in a lump sum payment
containing an amount that accrued in earlier income years.
 Spouse superannuation contribution rebate — you may be entitled to a tax offset if contributions are made to a
complying superannuation fund or RSA for the purpose of providing superannuation benefits for your spouse who
is a low income earner or not working.
 Net medical expenses tax offset — taxpayers with an adjusted taxable income below certain thresholds, and who
claimed the net medical expenses tax offset for the year-ended 30 June 2013, can claim a reimbursement of 20%
39
for net medical expenses over $2,162 (CPI indexed for 2013/14) .
 Recipients of social security benefits and allowances — the rebate may be available if you receive certain
Australian benefit payments.
 UN forces and defence force rebate — this rebate is available to certain civilian personnel contributed by Australia
to an armed force of the United Nations overseas and for those that serve in a qualifying overseas locality as a
member of the Australian Defence Forces (ADF).
 Dependents rebate — available only to taxpayers who meet certain thresholds and maintain a dependent spouse
(born before 1 July 1952), have a child—housekeeper, or had a housekeeper.
 Franked dividend tax offset — a refundable tax offset where you receive a franked distribution.
 The Australian superannuation income stream tax offset — may be available if you receive an income stream
from your superannuation fund.
 Unused leave payments — a tax offset may be available to limit the tax payable on certain unused leave payments
to 30%.
 Zone rebates — you may be entitled to a rebate of tax where you are resident of specified remote areas of
Australia (known as Zone A and Zone B).
5D
Work expenses and substantiation
For the 2014 income year, individuals can claim an amount for work expenses. However, where the claim totals $300
or more, the claims must be substantiated. The $300 does not include claims for car expenses, meal allowancea, award
39
Note that from 1 July 2013, the METO is being phased out, with eligibility now being dependent on whether
taxpayers are eligible for the rebate in the prior year.
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40
Year-end planning considerations
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transport payments allowance and travel allowance expenses. The ATO accept a wide range of documents as written
records of your claim, for example paper or electronic copies of documents, such as invoices, receipts or delivery notes
statements from financial institutions, such as credit card statements, BPAY receipt numbers, PAYG payment
summaries and warranty documents.
Year-end planning considerations
 Ensure that you have kept appropriate records to substantiate your work expenses claim for 30 June 2014.
5E
Specific occupations under ATO target for work expenses
40
The ATO’s Compliance Program has outlined two specific occupations that it will be closely examining for work
related expenses and deductions. These occupations are:
•
Building and construction labourers, construction supervisors and project managers.
•
Sales and marketing managers.
The ATO has indicated that it has selected these occupations because it has found them to be at higher risk of making
mistakes with their work-related expenses due to the types of deductions they are entitled to claim. Furthermore, the
ATO will be examining and matching amounts reported under the Taxable Payments Annual Report (TPAR) in the
construction industry.
The ATO will also look closely at high work-related travel expense claims across all individuals.
The ATO has announced a data-matching program targeting online sellers. The ATO will collect data from online selling
websites to identify sellers who have made sales of $10,000 or more during the 2012/13 and subsequent income years.
Year-end planning considerations
 If you are either: [i] a building or construction labourer, construction supervisor or project manager; or [ii] a sales
or marketing manager, the ATO will be closely scrutinising your 30 June 2014 work expenses and deductions.
 The ATO will scrutinise high work related travel expenses by all other individuals. You should ensure your work
related expenses can be validly claimed and that you have appropriate documentation.
 If are you selling products through online selling sites, please note that the ATO will be conducting data matching
on your activities.
5F
Work related car expenses
Where you use a motor vehicle for income producing purposes, you may be able to claim car expenses as a tax
deduction. Car expenses are defined as expenses related to the operating of a car, such as fuel/oil, registration,
insurance and repairs/maintenance and depreciation expenses. The available methods are the: cents per km method
(business use of up to 5,000 km); the 12% of original value method (if business use over 5,000 km); the one-third of
actual expenses (if business use over 5,000 km); and the logbook method.
For the cents per km and 12% original value method, no substantiation is required. However you need to show how
you have calculated the business km. Full substantiation is required of all expenses for the one-third of actual costs and
the logbook method. Furthermore, odometer readings are required for the logbook method.
Note that appropriate estimates can be used for fuel rather than receipts. This can be done by estimating the fuel used
41
for the year based on the engine type and litres used per 100km . The average fuel price can be obtained from a
42
number of sources .
40
ATO Compliance Program 2013/14
Pitcher Partners – Year-end tax planning toolkit
 To leave your options open make sure that you have kept odometer readings for your car for the 30 June 2014
year.
 Ensure that you also keep receipts for the running costs of your motor vehicle. Note that you can estimate fuel
costs based on your business travel.
 If using the log-book method, ensure that you have appropriately completed a valid log-book that can be used for
the 30 June 2014 income year.
5G
Work related travel expenses
Work related travel expenses can include meals, accommodation and incidental expenses you incurred while away
overnight for work (for example, going to an interstate work conference). Generally, if your travel did not involve an
overnight stay, you cannot claim for meals. The ATO has published reasonable travel and overtime meal allowance
43
expense amounts that can be used for the 30 June 2014 income year . Other travel expenses you may be able to claim
include work related expenses for (but not limited to): air, bus, train, tram and taxi fares; car-hire fees; and the costs
you actually incur (such as fuel costs) when using a borrowed car.
You may be required to keep travel records if your travel involves being away from your ordinary residence for 6 or
more nights in a row. Travel expenses should be reduced to exclude any private portion of your trip. Costs incurred in
travelling from your home to your workplace are generally not deductible other than in limited circumstances (such as
if you need to carry bulky tools or equipment that you used for work and can't leave it at your workplace). However,
you can claim travel between two separate places of employment.
Year-end planning considerations
 Review whether you have incurred any costs during the year for work related travel expenses.
 Ensure that you have kept travel records where you are away for 6 or more nights in a row.
5H
Work related clothing, laundry and cleaning expenses
You can claim a deduction for the cost of buying or cleaning: occupation specific or protective clothes; or unique,
distinctive uniforms. More specifically, you can claim deductions for (but not limited to):
•
Clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your income
earning activities or the environment in which you are required to carry them out.
•
A uniform, either compulsory or non-compulsory, that is unique and distinctive to the organisation you work for.
•
Clothing that is specific to your occupation, is not every day in nature and would allow the public to easily
recognise your occupation.
•
Costs of washing, drying and ironing eligible work clothes, or having them dry cleaned.
However, you cannot claim the cost of purchasing or cleaning a plain uniform, ordinary clothes you wear for work that
may also protect you (e.g. everyday shoes), and clothes you bought to wear for work that are not specific to your
occupation. The ATO publish industry guidelines to help assist you with your claims for work related clothing
deductions.
41
This information can be obtained from http://www.greenvehicleguide.gov.au/GVGPublicUI/home.aspx for most
vehicles
42
See http://www.aip.com.au/pricing/pdf/AIP_Annual_Retail_Price_Data.xls for annual average prices
43
TD 2013/16
Pitcher Partners – Year-end tax planning toolkit
42
Year-end planning considerations
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Year-end planning considerations
 Examine whether you can claim deductions for work related clothing, laundry and dry cleaning expenses for 30
June 2014.
 Ensure you have reviewed your industry guidelines published by the ATO.
5I
Other work related expenses
There are a number of other common additional work related expenses that individuals claim including the following
types of expenses.
Home office expenses
Home office running expenses (heating, cooling, and lighting), depreciation of computers, phones and desks, work
related phone calls, internet usage, the costs of repairs to your home office furniture and fittings and cleaning
44
expenses. The ATO allow you to claim actual amounts or use a rate of 34 cents per hour .
Occupancy expenses
Occupancy expenses include rent or mortgage interest, council rates and house insurance premiums. You can only
claim occupancy expenses where your home office is considered to be a place of business.
Work related registration, development and support
This category of expenses includes union fees and subscriptions to associations, seminars, conferences and education
workshops books, DVDs, memory sticks, compact discs and insurance against the loss of your income.
Tools, equipment and stationary
This category of expenses may include depreciation on tools of your trade, protective items, computers and software.
This category may also include items of stationary purchased to complete your ordinary work activities.
Overtime meal allowance expenses
If you get paid an overtime meal allowance, you can claim a reasonable allowance amount. The reasonable allowance
amounts are provided yearly in an ATO taxation determination.
Year-end planning considerations
 You should consider whether you can claim other work related expenses including: home office expenses;
occupancy expenses; work related registration, development and support amounts; tool, equipment and
stationary; and overtime meal allowance expenses?
5J
Work related specific deductions for industries
The ATO publish industry guidelines to help assist you with your claims for work related deductions. You should
consider the specific industry guidelines for your profession.
44
Home Based Business ATO Fact Sheet
Pitcher Partners – Year-end tax planning toolkit
 Examine the ATOs industry guidelines for your occupation to ensure that you are maximising your claim for
deductions for 30 June 2014.
5K
Self-education expenses
Work related self-education expenses are expenses that you incur when you undertake a work related course to obtain
a formal qualification from a school, college, university or other place of education. The course must have a sufficient
connection to your current employment. If you are a part-time or full-time student, you may be able to claim the costs
of self-education if there is a direct connection between your self-education and your work activities at the time the
expense was incurred.
Self-education expenses incurred in connection with a course of education provided by an educational institution to
gain qualifications for use in a profession, business, trade or employment may need to be reduced by up to $250 in
some circumstances.
Year-end planning considerations
 Determine if you have self-education costs that relate to your current employment.
 You should quantify your self-education expenses and determine whether you need to reduce those costs by $250.
5L
Work related expenses you cannot claim
There are generally a number of expenses that you cannot claim that may be associated with your work. Typically,
these include the following types of expenses:

Travel between your home and your workplace.

Expenses for a uniform consisting of conventional clothing.

Self-education expenses where the course does not have sufficient connection to your current employment.

Entertainment (e.g. buying a meal for a client or colleague).

Fines or penalties.

Child care expenses.

Fees paid to social clubs.
Year-end planning considerations
 Review your work related expenses to ensure that they do not include non-deductible expenses for 30 June 2014.
5M
Prepaying expenses
Prepaying expenses can be an effective way of reducing taxable income for an income year. Where amounts are
incurred by an individual or small business entity, such amounts may still be deductible upfront if the eligible service
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period is essentially less than 12 months or does not end later than 12 months after year-end. However, this is
subject to another qualification.
45
Section 82KZM of the ITAA 1936
Pitcher Partners – Year-end tax planning toolkit
44
Year-end planning considerations
45
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Where the amount is incurred under an agreement , and exceeds income for the relevant year, such expenditure will
be required to be apportioned. Limited exceptions apply to this provision, including exemptions for investments in
certain negatively geared listed or widely held stocks, infrastructure borrowing related prepayments and excluded
expenditure.
Year-end planning considerations
 Consider whether a prepayment of the next 12 months of expenses, such as interest, before year-end will help to
effectively reduce your taxable income for the current year.
5N
Salary sacrifice arrangements
A salary sacrifice arrangement occurs where an employee agrees to forego part of their future remuneration in return
for the employer or someone associated with the employer providing benefits of a similar value. For example:
superannuation contributions; the provision of motor vehicles; and expense payment fringe benefits - such as payment
of school fees, childcare costs or loan repayments.
A valid salary sacrifice agreement must be entered into before the services have been performed and everything has
been done by the employee in earning the entitlement to the salary or wages. Where the salary sacrifice agreement is
invalid, this will mean that the original income will be that of the employee and the employer will have a PAYG
obligation, as well as other associated obligations (e.g. superannuation guarantee charges etc.).
While recent cases have cast doubt on the efficacy of salary sacrifice arrangements, it is noted that the ATO has not
withdrawn its long-standing public ruling allowing personal service providers (e.g. employees) to enter into salary
sacrifice arrangements.
It is noted that the FBT rate will increase to 49% from 1 April 2015, to match the highest marginal tax rate for
individuals due to the temporary budget repair levy. This provides a mismatch in the highest marginal tax rate
compared to the FBT rate for a nine-month period from 1 July 2014 to 31 March 2015. Accordingly, individuals with
taxable incomes greater than $180,000 could consider salary sacrifice arrangements for the period 1 July 2014 to 31
March 2015.
Year-end planning considerations
 Where you are considering a salary sacrifice arrangement before year-end, ensure that the arrangement is
effective for tax purposes. As the ATO are currently challenging some of these arrangements, if the amount is
material you should seek appropriate advice.
 Where individuals are expected to have taxable income of greater than $180,000 for the year-ended 30 June 2015,
consider the opportunity to salary sacrifice prior to 31 March 2015 and the ability to utilise the lower FBT rate.
5O
Employee share schemes
Revised employee share scheme rules apply from 1 July 2009 to the taxation of the discount on shares, stapled
securities and right/options acquired under an employee share scheme.
Pursuant to these rules, the timing of the taxation of the discount (i.e. upfront or deferred taxation) depends on the
structure of the scheme - and not on a choice made by the employee.
The inclusion of the discount will be deferred if the shares / rights / stapled securities are subject to a real risk of
forfeiture. A risk will be real if the employee will lose their shares if he / she does not satisfy a meaningful performance
hurdle, such as completing at least a minimum term of employment.
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Section 82KZME of the ITAA 1936
Pitcher Partners – Year-end tax planning toolkit
Year-end planning considerations
 Consider whether employee options and/or shares qualify for deferral under the employee share scheme
provisions.
5P
Foreign employment income
From 1 July 2009, only the foreign employment income of Australian resident individuals engaged on foreign aid
projects or military service overseas, is exempt from Australian tax. This means that fringe benefits provided in respect
of non-exempt overseas employment can now be subject to FBT. However, the Government has introduced legislation
dealing with fly-in / fly-out arrangements from 1 July 2009.
Year-end planning considerations
 Consider whether you are taxable on income (or whether FBT applies to fringe benefits provided to you) in respect
of overseas employment.
5Q
Non-commercial losses
A non-commercial loss refers to a loss generated from a business conducted by an individual. Where activities are a
hobby or relate to generating passive income, the non-commercial loss rules do not apply.
An individual will only be able to offset their losses from non-commercial business activities against income from other
sources in the 2014 income tax year if they satisfy one or more of the following exceptions:

Assessable income from the non-commercial business activity is more than $20,000.

There has been a profit for at least 3 of the last 5 years from this business activity.

Land worth more than $500,000 is used in this business activity.

Plant and equipment of more than $100,000 is used in this business activity.
These exceptions are no longer available for high income earners who have adjusted taxable income of more than
$250,000. For such individuals, the non-commercial losses can only be offset against the taxpayer’s other income if the
47
ATO exercises its discretion that the non-commercial business activities are commercially viable.
Year-end planning considerations
 If you carry on a business in your own name, you should consider whether deductions and losses are required to
be quarantined under the non-commercial loss provisions.
 If your adjusted taxable income is equal to or less than $250,000, you can only offset your loss made in the 2014
income year from the non-commercial activity if you can satisfy one of the 4 tests mentioned above. Otherwise,
consider applying to the ATO to obtain access to the losses.
5R
Personal services income
Personal services income (PSI) is income that is mainly a reward for an individual’s personal efforts or skills for doing
work or producing a result. If you are an individual and you operate through a trust, company or partnership, the PSI
47
AAT Case [2011] AATA 779
Pitcher Partners – Year-end tax planning toolkit
46
Pitcher Partners can assist you with the design of an employee share scheme and can also help you with any valuation
issues you might have when trying to value the options granted under an employee share scheme.
47
regime may apply to attribute such income to you. You therefore need to consider the application of these provisions.
See Chapter 3R for details.
Year-end planning considerations
 Where you have provided services and you have operated through an entity (e.g. a trust or company), you need to
consider the possible application of the PSI. Refer to Chapter 3R for details.
5S
Living Away from Home Allowance
Living away from home allowances (LAFHAs) will continue to be taxed under the FBT regime going forward however,
the eligibility for the concessions relating to food and accommodation expenses has been reduced significantly.
With effect from 1 October 2012 there are new requirements that must be satisfied in relation to these two items to
be eligible to claim the LAFH concessions. The new main condition is that an employee must maintain a home in
Australia for their own use, and then live away from that home for the purposes of their employment. The home must
be available to the employee for the duration of their time away (i.e. cannot be rented out etc.). The employee must
also have a sufficient interest in the home (i.e. they or their spouse must own or lease the property).
Furthermore, the ability to be exempt from FBT for LAFHA food and accommodation costs is now limited to a
maximum period of 12 months for an employee at any work location. Finally, all accommodation expenses must be
substantiated or they will be subject to FBT.
Transitional arrangements apply to 30 June 2014 for permanent Australian resident employees whose LAFHA
arrangements were in place prior to 8 May 2012. Other concessional living away from home benefits [such as:
relocation transport; and removal and storage of household goods] are still available even if the employee does not
meet the ‘maintaining a home’ criteria.
Year-end planning considerations
 If you are in receipt of a living from way from home allowance (LAFHA), you need to review the changes to LAFHA
effective from 1 October 2012.
5T
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
6A
ATO compliance activity
Over the last few years, the ATO has increased its scrutiny of trusts and has sought to apply the law in a strict manner.
In addition a Trust Taskforce has been established by the ATO to target the use of trust structures by wealthy
individuals.
Accordingly, if you operate your activities through a trust, you should carefully review all of the planning considerations
contained in this chapter and ensure that you strictly comply with the law and the requirements of your trust deed on
an annual basis.
Year-end planning considerations
 As the ATO has announced a number of trust compliance activities for 30 June 2014, you should carefully review all
of the 30 June 2014 planning considerations contained in this chapter.
6B
Trustee tax rate
Where no beneficiary is presently entitled to a share of the income of the trust estate, trustees will generally be liable
to pay tax on that proportionate share of the net (taxable) income of the trust at the top marginal rate (i.e. 46.5%).
Accordingly, care needs to be taken to ensure that appropriate resolutions are created by the required time under the
trust deed so that the trustee is not taxed at the top marginal rate of tax.
Year-end planning considerations
 To avoid a trustee assessment at 46.5%, you should ensure that beneficiaries are made presently entitled to all of
the income of the trust estate by either 30 June 2014 or an earlier time (if required by the trust deed).
6C
Trustee resolutions
For the 30 June 2014 income year, trustees must make income distribution resolutions by the end of an income year
(i.e. 30 June) or earlier if required by the trust deed. This is to ensure that the desired beneficiaries are presently
48
entitled to trust income for income tax purposes and to avoid trustee assessments at 46.5%.
In completing resolutions, you are not required to have fully documented the trustee resolution by 30 June. However,
the ATO will expect that you are able to evidence your decisions made. This can be done by way of rough notes, or
other documents prepared (such as budgets, spreadsheets, mapping documents etc.).
In preparing your resolutions for 30 June 2014, it is prudent to consider prior year distribution patterns and anticipated
income and losses of other entities within the group. This can often involve reviewing draft financial statements and
typically requires an appropriate “mapping” of projected distributions through the group. Your Pitcher Partners
representative can assist you in this process by helping you to implement a distribution plan before year-end.
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Rulings IT 328 and IT 329, which gave an extension to 31 August, have been withdrawn with effect from September
2011.
Pitcher Partners – Year-end tax planning toolkit
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6 Trusts
49
Year-end planning considerations
 Ensure that you have made distribution resolutions or distribution plans before year-end (or earlier if required by
the trust deed) and that these can be evidenced.
 Consider implementing a distribution plan where there are a number of trusts and other entities in the group.
6D
Meaning of income of the trust estate
The taxable income of a trust is allocated to beneficiaries based on their respective entitlements to the income of the
trust estate for trust purposes. The way in which a trust deed defines income, as well as the accounting treatment of
the trust income, can be critical in determining how taxable income is allocated to beneficiaries.
All trust deeds are unique. However, typically trust deeds define trust income as being one of the following: (a) income
according to ordinary concepts; (b) the taxable income of the trust; or (c) a combination of the above. Many trust
deeds also contain discretions to treat income or expenditure as either capital or income of the trust.
49
The ATO released a draft taxation ruling in 2012 which provides its initial views on the meaning of income of a trust
estate where the trust deed equates the amount to taxable income. Whilst this draft Ruling will not be finalised prior to
the outcome of the trust tax reform process that commenced under the previous [Labor] Government and is
continuing as part of the current Government’s tax reform ‘White paper’ process, in the interim the ATO hold the view
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that notional (or fictional) tax amounts (such as franking credits, Division 7A dividends, etc ), cannot form part of the
income of the trust estate and should be excluded unless there is trust property that can support the amount. While
the draft taxation ruling is highly controversial, taxpayers need to be careful where their trust deed attempts to define
income as equating to taxable income and such types of fictional tax income exist.
Finally, it is noted that in practice issues mostly only occur where trustee distribution resolutions are based on
distributing “fixed” amounts of income of the trust. Where the trustee resolves to distribute a percentage of income of
the trust estate, the same proportion of taxable income will always flow through to the beneficiary.
Year-end planning considerations
 Ensure that you review your trust deed and understand the meaning of income under the relevant trust deed
before determining your distribution from the trust.
 Note that you will need to disclose the income of your trust estate for trust purposes in the 30 June 2014 tax
return.
 If you derive notional tax amounts (such as franking credits) you should consider how your deed defines income
and how it deals with such amounts.
 The accounting profit of the trust will not necessarily equate to the “income of the trust”. You need to consider
whether accounting amounts should be included or excluded from your calculation (e.g. revaluation or devaluation
amounts) by having regard to your resolutions and trust deed.
 Compare the amount booked in your accounts (as distributions of income) to the resolutions to distribute income.
Where income under the trust deed is not “accounting income” but is (instead) taxable income, this can impact on
the net assets of the trust.
 Consider using percentages in your distribution resolutions to avoid a dispute with the ATO as to the meaning of
income of your trust estate.
 Complexities can occur if your trust deed defines income as being equal to taxable income (as outlined in TR
2012/D1). Consider either amending the definition in your trust deed before 30 June 2014, or exercising
49
50
Draft Taxation Ruling TR 2012/D1
Colonial First State Investments Ltd v FC of T [2011] FCA 16
Pitcher Partners – Year-end tax planning toolkit
6E
Distribution of timing differences
The ATO is focussing some of its compliance activity on timing differences in trusts. In particular, the ATO is examining
cases where the income of the trust estate is lower than the taxable income and such amounts have been distributed
51
to a corporate beneficiary to avoid top-up tax being paid by individuals.
Year-end planning considerations
 Care needs to be taken where there are significant timing differences, especially where taxable income exceeds
accounting profit and the distribution is made to a corporate entity.
6F
Unit Trust - distribution of timing differences
If a unit holder receives a distribution of trust income for an income year and the distribution exceeds the trust's
(taxable) net income for that year, the cost base of the unit is required to be reduced by that difference. If the cost
base has been exhausted, a capital gain may arise as a result of such distribution (under capital gains tax event E4).
The ATO has released ATO ID 2012/63 which confirms this result, even if the difference between the trust income and
the net income is merely as a result of a timing difference. For example, this adjustment can occur where an expense is
deductible for trust accounting purposes in year 1 and deductible for tax purposes in year 2.
One possible way to avoid this problem is to define income in the trust deed as being equal to “taxable income”. This
helps to ensure that the trust only distributes taxable amounts (and that there are no timing differences). However, in
considering this option, have regard to the items discussed at Chapter 6D above.
Year-end planning considerations
 As beneficiaries of unit trusts can be taxable on a distribution of timing differences, consider whether it may be
possible to align tax and accounting by defining income as “taxable income” for the current income year.
6G
Trust to company distributions
The Division 7A implications of a trust making distributions to a corporate beneficiary and leaving those trust
distributions unpaid (i.e. as unpaid present entitlements or UPEs) must not be ignored. See Chapter 7E for a more
detailed description of Division 7A.
Year-end planning considerations
 Ensure that you have considered Division 7A when making trust to company distributions for the current year.
 Ensure you have complied with Division 7A in relation to prior year unpaid trust distributions to corporate
beneficiaries.
6H
Trust to trust distributions (rule against perpetuities)
Where a trust distributes an amount of income or capital to another trust, such distributions may (at a later stage) be
taken to become void if the trust breaches the rule against perpetuities. This may occur (for example) if the receiving
trust has a later vesting date than the first trust. This may create an issue, for example, if the first trust is due to vest
51
See TA 2013/1
Pitcher Partners – Year-end tax planning toolkit
50
discretions under the trust deed to alter the definition of income (where such an option is available under the
deed).
51
within the next few years. Where the group consists of a large number of trusts, you should consider whether this rule
may have practical implications for your 30 June 2014 trust distributions.
Year-end planning considerations
 Ensure that you have considered the rule against perpetuities when making trust to trust distributions for the
current year.
6I
Eligible beneficiaries of the trust
You should closely consider the relevant trust deed to ensure that amounts are distributed to eligible beneficiaries
under the relevant deed. Distributions to ineligible beneficiaries may not be effective for tax and trust purposes and
may give rise to assessments to the default beneficiary or the trustee at 46.5%.
This problem can occur, for example, where the trust deed of the first trust in a trust to trust distribution chain
excludes the “trustee” of that trust from being a beneficiary of the first trust (e.g. under the excluded beneficiary
clause). Typically, in such a case, it may not be possible to distribute to a second trust where the trustee of the first
trust is an eligible beneficiary of the second trust (i.e. as the second trust may therefore be classified as an excluded
beneficiary of the first trust). Accordingly, you should consider the trust deed very carefully.
Year-end planning considerations
 Review the trust deed to ensure that distributions for the current year are made to eligible beneficiaries of the
trust.
6J
Trust streaming
Specific provisions allow capital gains and franked distributions to be streamed to beneficiaries of a trust estate. In
order for this to be effective, the trust deed must allow for streaming (express or implied). Where a deed does not
contain specific streaming powers, you may need to consider amending the trust deed before year-end.
The streaming measures require that beneficiaries must be made “specifically entitled” to either franked distributions
or capital gains in order for those amounts to be streamed to the beneficiaries. In creating the specific entitlement,
there is a requirement that written documentation be in place by 30 June for franked distributions, with an extension
to 31 August for capital gains. The legislation also requires for the full amount of the financial (economic) benefits to be
allocated to beneficiaries.
Pitcher Partners have developed standard documentation to help your trust satisfy the record keeping requirements
for 30 June 2014.
Care needs to be taken with streaming any other form of income (e.g. interest, unfranked dividends, rental income,
royalties, foreign income etc.) as the ATO’s view is that such streaming is ineffective for tax purposes.
Pitcher Partners – Year-end tax planning toolkit
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Year-end planning considerations
 Where your trust derives capital gains and/or franked distributions, determine whether such gains can be
streamed to various beneficiaries of the trust under the relevant trust deed.
 If your deed does not explicitly allow for streaming, consider whether the trust deed should be amended before
year-end.
 Complete a written record before midnight on 30 June (or earlier if required by the deed) that evidences the
specific entitlement for franked distributions from the trust. Consider utilising the Pitcher Partners standard
documentation.
 Complete a written record before midnight on 31 August 2014 (or earlier if required by the deed) that evidences
the specific entitlement for capital gains from the trust. Consider utilising the Pitcher Partners standard
documentation. An earlier time may be required (e.g. 30 June) if the trust deed defines capital gains to be income.
 Make sure you understand the tax consequences of trying to stream any other forms of income, other than capital
gains and franked distributions.
6K
Capital gains versus revenue gains
Capital gains concessions (such as the 50% CGT discount) are often available when a trustee flows through a capital
gain to certain beneficiaries of the trust. Such concessions are not available where the gains are on revenue account. In
this respect, the ATO has released a public ruling indicating that (in its view) not all gains made by an investment trust
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are to be treated on capital account .
The ATO holds the view that a gain or loss will be only be on capital account if the trustee adopts a “buy and hold” style
of investment, where annual turnover is less than 10% of the portfolio of investments and there is a low level of sale
transactions compared with the number of stocks in the portfolio. Alternatively, the gain or loss may be treated on
revenue account if it is a business or profit making type transaction. If the trust has a policy of measuring returns by
virtue of including both the annual return and the profit from sale, then prima facie the ATO will treat the portfolio as
being on revenue account. A number of additional factors are taken into consideration in determining whether the gain
is on revenue account or capital account.
53
Recently, the ATO has been successful in arguing that the disposal of commercial properties (in this case the sale of
shopping centres and other like properties) was on revenue account, even though they had been leased for a
substantial period of time. Accordingly, care needs to be taken where gains derived are material.
Year-end planning considerations
 Where substantial (or a significant volume) of gains are derived by a trust, consider reviewing the position of
whether the gains are on capital account or revenue account.
 Ensure that you are aware of the ATO’s guidelines for determining whether a gain is on revenue or capital account
and update your investment strategies and documentation appropriately.
6L
Trust losses and bad debts
Where a trust incurs a revenue loss or seeks to deduct a bad debt, the trust loss provisions must be satisfied. These
rules require testing the trust for changes in ownership and control which vary depending on whether the trust is fixed
or non-fixed. Given that, as a general rule, the trust loss provisions do not contain a same business test fall-back, they
should always be considered whenever a trust seeks to utilise a loss or a deduction – especially if income is injected
into the trust (see Chapter 6N).
52
53
TD 2011/21
August v FCT [2013] FCAFC 85
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However, a trust may automatically satisfy the trust loss provisions if the trust makes a family trust election (FTE) for
the applicable years. The consequence of making a FTE is that the trust can only distribute to members of the family
group (as defined). Significant penalties are imposed if this rule is breached (see Chapter 6P).
Accordingly, if the trust has not made (and is unlikely to make) a FTE, the control and ownership tests must be
considered before year-end. This is because distributions made at year-end may result in failure of these tests.
Year-end planning considerations
 If the trust has not made a FTE, consider whether such an election should be made if the trust is likely to incur
losses in the current income year or bad debt deductions from debts arising in the current income year.
 If elections are unlikely to be made, current year distributions to a trust may result in the trust being unable to
utilise tax losses or bad debts. Accordingly, consider trust distributions carefully before year-end.
6M
Flowing franking credits through a trust
Where a trust holds shares that were acquired after 31 December 1997, franking credits can only be passed through to
a beneficiary of the trust if the beneficiary is a qualified person. This generally requires the strict application of the 45day holding period test, together with the trust being a fixed trust. It is noted that it is practically difficult (if not
54
impossible) to satisfy the fixed trust test without requesting the ATO to exercise its discretion .
Exceptions from the need to pass the 45-day holding period test include: a small individual exclusion (i.e. if the
beneficiary is an individual and the total franking credit tax offsets claimed by that person do not exceed $5,000 for the
income year); an exception for trusts that have made a FTE where the beneficiary is part of the family group; and
certain deceased estates.
Year-end planning considerations
 If the trust has not made a FTE, consider whether such an election is required if the trust has derived franked
distributions for the year.
 If the trust is not a fixed trust, consider whether either: (i) an application should be made to the ATO to treat the
relevant trust as a fixed trust for the purpose of these provisions; or (ii) amendments can or should be made to the
trust deed to try and ensure that the trust is a fixed trust for tax purposes.
6N
Injection of income into a trust
A trust may not be able to apply its losses or deductions to income that is injected into the trust by an outsider to the
trust. An injection may involve another trust distributing income to the relevant trust.
Where a trust has not made a FTE, all entities (other than the trustee and persons with fixed entitlements in the trust)
are considered outsiders to the trust. However, where a trust has made a FTE, the definition of an outsider is narrowed
to exclude: the individual specified in the family election; that individual’s family; any other trust that has also made a
FTE with the same individual specified; entities that have made interposed entity elections with the trust; and certain
wholly owned fixed trusts, companies or partnerships.
Where there are multiple trusts in the group, it is very easy to breach the income injection test. For example, it has
been held that not charging interest on an unpaid present entitlement is sufficient to breach the rules to deny
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deductions to the trust .
54
55
Colonial First State Investments Ltd v FC of T [2011] FCA 16
Corporate Initiatives Pty Ltd & Ors v FC of T 2005 ATC 4392
Pitcher Partners – Year-end tax planning toolkit
Year-end planning considerations
 Where income is to be injected into a trust (e.g. by another trust), you should consider whether a family trust
election should be made. The consequences of not making an election are: (1) that the trust may not be able to
use its losses and deductions for the income year; and (2) the trustee may be taxed on the injection of income.
6O
Interest expense to fund distributions to beneficiaries
Care needs to be taken where distributions, or unpaid entitlements, are funded by way of interest bearing loans taken
out by the trustee. The ATO holds the view that borrowings to fund contemporaneous distributions do not give rise to
deductible interest. A similar view is also held where borrowings are used to fund the repayment of beneficiary loans
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or unpaid entitlements created from asset revaluation reserves of the trust .
A different result may occur if the unpaid entitlement has been used to fund income generating assets of the business
and the trustee subsequently borrows an amount to return the funds to the beneficiary. In such a case, it may be
possible to obtain an interest deduction for the refinanced amount.
Year-end planning considerations
 Carefully consider all loan funding that is used by the trust and consider whether interest deductibility is
compromised if you are looking to borrow in order to distribute amounts to beneficiaries.
6P
Family trust elections (FTEs)
FTEs are made for various reasons. They can enable trusts to carry forward losses or utilise bad debt deductions (see
Chapter 6L); they can ensure that the income injection test is not breached (see Chapter 6N); they can ensure that
franking credits can flow through the relevant trust (see Chapter 6M); and they can ensure that losses are available in a
company that is owned by the trust (see Chapter 7F).
However, the consequence of making a FTE is that the trust can only distribute to members of the family group (as
defined). A significant Family Trust Distributions Tax (FTDT) penalty of 46.5% on the distribution is imposed if the trust
breaches this rule. If a corporate trustee breaches this rule, the directors of the company will be jointly and severally
liable, together with the company, for the FTDT. There is no time limit imposed on the ATO for raising FTDT
assessments.
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The definition of a distribution is very wide and includes non-arm’s length transactions (e.g. interest free loans ,
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transfers of trust property, allowing use of trust property, forgiveness of commercial debts or unpaid entitlements ).
Because an FTE is made when a trust return is lodged, the ATO hold the view that a valid FTE cannot be made unless
the test individual is alive at the time of lodging the return. This view can be problematic, especially if new trusts have
operated as part of an existing group during an income year. To help safeguard against this issue, it is typically prudent
to maintain dormant trusts that have made family trust elections in prior years. Where this option is not available, the
group may need to consider other options, including whether the test individual can be changed or whether interposed
entity elections can be made.
56
TR 2005/12
Section 272-60 of Schedule 2F of the ITAA 1936
58
Corporate Initiatives Pty Ltd & Ors v FC of T [2005] FCAFC 62
57
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As the rules can generally be overcome by making an FTE, you should consider whether a family trust election should
be made by the relevant trusts. The consequence of making a FTE is that the trust can only distribute to members of
the family group (as defined). Significant penalties are imposed if you breach this rule (see Chapter 6P).
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Year-end planning considerations
 Where the trust has made a family trust or interposed entity election, ensure that non-commercial transactions
are not made with anyone outside the FTE group (otherwise you may have a family trust distribution tax exposure
at 46.5%).
 If an issue is identified, consider charging arm’s length consideration before year-end to reduce any exposure for
family trust distributions tax.
 Where the existing group has made a family trust election, consider whether it is prudent to have a number of
dormant discretionary trusts that have made valid FTEs before year-end (as a safeguard if the test individual passes
away).
 If the test individual has passed away before the making of the FTE and lodgement of the tax return, consider if
other options are available (including the ability to make an interposed entity election or the ability to change the
test individual).
6Q
TFN withholding and trustee reporting
Beneficiaries must quote their tax file numbers (TFNs) to trustees prior to receiving or becoming entitled to trust
distributions. The consequences of non-compliance can be a 95% tax rate.
That is, where the trustee has not received the TFN, the trustee is required to withhold 46.5% from the relevant
distribution. The beneficiary can claim a credit for this amount in their tax return. However, where amounts are not
withheld, the trustee will be liable for penalties and interest. The non-deductible / non-creditable penalty is at least
equal to the withholding amount and can result in a tax rate of up to 95% (i.e. 46.5% income tax on the distribution in
the hands of the beneficiary and 46.5% penalties on the trustee). It is therefore, critical that trustees comply with these
rules.
Where the trust distributes an amount to a beneficiary, the trust must obtain a TFN from the beneficiary before the
distribution. The trustee must then report the TFN to the ATO by 30 days after the quarter end (if the trustee has not
previously reported the TFN).
For the 30 June 2014 income year, this means that beneficiary TFNs which have not already been reported in a
previous income year must (essentially) be reported to the ATO by 31 July 2014. Accordingly, it is absolutely critical
that trust resolutions are completed by 30 June 2014 and that new beneficiary TFNs are reported to the ATO by end of
July.
Finally, one way of possibly safeguarding against non-disclosure is to report the TFNs of all potential beneficiaries to
the ATO which have not already been reported in a previous income year by 31 July 2014. Pitcher Partners can assist
you in creating such a report.
Pitcher Partners – Year-end tax planning toolkit
 Before year-end, ensure that all beneficiaries have quoted their TFNs to the trustee. Failure to quote a TFN to the
trustee may result in a withholding tax obligation of 46.5% on the distribution.
 Ensure that the trustee reports any new beneficiary TFNs to the ATO by 31 July 2014 (if they have not already been
reported in a previous income year).
 If a new beneficiary does not yet have a TFN, ensure that they make an application to the ATO for a TFN as quickly
as possible (i.e. before 30 June 2014).
 Consider lodging a TFN report for 31 July 2014 that includes the TFNs of all potential beneficiaries of the trust not
already been reported in a previous income year. Pitcher Partners can assist you in creating such a report.
6R
Review of trust deeds
You should consider whether the relevant trust deed should be reviewed before year-end. For example, you may wish
to consider whether the trust deed defines income of the trust in an appropriate or flexible enough manner and
whether the deed allows streaming (or at least does not forbid it). You may wish to also review distribution clauses to
ensure they are appropriate for the current year.
The ATO has acknowledged that a resettlement is unlikely to occur if an amendment to the trust deed is made
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pursuant to a power under the deed . You should also be aware that further changes to your deed may subsequently
be required following any changes to the taxation of trusts under the Government’s proposed ‘White Paper’ on tax
reform.
Year-end planning considerations
 Consider reviewing your trust deed before year-end to ensure that the deed is appropriate for the current year
resolutions and distributions.
6S
Superannuation deductions
Superannuation contribution payments for a director of a corporate trustee of a trust will only be deductible if the
director is a common law employee of the trust engaged in producing the assessable income of the trust or its
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business . This largely agrees with the ATO’s view in TR 2010/1 .
Accordingly, before a trustee of a trust makes a superannuation contribution payment to a director of a corporate
trustee, it should consider whether or not the director is an employee. This requirement is more likely to be satisfied
for a trust which is an operating entity.
59
ATO Decision Impact Statement: Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark
and TD 2012/21
60
Kelly v FCT (No 2) [2012] FCA 689
61
TR 2010/1, paragraph 243
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Year-end planning considerations
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Year-end planning considerations
 If you are paying superannuation contributions for directors of the trustee, you need to carefully consider whether
those payments will be deductible to the trust.
6T
Distributing income to a superfund
Care needs to be taken with any distributions that are made to a superannuation fund. Income derived by a SMSF as a
beneficiary of a discretionary trust is non-arm’s length income, as are dividends paid to an SMSF by a private company
(unless the dividend is consistent with arm's length dealing). Non-arm’s length income is taxed at 45%.
Year-end planning considerations
 Non-arm’s length income derived by a superfund (which may include discretionary trust distributions or private
company dividends) can be taxed at 45% in a superfund.
6U
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
7A
Payment of dividends
For taxation purposes, a dividend cannot be franked if it is sourced (directly or indirectly) from share capital. This has
created some significant uncertainty where an entity has current year profits but there are prior year retained losses
(or alternatively, prior year profits and current year losses).
The ATO has provided safe harbours in TR 2012/5. Essentially, the safest option is for a company to create a separate
profit reserve before signing off its financial statements. This can help to ensure that the profits are isolated from
losses. Another option includes appropriately drafted minutes and notes to the signed accounts.
Pitcher Partners worked extensively with the ATO in developing these approaches in the taxation ruling and can assist
you with implementing this strategy.
Year-end planning considerations
 If your company is looking to pay a franked dividend in circumstances where it has retained losses (or a current
year loss), you may not be able to frank the dividend unless you ensure appropriate actions are taken before
signing of your accounts for the current year.
7B
Franking distributions
When paying dividends for the 30 June 2014 income year, you will need to determine the level of franking for the
relevant distribution. It is noted that the benchmark rate (i.e. the franking percentage) can only be set once a year for
private companies and twice a year for public companies. Once set, all dividends paid during the period must use that
franking percentage. If you vary this percentage by more than 20% from period to period, this must be disclosed to the
ATO.
The benchmark percentage must be set at the time of making the first distribution for the period. Accordingly, if the
first dividend is to be paid at 30 June 2014, the benchmark rate is set at this time.
Care needs to be taken that you do not create a franking deficit by over franking distributions. Some key items that
should be considered before year-end include:

Generally the fourth quarter PAYG instalment cannot be included in the current year franking account. However,
you can include the prior year fourth quarter PAYG instalment.

Ensure that you have taken into account any refunds or final tax payments that have been received during the
year.

Make sure that you have removed penalties and interest amounts that may have been included in the relevant
assessments issued for the year.

Any refund received within three months of year-end should be taken into account to determine if the year-end
balance is a deficit.
The consequence of a franking deficit is that franking deficits tax will be payable. Generally, this amount can be used as
a tax offset for the following year (i.e. treated as a prepayment of tax). If the amount of franking deficits exceeds 10%
of the franking credits for the year however, the entity is penalised, by a disallowance of the offset by 30%.
Pitcher Partners – Year-end tax planning toolkit
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7 Companies
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Year-end planning considerations
 If you are paying a franked dividend before 30 June, you should consider reviewing your franking position so that
you do not inadvertently create a franking deficits tax position.
7C
Distribution statements
A private company must give a distribution statement to the shareholder within four months after the end of the
income year in which the distribution is made. It is noted that this extension of time for giving a statement does not
provide an extension of time to determine to declare a dividend or to determine the extent to which the dividends are
franked (i.e. the benchmark percentage). If the company is not a private company, the statement must be given on or
before the day of the distribution.
Year-end planning considerations
 Where dividends are paid, ensure compliance with the dividend statement requirements including the period for
providing these to your shareholders.
7D
Debt that can be treated like equity
Companies must apply the debt/equity tax rules when classifying debt and equity that they have issued. Generally,
returns paid by a company on a debt interest can be deductible, while returns on equity interests cannot be deductible
(but may be frankable).
Where loan funding is provided to a company, but not placed on fixed repayment terms, the debt/equity tax provisions
can treat such “at call” loans as equity. An exception applies to certain “at call” loans provided to a company that is a
related party, where the company’s GST turnover is less than $20 million. Where this exception does not apply, such
“at call” loans made to a company run the risk of being treated as equity for tax purposes and thus interest paid may
be classified as an unfranked dividend (depending on your franking benchmark rate).
Agreements can be put in place to ensure that loan arrangements are treated as debt for taxation purposes by either
having a repayment term of 10 years (or less) or by charging an interest rate that satisfies the legislative
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requirements .
The debt/equity tax provisions were introduced with effect from 1 July 2001. A number of loans have been placed on
10 year terms since that date and thus may be due for repayment by 30 June 2014. Accordingly, you should review and
monitor the repayment date on all loans that have been placed on terms for the purpose of the tax debt/equity
provisions. If you are seeking to extend the repayment date, care needs to be taken that this does not turn the debt
instrument into an equity instrument. You should consult your Pitcher Partners representative where this is the case.
Where an error is made in the classification of an arrangement as debt, the ATO has highlighted that it will amend prior
year returns to treat interest as (effectively) dividends and that the benchmark percentage will be applied to such
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returns . This can also give rise to franking deficit issues and penalties where you are treated as over franking the
dividend.
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63
The legislation requires an adjusted benchmark interest rate to be calculated.
ATOID 2005/38
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Year-end planning considerations
 Review loans provided to companies in the group to ensure they have been placed on terms that will not result in
them being treated as equity for tax purposes.
 Review new loans made to the company during the current income year to ensure that appropriate loan
agreements have been put in place to ensure that the loan is treated as debt for tax purposes.
 Review the status of existing loan arrangements that have been put in place since 1 July 2001 to determine
whether the 10 year loan repayment date is approaching. Care needs to be taken when considering options for
extending the date of the loan arrangement, as this may result in the arrangement being treated as equity.
7E
Division 7A
Division 7A is an integrity measure to prevent tax free distributions from private companies to shareholders or their
associates. The provisions operate to deem an unfranked dividend in circumstances where a private company has
provided financial accommodation directly or indirectly to a shareholder or their associate. The extent of the deemed
dividend is limited to the private company’s distributable surplus. Where the operation of Division 7A will deem a
dividend as a result of mistake or omission, the ATO has a discretion to disregard the deemed dividend or deem it to be
a frankable dividend. However while Pitcher Partners has successfully applied for dividends to be disregarded, leave is
only granted in certain circumstances.
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The ATO has announced that it will be conducting compliance activity on Division 7A . The Division 7A legislation is
complex and we suggest that you speak to your Pitcher Partner representative to find out more about how best to
manage your Division 7A exposure prior to 30 June 2014.
Direct loans, payments and debt forgiveness transactions
Loans, payments or debt forgiveness transactions to shareholders or their associates will trigger a Division 7A exposure.
From 1 July 2009, the use of a company’s assets (e.g. a company yacht) for private purposes at less than their market
value will also constitute a payment.
Placing a loan on a Division 7A complying loan agreement can help to mitigate the Division 7A exposure on that loan. A
complying loan generally needs to be repaid over seven years, with interest charged at the benchmark interest rate.
For payments that have been made to shareholders or their associates, charging appropriate amounts to them may
mitigate any exposure under the payment rules. Alternatively, the payment can be converted into a loan, which can be
placed on complying Division 7A loan terms.
Prior to year-end, you may be required to make minimum loan repayments for existing Division 7A loans. You should
explore the ability to offset amounts due to you against these minimum loan repayments. Where insufficient funds are
unavailable, consider paying a dividend prior to year-end to meet repayment obligations.
Benchmark Interest Rate
Each year the ATO releases the designated benchmark interest rate for the year. The rate is used to determine
minimum yearly interest repayments for Division 7A loans and 7 year investment agreements. The 2013/14 Benchmark
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interest rate is equal to 6.20% .
64
65
ATO Compliance Program 2013/14
TD 2013/17
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Year-end planning considerations
 Identify all Division 7A loans made by the company in prior years and determine the required minimum loan
repayments (MLR) before 30 June. Consider the borrower’s ability to pay the MLR by 30 June and whether
dividends need to be declared before year-end.
 Identify any new loans that have been made to shareholders or associates. These loans may need to be placed on
complying terms.
 Identify any payments made for shareholders or associates (including cash payments, payments on their behalf,
asset transfers or use of asset arrangements). Ensure that an appropriate amount is charged before 30 June (either
through the P&L or through the appropriate loan accounts).
 Ensure that interest has been charged on compliant Division 7A loans using (at the very least) the 2013/14
benchmark interest rate of 6.20%.
Unpaid entitlements — Division 7A loans
Division 7A may apply to private groups that resolve to distribute income from a trust to a company but do not actually
pay those amounts to the company, creating an Unpaid Present Entitlement (UPE).
It is ATO practice to treat UPEs made on or after 16 December 2009 directly or indirectly to a corporate beneficiary as
loans from the company to the trust. This means that the UPE will be treated as a deemed dividend unless the UPE is
placed on complying loan terms (over 7 or 25 years, with principal and interest repayments). It is noted, however that
this is subject to the UPE being placed on a complying investment agreement.
Unpaid entitlements — complying investment agreement
If the post 16 December 2009 UPE is put on a complying “investment” agreement it will remain a UPE for the purposes
of Division 7A.
The complying investment agreement, usually referred to as a sub-trust arrangement, may consist of a 7 or a 10 year
interest only loan, with a balloon principal repayment at the end of the agreement. Alternatively, the post 16
December 2009 UPE may be invested into an asset for which all benefits must be returned to the corporate
beneficiary.
Where a UPE to a company remains a UPE, you will still need to consider the implications of a UPE to a company
situation.
Where a trust has an outstanding UPE directly to a company, Division 7A will deem any loan, payment or debt
forgiveness made by the trust as being made directly by the company. Interposed entity rules can trace UPEs through
several trusts.
Where a trust has made a distribution to a company in a prior year and that amount is still unpaid, then all loans,
payments and debt forgiveness by the trust in the current year (whether directly or indirectly through one or more
trusts) can be deemed to be made directly by the company.
Exposure can be mitigated by ensuring that loans from the trust are placed on complying terms or payments made by
the trust are appropriately dealt with. Alternatively, the UPE can be converted to a complying loan and thus be subject
to the ordinary Division 7A rules.
Where existing complying loan agreements have been entered into with the trust in prior years, minimum loan
repayments will be required with the trust by 30 June.
Pitcher Partners – Year-end tax planning toolkit
 Identify all pre and post 16 December 2009 UPEs that are outstanding to a private company within the group and
ensure the pre 16 December 2009 UPEs are recorded separately in the financial statements.
 Consider whether UPEs arising on or after 16 December 2009 should be placed on complying investment
agreements or treated as loans before the lodgement date of the trust. This should occur for UPEs owing to
companies and other types of entities (e.g. trust to trust distributions if there is a corporate beneficiary with a UPE
in the group).
 Consider rationalising UPEs and loans around the group to simplify the Division 7A analysis before 30 June 2014.
 For prior year UPEs that have been converted to Division 7A compliant loans, ensure the trust has made minimum
yearly repayments before 30 June 2014.
 For prior year UPEs that have been placed under an investment option agreement ensure that you record
appropriate amounts of ‘interest’ income in the accounts for the current year.
 Identify and examine all related party transactions made by a trust where that trust has one or more UPEs to a
corporate beneficiary.
 If there are existing complying loan agreements in place between the trust and related entities, you will need to
consider minimum loan repayments that need to be made before 30 June.
 Consider whether turning the UPE with the corporate entity into a complying Division 7A loan provides a more
manageable outcome.
Other interposed entity transactions
Division 7A contains interposed entity provisions. These provisions may apply where a loan or payment is made from a
company to an entity (for example, another company) which provides a loan to a target entity or trust. It is generally
useful to identify all loans and payments between entities within the group to assist in the application of the
interposing rules.
Year-end planning considerations
 Identify all loans and payments that have been made by the private company to other entities within the group
(including other private companies) to determine if there is a risk of the interposed entity rules applying.
 Consider strategies to mitigate the interposed entity rules from applying, such as placing all loans from companies
on complying Division 7A terms (e.g. even when such companies do not have a distributable surplus).
7F
Company Losses
A company can only utilise carry forward losses if the entity passes the continuity of ownership test - i.e. it has
maintained the same majority ownership from the start of the loss year to the end of the utilisation year with regard to
shares carrying more than 50% of entitlements to dividends, capital and voting rights. It must also demonstrate that
there has not been a change of control in the voting power of the company. Where the shares in the loss company are
owned by a trust additional rules are required to be satisfied (See Chapter 6L).
Where the ownership test is not satisfied, the same business test must be applied. However, the ATO takes a very
stringent view on what constitutes maintaining the same business.
It is critical that you consider the application of the carry forward loss provisions where prior year losses are to be
utilised for the 30 June 2014 income year. It is noted that this continues to be a target area of the ATO from a tax
compliance perspective.
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Year-end planning considerations
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Year-end planning considerations
 If you are utilising prior year tax losses, or have tax losses in the current year, you should consider whether the
company has satisfied the continuity of ownership test, the control test and the same business test.
7G
Loss carry-back provisions
The current Government's Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 (the “Mining Tax Repeal
Bill”) proposed to abolish the loss carry-back rules for the 2013/14 income year and later income years. The defeat of
this Bill in the Senate on 25 March 2014 however, means the proposed repeal has not been passed and the current loss
carry-back rules still stand (despite the Government's intention that they be repealed). The current rules allow the
2014 losses to be carried back to either (or both) of the 2012 and 2013 income years. The maximum amount of the
rebate is the lesser of: $300,000 (i.e. $1 million of losses multiplied by 30%); the company’s franking surplus at the end
of the 2014 income year; and the amount of tax paid in the relevant prior 2012 and 2013 income years (adjusted for
net exempt income where applicable).
If a taxpayer is eligible to claim a loss carry-back tax offset in respect of the 2014 income year the ATO has announced
that it is open for a company to self-assess on the basis of the existing law but once the law is repealed, the ATO will
amend the company tax return to disallow the claim. This will result in an increase in the taxpayer’s tax liability. No tax
shortfall penalties will be applied by the ATO and any interest attributable to the shortfall will also be remitted to nil
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according to the ATO.
Year-end planning considerations
 While the Government intends to repeal of the loss carry-back rules for the year ending 30 June 2014, legislation
has not yet passed. Consider whether you should be making a claim or not based on the currently enacted
provisions.
 Companies self-assessing on the basis of the existing law should examine transactions close to year-end to
determine whether they will jeopardise their ability to carry-back losses (e.g. receiving a dividend from a subsidiary
entity).
7H
Share capital transactions
A number of integrity provisions can operate when an amount moves in or out of the share capital account. For
example, if an amount is transferred to the share capital account (outside of the raising of share capital), this can
“taint” the whole of the share capital account. Any subsequent payment from a tainted account will be treated as an
unfranked dividend unless un-tainting tax is paid. Alternatively, transfers of amounts from share capital to other
accounts (or distributions from share capital) can also give rise to unfranked dividends.
Care therefore, needs to be taken in recording such entries to the ‘equity’ section of the balance sheet under
accounting standards, as they can give rise to share capital tainting consequences. This is especially an issue for share
based payment transactions that are accounted for under AASB 2.
As the tax consequences can be severe where share capital transactions occur, it is recommended that a review of all
entries to the equity section of the balance sheet occurs prior to year-end (i.e. to ensure corrections can be made to
errors posted). Furthermore, it is recommended that management consider controls on the posting of accounting
entries to any share capital accounts to prevent the inadvertent application of the share capital tainting provisions.
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https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-businesses/Company-losscarry-back/
Pitcher Partners – Year-end tax planning toolkit
 Review all accounting entries made to the equity section of the balance sheet for 30 June 2014 and the income tax
consequence of these entries (e.g. tainting, unfranked dividends etc).
 Consider whether it is possible to correct accounting entries that have been made in error.
 Consider implementing controls to prevent inadvertent entries to the share capital accounts in future periods.
7I
Tax consolidation — choice to consolidate
For taxpayers who formed a consolidated group in the 30 June 2014 income year, it is important that they have made a
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choice to consolidate in writing, and submitted a notification form to the ATO. Both the notification form and the
choice to consolidate must be made by the time the 30 June 2014 tax return is lodged. These documents must state
the effective date from which tax consolidation must be applied.
Critically, if the separate written choice to consolidate is not prepared in writing, the tax consolidated group will not
have formed. This document does not need to be lodged with the ATO. You can contact your Pitcher Partners
representative to obtain a pro-forma choice template.
You should also consider entering into a tax sharing agreement and tax funding agreement for the current year (to
avoid adverse AASB 112 and UIG 1052 consequences, and to avoid being jointly and severally liable for all income tax
debts).
Year-end planning considerations
 If your corporate group formed a consolidated group during the 30 June 2014 income year, you must ensure that
you have made a choice in writing. This choice does not need to be lodged with the ATO. You can obtain a proforma choice from your Pitcher Partners representative.
 If your corporate group formed a consolidated group during the 30 June 2014 income year, you must lodge a
notification form with the ATO. This is separate to the choice to consolidate.
 You should consider entering into tax funding and tax sharing agreements for your new tax consolidated group
prior to lodging your first tax return.
7J
Tax consolidation — change in members
Where new members joined the tax consolidated group during the year, there is a requirement to add the member to
the existing tax sharing and tax funding agreements. Typically this is done by completing a deed, which is generally
included as a schedule to the agreements.
For members that leave a tax consolidated group during the year, there is a requirement for the member to make a
clear exit payment under existing tax sharing and tax funding arrangements.
The head company is also required to notify the ATO of the changes in membership within 28 days of an entity joining
or leaving the tax consolidated group.
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GE Capital Finance Australasia Pty Ltd & Anor v FCT [2011] FCA 849
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Year-end planning considerations
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Year-end planning considerations
 If an entity has joined the tax consolidated group during the income year, ensure that you have updated your tax
sharing agreement and notified the ATO within 28 days of joining the group.
 If an entity has left the tax consolidated group during the income year, ensure that you have made clear exit
payments and notified the ATO within 28 days of leaving the group.
 Ensure that you have appropriately updated tax sharing and tax funding agreements for new entities and that
appropriate exit payments were made for leaving entities.
7K
Tax consolidation — updating tax costs
If you formed a tax consolidated group during the income year, or if entities joined the tax consolidated group, the tax
cost of assets and certain liabilities need to be reset. This can have a material impact on your tax calculation for 30 June
2014.
Year-end planning considerations
 Ensure that you have calculated the new tax costs of all assets and certain liabilities for subsidiary members that
joined the tax consolidated group for 30 June 2014.
7L
Tax consolidation — disposal of subsidiary entities
If an entity has left the tax consolidated group (the leaving entity), for example by way of a sale of the shares, the cost
base of the shares in the leaving entity is generally recalculated based on the tax cost of the underlying assets and
liabilities held by the leaving entity. This is known as the exit ACA amount. It is noted that the re-calculated cost base
can sometimes have a material effect on the capital gain or loss that is realised on the disposal of the subsidiary entity.
Furthermore, where a loss is generated on the sale of the subsidiary, special rules can operate to automatic deny a
capital loss being generated (under the loss duplication provisions).
Year-end planning considerations
 If entities have left a tax consolidated group, the cost base of the shares needs to be recalculated based on the
underlying tax cost of assets and liabilities of the leaving entity. This can have a material impact on any capital gain
or loss on sale of the leaving entity.
 Where a loss is generated on the disposal of an entity by a tax consolidated group, the loss can be denied under
the loss duplication provisions.
7M
Research and development (R&D)
Companies undertaking eligible R&D activities may qualify for the R&D tax incentive which provides either of the
following.
•
A 45% refundable tax offset (equivalent to a 150% tax deduction) to eligible entities with an aggregated turnover
of less than $20 million per year.
•
A 40% non‐refundable tax offset (equivalent to a 133% tax deduction) to all other eligible entities. Unused offsets
may be able to be carried forward for use in future income years.
Whilst R&D plans are no longer formally required under the R&D tax incentive, a company’s business records must be
sufficient to verify the nature of the R&D activities, the amount of expenditure incurred on those activities and the
relationship between the expenditure and the R&D activities. Furthermore, companies are still required to register
annually with AusIndustry before being able to claim the tax offset. Companies will need to register within 10 months
Pitcher Partners – Year-end tax planning toolkit
R&D activities undertaken overseas may also qualify as eligible R&D activities if they meet certain requirements. In
addition to meeting these requirements, companies need to also ensure they submit ‘advance findings’ and ‘overseas
findings’ with AusIndustry for overseas R&D activities conducted from 1 July 2013 to 30 June 2014, by 30 June 2014.
The period leading up to 30 June is an opportune time to ensure that your accounting, information and record keeping
systems are up to date to accommodate any claims you want to make under the R&D tax incentive for the year-ending
30 June 2014 – especially as the Government announced in the Budget that from 1 July 2014 it plans to reduce: the
45% refundable tax offset to 43.5%; and the 40% non‐refundable tax offset to 38.5%.
Please contact your Pitcher Partners representative if you require any assistance in this process or if you would like to
discuss the potential to claim the R&D tax incentive for the 2014 income year. We can assist you at all stages with your
R&D claims.
Year-end planning considerations
 Consider whether the taxpayer is eligible for the R&D tax incentive for the 30 June 2014 income year and, if so,
whether eligible R&D expenditure can be brought forward into the current year prior to the proposed reductions
in the R&D tax offset rates from 1 July 2014.
 If the taxpayer is eligible for the R&D tax incentive, ensure that the taxpayer lodges the registration of R&D
Activities with AusIndustry within 10 months of year-end.
 If overseas R&D activities have been conducted during the period 1 July 2013 to 30 June 2014, ensure that the
taxpayer lodges the advance findings and the overseas findings prior to 30 June 2014.
7N
R&D — ineligible companies
Under legislation currently before Parliament, companies with an aggregate turnover of greater than $20 billion will no
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longer be eligible for the 40% non-refundable R&D Tax Incentive from 1 July 2013 . In calculating the R&D entity's
aggregate turnover, the assessable income of entities that are connected or affiliated with the entity along with
entities that it is an affiliate of, for the same income year will be counted, even if their corresponding income year
starts before 1 July 2013. These companies can however still claim the expenditure as a tax deduction at the company
tax rate of 30%.
Year-end planning considerations
 In light of draft legislation, where the taxpayer’s aggregated turnover is $20 billion or more the taxpayer will be
ineligible for the R&D tax incentive from 1 July 2013.
7O
R&D — feedstock adjustments
When a company obtains a R&D tax incentive offset for their feedstock expenditure incurred on R&D activities (and
where those activities produce either of the marketable products listed below or products applied for the use of the
company), a feedstock adjustment may be required.
The feedstock adjustment applies to expenditure on goods or materials (feedstock inputs) that are transformed or
processed during R&D activities in producing one or more tangible products (feedstock outputs), or energy that is input
directly into that transformation or processing.
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Tax Laws Amendment (Research and Development) Bill 2013
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after the end of their income year in which the R&D activity was undertaken (i.e. by 30 April 2015 for 30 June 2014
year-ends).
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The feedstock adjustment works by increasing the company’s assessable income, rather than by reducing the
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deductions or offset you can claim. The ATO has released a ruling outlining its views on the feedstock adjustments .
Year-end planning considerations
 Consider whether the taxpayer received a R&D tax incentive offset for feedstock expenditure incurred on R&D
activities. If so, it may be necessary to include an adjustment in the assessable income of the taxpayer.
7P
Reportable tax positions
Certain large business and multinational taxpayers are subject to a new reporting requirement to disclose their most
contestable and material tax positions to the ATO by completing and lodging a reportable tax position (RTP) schedule
with their tax return.
A tax position will not need to be disclosed if the position is more likely to be correct than incorrect. However, positions
that are based on pending legislative amendments will need to be disclosed. Due to changes to the Taxation
Administration Act 1953, non-disclosure of information to the ATO can now result in an administrative penalty of up to
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$6,600 , even where the non-disclosure does not result in a tax shortfall.
For taxpayers that are required to complete a RTP schedule, it will be important to ensure that you have an appropriate
tax risk management policy in place to monitor reportable tax positions. In particular, this can also assist to identify
those contentious positions, where such positions will not need to be disclosed where the taxpayers can establish a
position that is more likely than not to be correct. Where positions are contentious, it will therefore be important to
ensure that the position is “more likely than not”, to ensure that the position does not need to be disclosed on the RTP
schedule.
Year-end planning considerations
 If you are a large taxpayer, you may be required to complete a reportable tax position (RTP) schedule with your tax
return.
 You should review all tax positions that are material to identify if there are any positions that are about as likely as
not to be correct as incorrect. You should consider reviewing such positions to determine whether they can be
made more certain before lodging your tax return.
 You should consider appropriate tax risk mitigation processes to ensure minimisation of issues that are required to
be reported on the RTP schedule.
7Q
PAYG instalments
A PAYG instalment operates like a prepayment of a taxpayer’s tax liability for the current year. The amount of the
instalment is calculated either by the ATO or by the taxpayer, based on the income tax payable in the taxpayer’s most
recent income tax return. If the taxpayer is also subject to TOFA, the net TOFA gains should be included in the PAYG
instalment income amount. At 30 June, it is possible to consider varying a final PAYG instalment - i.e. if you have
sufficient information to accurately calculate the company tax for the year.
Generally a 15% buffer is provided for such estimates, whereby a taxpayer will be liable to the general interest charge
(GIC) if the (varied) instalments are less than 85% of the actual tax that would have been paid. Due to the penalties that
may be imposed for getting a variation incorrect, you should consider seeking advice prior to lodging the variation
amount.
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70
TR 2013/3
Section 284-75 of the TAA 1953
Pitcher Partners – Year-end tax planning toolkit
 Consider whether there is an opportunity to vary the PAYG income tax instalment for 30 June 2014 (for example, if
an instalment is payable but a large refund is expected for the income year).
 Where you are subject to TOFA, ensure that your PAYG instalment income only includes your net TOFA gains and
not your gross income from TOFA arrangements. For example, interest expenses may reduce your PAYG
instalment income.
7R
Director penalty regime
There have been recent changes that expand the director penalty regime where a company fails to remit
superannuation guarantee amounts and PAYG withholding. As a consequence, directors should ensure that
superannuation guarantee payments and PAYG withholding payments are all up to date.
Year-end planning considerations
 Review any outstanding PAYG and superannuation guarantee payments at year-end and ensure that these are paid
within the appropriate timeframe.
 Consider implementing stringent internal guidelines and requirements in relation to PAYG withholding and SGC
payments.
7S
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
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Year-end planning considerations
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8 Partnerships
8A
Professional practices and trusts as partners
The ATO is now considering its position in relation to a number of related issues for professional practices and
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partnerships, including :
•
Whether CGT has been accounted for when there has been a transfer of an interest in the partnership to a
discretionary trust, or a change in owner’s interests.
•
The commerciality of using a trust in a professional practice (e.g. determining how a trust partner carries on
business in a professional partnership).
•
Supporting documentation to transactions that are occurring, including the admission of the trust as a partner and
appropriate legal documentation, including whether legal documentation matches what has occurred.
•
Whether Part IVA will apply where a practitioner is returning income which is now low compared to the
partnership profitability following a restructure.
•
Understanding the commercial drivers when practitioners restructure to a partnership of discretionary trusts.
If you operate in professional services, it will be important to consider the extent to which income of the partnership is
to be distributed to the underlying principals and any risks associated with the issues being examined by the ATO.
Year-end planning considerations
 Where the professional practice discloses (in its tax return) partners in the partnership as being “trust” entities,
you should carefully consider the issues being examined by the ATO in relation to this issue.
 The ATO has recently indicated that you may be able to mitigate the risk of the ATO taking an issue with the
structure if an appropriate amount of income is included in the principal’s tax return. Pitcher Partners can assist
you in reviewing this issue.
8B
Professional practices (unincorporated and incorporated)
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The ATO has released a number of tax determinations concerning no-goodwill professional practices. The tax
determinations restrict the situations where the ATO will apply its concessional tax treatment under IT 2540 for both
incorporated and non-incorporated practices. Under IT 2540, the ATO does not apply CGT market value substitution
rules where partners are admitted or retire for no consideration (i.e. a “no-goodwill” practice).
However, the ATO has controversially indicated that it will apply CGT market value substitution rules in a range of
situations, including where at least one of the partners (in the partnership) or shareholders (in the incorporated
practice) is not a natural person practitioner. This view could mean that the ATO may challenge whether capital gains
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tax is payable when a member joins or leaves the professional practice, or the member’s interest in that practice
changes. Recent meetings with the ATO have indicated that its underlying concern is the ability to alienate income
through the use of trusts. Accordingly, one strategy to mitigate risks associated with these issues may be to ensure that
appropriate amounts of income are included in the principal’s tax return.
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Taxpayer Alert TA 2013/3
TD 2011/26, TD 2011/D9 and TD 2011/D10
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Or whether the Employee Share Scheme Rules apply, or a dividend is payable, in an incorporated practice situation.
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Pitcher Partners – Year-end tax planning toolkit
 Where the professional practice owners do not entirely comprise natural person practitioners, you should consider
the ATO’s recent view that tax may be payable where a member joins or leaves the professional practice, by virtue
of the market value substitution rules being applied.
 The ATO has recently indicated that you may be able to mitigate the risk of the ATO taking an issue with the
structure if an appropriate amount of income is included in the principal’s tax return. Pitcher Partners can assist
you in reviewing this issue.
8C
Varying distribution amounts to partners
Where a partnership exists at common law, it may be possible to vary the distribution of partnership profits amongst
the partners of the partnership. The ATO accepts that an agreement by the partners of a partnership to allow a partner
to draw a 'partnership salary' is a contractual agreement among the partners to vary the interests of the partners in the
partnership (and thus the partnership’s net income) between the partners. However, for such an agreement to be
effective for tax purposes in an income year, the agreement must be entered into before the end of that income
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year .
Care needs to be taken as the ATO may seek to adjust such amounts where they believe that the distributions made
are completely out of proportion to either a partner’s true interests in the partnership assets or their participation in
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the partnership business . Furthermore, a partnership agreement cannot exist or operate retrospectively .
Accordingly, special consideration should be given to the partnership agreement when varying such rights.
This principle can also arguably be extended to profits relating to property that is an asset of a partnership at general
law. In this case, the parties may be able to determine the proportion of the profit and loss from that property to which
77
each partner will be entitled . Again, care needs to be taken to ensure that amendments do not crystallise capital
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gains tax events. Furthermore, the ATO does not accept variations where no partnership exists at common law .
Year-end planning considerations
 Where a partnership exists at common law, consider whether partnership distribution variations can be utilised
before 30 June 2014 to vary distribution entitlements for various partners.
8D
Equity contributions by a company
An ATO fact sheet stipulates that bona fide capital contributions to a partnership by a company will not trigger Division
7A. Furthermore, undrawn partnership profits of a company partner are not treated as a loan to the partnership.
Accordingly, care should be taken in reclassifying any such amounts as loans from the partner, where they are (in fact)
partnership capital or current account amounts. The consequence of a classification error could be a deemed
unfranked dividend by the company to the partnership, which would be shared between the partners.
It is noted that the statement by the ATO is only contained in a non-binding fact sheet. Accordingly, care needs to be
taken if the amounts are material.
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TR 2005/7
IT 2316 and section 94 of the ITAA 1936
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Waddington v O'Callaghan (1931) 16 TC 187
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FC of T v Nandan 96 ATC 4095
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TR 93/32 and FC of T v McDonald 87 ATC 4541
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Pitcher Partners – Year-end tax planning toolkit
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Year-end planning considerations
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Year-end planning considerations
 Review partnership accounts to ensure that amounts of partnership equity and undrawn profits owing to a
company are not inadvertently recorded as partnership loans at year-end.
8E
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
9A
General
Where amounts or proceeds are received by an entity, those amounts may be subject to the capital gains tax (CGT)
provisions. Generally, CGT applies to the disposal of CGT assets acquired on or after 19 September 1985. However, CGT
events apply in broader circumstances, with catch-all CGT events that can apply to capital proceeds received in respect
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of other assets and the creation of other rights . It is therefore prudent to consider all proceeds received during the
year, especially in respect of amounts received that have not otherwise been included in assessable income.
The capital gains rules may crystallise a gain or loss in a year that is earlier than the settlement of the contract or
receipt of proceeds. For example, CGT events can happen at the time you enter into the contract. Accordingly, you
should review all contracts that straddle year-end to ensure that you have correctly taken into account the CGT
consequences.
Generally a capital gain or loss is calculated by comparing the proceeds from the event with the cost base of the
relevant asset. Exclusions apply to exempt a capital gain derived in respect of certain events (e.g. main residence - refer
to Chapters 9F and 9G).
The ATO has indicated that during the 2013/14 income year it will be conducting compliance activity on CGT events
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within the SME market.
Year-end planning considerations
 Review all proceeds received during the year, especially where those proceeds have not been included in
assessable income.
 A capital gains tax event may happen on entering into a contract (e.g. for the sale of a CGT asset). Consider any
contracts that straddle year-end that may give rise to a capital gain in the 30 June 2014 income year.
 Consider whether there are any exceptions to the CGT provisions to exempt the capital gain or capital loss (refer to
Chapters 9F and 9G).
 If you have material capital gains, the ATO may review those under its compliance activity. Consider whether
specific advice or an ATO private binding ruling should be obtained.
9B
Small business CGT concessions
Where you have made a capital gain for the year, you should consider the ability to reduce that gain through the small
business CGT concessions.
A taxpayer can qualify for these concessions if the taxpayer satisfies the $6 million net assets test (on a connected
entity and affiliate basis) or the $2 million turnover test (on a connected entity and affiliate basis). The asset must be an
active asset (i.e. an asset used in business) and can extend to certain assets held by connected entities, affiliates and
partners in a partnership where those entities do not carry on a business. The small business concessions can also
apply to the sale of shares in a company or units in a trust, provided additional requirements are satisfied (e.g. the CGT
concession stakeholder test).
The four concessions available are a 15 year exemption, a 50% active asset reduction, a retirement exemption and a
replacement asset rollover.
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80
CGT events D1 and H2 of the ITAA 1997
Compliance in focus 2013-14 | Australian Taxation Office
Pitcher Partners – Year-end tax planning toolkit
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9 Capital gains tax
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The small business concessions require choices to be made by certain dates. Some of these elections are due by the
date of lodgement of the return, while others require choices to be made at earlier times (e.g. the retirement
exemption within 7 days of payment). Breaching these dates may have significant consequences. Furthermore, where
the retirement exemption is being sought and contributions are required to be made to a superannuation fund, it is
critical to not only ensure that the amounts qualify for the CGT concessions but to lodge the required Capital Gains Tax
Election Form with the superannuation fund on or before the contribution is made. Otherwise, you may risk the
amount being an “excessive” contribution and taxed at penalty rates (see Chapter 12E).
Finally, it is important to note that recently there has been a considerable amount of ATO audit activity and litigation
dealing with the $6 million net asset value test. Taxpayers should ensure that when relying on the $6 million net asset
value test, they have valued their assets correctly just before the CGT event happens (i.e. generally the date of signing
the sale contract) and that they have correctly identified all of the relevant associated entities. In some cases, the
alternative $2 million turnover test can help to overcome this issue.
Year-end planning considerations
 If a capital gain on a business related asset (including shares or units) is derived during the current income tax year
by a taxpayer (or its affiliates / connected entities), consider whether the small business CGT concessions can be
accessed.
 Where the taxpayer is seeking to utilise the retirement exemption and there is a risk that this concession will not
be available, consider obtaining a ruling to confirm that the contributions will not be treated as “excessive”
contributions.
 Where the taxpayer is seeking to utilise the retirement exemption, ensure that you lodge the required capital gains
tax election form with the superannuation fund on or before the contribution is made.
 When relying on the $6 million net asset value test to access the small business concessions, ensure that your
valuation method is appropriate and you have identified all assets and associated entities that are required to be
valued. You may also wish to consider the ability to use the $2 million business turnover test.
 Ensure that choices are made by the relevant dates.
9C
CGT discount
A capital gain can be reduced by 50% if an individual or trust holds an asset for more than 12 months before a CGT
81
event happens to it. The day of acquisition and the day of the CGT event do not count towards the 12 month period .
Not all CGT events qualify for a 50% discount.
The CGT discount may no longer be fully available for non-resident and temporary resident individuals where CGT
events occur on or after 8 May 2012, to the extent that the individual was a foreign resident or a temporary resident at
any time after that date. The changes will also apply to any resident taxpayer who inherits property from someone who
was a foreign or temporary resident at any time from 8 May 2012. However, special rules can apply to allow for a full or
partial discount in certain circumstances. For example, a market valuation obtained for the asset as at 8 May 2012 can
(in some cases) protect the CGT discount on the unrealised capital gain as at that date. However, to apply this method,
a choice needs to be made by the taxpayer. Alternatively, the CGT discount may be available on a day’s basis to the
extent the individual was an Australian resident over the period that the asset was held.
Finally, the ATO may also seek to classify capital gains as being on revenue account in certain cases (see Chapter 6K).
Where this occurs, the discount will not be available.
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TD 2002/10
Pitcher Partners – Year-end tax planning toolkit
 For asset sales contemplated before year-end, consider whether the asset has been held for at least 12 months
and consider the commercial implications (as compared to the taxation consequences) of delaying a disposal of the
asset.
 Where assets have been held for a short period, for example just over 12 months, consider whether there is a risk
that the gains are on revenue account (i.e. no discount is available).
 Non-resident and temporary resident individuals no longer qualify for discount capital gains. However, special
rules may allow for a full or partial discount in certain circumstances (either on an Australian resident day’s basis or
in some cases using a market valuation as at 8 May 2012).
9D
CGT and international tax
Special rules apply to in-bound investments by non-residents and outbound investments made by residents into nonresident countries. Refer to Chapters 11L and 11M for further details.
9E
Earnout arrangements
Earnout arrangements are commonly used when selling private businesses or assets used in a business. On 14
December 2013, the Government announced that it will be proceeding with the previously announced earnout
amendments, where the CGT provisions will apply to ensure that earnout payments (as defined) will be attributed to
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the underlying assets . These measures could allow for CGT to be payable based on capital proceeds received, rather
than the market value of future capital proceeds.
These measures have been earmarked to apply from 17 October 2007. The ATO has indicated that it will
83
administratively allow taxpayers to lodge returns based on the proposals . Therefore, a properly constructed earnout
arrangement may allow for the deferral of a portion of taxation on the capital proceeds on the sale of a CGT asset until
such proceeds are received.
Year-end planning considerations
 Consider whether the sale of any CGT assets for the income year require consideration of the announced earnout
provisions, which may result in a deferral of the capital gain.
9F
CGT exemptions and rollovers
A number of CGT exemptions can apply to reduce capital gains and losses derived during an income year. The following
table provides a non-exhaustive list of a number of those exemptions that should be considered during your year-end
tax planning.
•
Pre-CGT assets
•
Certain collectible and personal use assets
•
Shares in a pooled development fund
•
Trading stock
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83
Treasury discussion paper, 12 May 2010
CGT: Look-through treatment for earnout arrangements, ATO
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Year-end planning considerations
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•
Certain payments for compensation and damages
•
Transfer of stratum units to occupiers
•
Certain testamentary gifts
•
Marriage or relationship breakdown settlements
•
Main residence exemption
•
Rollover for assets compulsorily acquired / lost / destroyed
•
Scrip for scrip rollover relief
•
Demerger relief
•
Splitting of assets and merging of assets
•
Cars, motor vehicles and valour decorations
•
Assets used to produce exempt and NANE income
•
Depreciating assets used for producing income
•
TOFA financial arrangements
•
Capital losses by a lessee where the asset is non-income producing
•
Forex hedging gains or losses on liabilities
•
Forex hedging gains or losses on pre-CGT assets
•
Capital gains or losses on certain boats
•
CGT events on death
•
Rollover for the change of an unincorporated body to an incorporated company
Year-end planning considerations
 Where you have significant capital gains, consider if any exemptions or rollovers will reduce your capital gains or
losses for the income year.
9G
Main residence exemption
If a taxpayer sold his/her dwelling in the 2014 income tax year, the individual may qualify for the main residence
exemption to reduce the capital gain made from this sale.
Special rules apply in a range of circumstances, for example: where there was an absence during the ownership period;
adjacent land (whether up to two hectares or more) is being sold with the main residence; compulsory acquisitions of
the main residence and/or adjacent land have occurred; where the residence was used for a period to derive income;
when there are two properties that are both used as a main residence; and when special disability trusts can claim the
main residence exemption.
Furthermore, where dwellings have been acquired from a deceased estate, the ATO has a discretion to extend the 2
year ownership period in which the trustee of the deceased estate or a beneficiary must dispose of the dwelling to
qualify for the main residence exemption.
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On 14 December 2013 the Government confirmed that it would proceed with a previous announcement that if you
have received compensation or insurance payments since 1 July 2005 through a trust, you may be eligible for CGT
exemptions.
Pitcher Partners – Year-end tax planning toolkit
 Apply the main residence exemption if a CGT event happens to a dwelling that was used by an individual taxpayer
as a main residence and the relevant conditions are met.
9H
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
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Year-end planning considerations
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10 Finance issues
10A
Loan rationalisation and debt forgiveness
At 30 June of each year, it is often common to rationalise loans between group entities and/or for debt restructuring to
occur. This can make the group’s Division 7A position easier to manage by reducing the number of loans around the
group. Furthermore, the relevant entity may have entered into debt restructuring or debt forgiveness transactions
during the relevant income year.
However, loan rationalisation and debt restructuring can give rise to significant taxation issues that need to be carefully
considered - especially if one of the entities involved has a deficiency in net assets. Some of these issues are listed
below.
•
Limited recourse debt provisions — where limited recourse debt (defined to include non-arm’s length group debt)
is terminated, the termination can have significant tax consequences if the debt was used to fund capital
allowance deductions. Termination includes repayment, refinancing and debt forgiveness.
•
Division 7A — an assignment of debts can give rise to debt forgiveness, where the creditor is a company and the
assignee will not exercise the assigned right. This may give rise to a deemed dividend under Division 7A.
•
Debt forgiveness provisions — an assignment of debts can give rise to debt forgiveness. This may trigger the debt
forgiveness provisions and therefore could result in a reduction of losses or the tax cost of assets.
•
Debt / equity swaps — a debt / equity swap may give rise to the application of numerous tax provisions, including
the possible application of the share tainting provisions and the debt forgiveness provisions.
Year-end planning considerations
 Consider rationalising all group loans prior to year-end to simplify the loan structure and the management of
Division 7A loans around the group.
 Consider whether a loan rationalisation could result in a debt forgiveness. Consider whether there are any other
tax issues that may arise from a loan rationalisation.
10B
Interest deductibility
Interest expenses can form a major part of deductions for an income year. Where this is the case, you should consider
closely the deductibility of the interest and any tax planning items that may be available for prepaying interest (see
Chapter 4N). Questions concerning the deductibility of interest can occur where:
•
The costs are incurred before the project has started to earn income.
•
The deductions exceed any likelihood of income to be derived from the property financed.
•
Interest is incurred after the income producing asset has been disposed of or the business has ceased.
•
An entity obtains financing to repay partnership capital or unpaid present entitlements.
•
Interest is incurred on perpetual debt or convertible interests.
•
Interest is incurred on an instrument that is not debt under the debt / equity rules (see Chapter 7D).
•
The loan is used to finance an asset that is provided to a related party at less than market rates.
•
You do not satisfy the thin capitalisation provisions (see Chapter 11P).
Furthermore, the prepayment of interest expenses close to year-end is often considered as an option to reduce the 30
June taxable income position. However, you should consider closely whether the prepayment of such expense amounts
can be deductible as paid or is only deductible over time (see Chapters 4N and 5M).
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 Consider whether there will be any issue with interest deductions claimed for the year.
 If you are considering a prepayment of interest, ensure that the prepayment will be deductible as intended (see
Chapters 4N and 5M).
10C
Capital protected borrowings
Where a product (being a direct or indirect interest in a share, unit or stapled security) involves capital protection to
the taxpayer in respect of a borrowing (e.g. an embedded put option that ensures the investment value is protected or
where debt is secured only against the value of the investment), this may result in a component of the interest expense
being reclassified as a capital protection component.
Where the investor holds the underlying asset on capital account, the capital protection amount may not be
deductible. You should carefully consider whether you hold any such products (or are looking at investing into any
products before year-end), as these provisions may apply to deny deductions for 30 June 2014. This should be
considered where a deductible prepayment of interest is being considered close to year-end.
Year-end planning considerations
 Consider closely whether any of your investments in shares, units or stapled securities are capital protected
products and whether any of your interest deductions for the year are at risk of being treated as capital.
10D
The Taxation of Financial Arrangements (TOFA) — general
The Taxation of Financial Arrangement (TOFA) provisions apply to “financial” arrangements, such as loans, derivatives,
foreign currency etc. The provisions aim to apply a systemic set of rules to bring to account gains and losses on such
arrangements.
TOFA can apply to taxpayers that that have an aggregated turnover of $100 million or more, gross assets greater than
$300 million or financial assets greater than $100 million. The rules also apply to a taxpayer where the arrangement is a
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qualifying security (e.g. has deferred interest and has an issue life of greater than 12 months) . A small taxpayer can
also elect to apply the TOFA provisions.
TOFA applies an accruals regime, so that gains (e.g. interest income) and losses (e.g. interest expense) are accrued
where they are sufficiently certain. Accordingly, TOFA can change the basis for assessing returns to taxpayers. TOFA
applies to new arrangements from 1 July 2010 for most taxpayers, unless the taxpayer has previously made an early
election (i.e. to apply the rules from 1 July 2009) or made a transitional election to bring existing arrangements within
TOFA. Transitional elections needed to be lodged with the ATO.
Being taxed under the TOFA rules may offer advantages as compared to the ordinary provisions. For example dividends
paid on preference shares that are debt interests under the debt / equity rules may be deductible on an accruals basis
under TOFA, while they are only deductible on a cash basis outside of TOFA.
However, TOFA also requires interest income to be accrued. Accordingly, this will mean that unearned interest income
would need to be brought to account at year-end under TOFA.
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Section 230-455 of the ITAA 1997
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78
Year-end planning considerations
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Year-end planning considerations
 Consider whether TOFA applies mandatorily to your entity for the 30 June 2014 income year and the impact it may
have on financial type arrangements (e.g. loans, bank accounts, swaps, debts, deferred settlements, etc).
 Consider whether it may be preferable to elect into the TOFA regime due to the treatment of arrangements under
TOFA as compared to provisions outside of TOFA (e.g. preference share deductions).
10E
TOFA — elections
The TOFA provisions allow taxpayers to make a number of elections that align their taxation outcomes with their
accounting outcomes. These elections include: an election to allow small taxpayers to be taxed under TOFA; an election
to use the tax hedging provisions; an election to use the fair value accounting method; an election to use the forex
retranslation accounting method; an election to book gains and losses on financial arrangements for tax purposes in
accordance with the accounts.
The elections are once off (i.e. if the election was made for the 2011 income year, the election would also apply to the
2012 and subsequent income years) and require a number of conditions to be satisfied (e.g. audited accounts).
Where such elections have not previously been made, elections will need to be made by 30 June 2014 if such elections
are to apply for the 30 June 2014 income year. Accordingly, this means your consideration of TOFA should be
performed before this date.
Year-end planning considerations
 TOFA allows a number of elections to align tax with accounting. Such elections need to be made before 30 June
2014.
10F
TOFA — consolidated groups
Changes have been introduced that deem the head company to acquire the TOFA liabilities of the joining entity.
Accordingly, this sets a starting value for those TOFA liabilities in the head company. This means that a deduction
would be denied for the subsequent settlement of an out-of-the-money derivative, to the extent of its value at the
time the entity joined the tax consolidated group.
Year-end planning considerations
 Where a taxpayer has joined a consolidated group, ensure that TOFA liabilities acquired by the head company are
adjusted appropriately (which may deny a deduction for settlement of the liabilities or may prevent a gain from
accruing on settlement).
10G
TOFA — compliance issues
Taxpayers should also be aware that the ATO is conducting targeted implementation reviews of TOFA focusing on
identifying taxpayers who meet the TOFA thresholds to ensure they are applying the TOFA rules correctly (i.e. the
validity of elections made under TOFA, compliance with the hedging method recording requirements and the
appropriate application of the TOFA tax-timing methods).
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 Ensure that you have appropriately considered your TOFA positions for the 30 June 2014 income year as the ATO
are conducting compliance activity through TOFA questionnaires.
10H
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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Year-end planning considerations
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11 International tax
11A
General
Generally, international tax issues are complex and the application of various provisions can have a significant impact
on your 30 June results. When dealing with international tax issues, it is always important to consider whether the
relevant entity is a resident or non-resident for Australian tax purposes. It is also important to consider the entity’s inbound and out-bound taxation issues for the income year. Where foreign tax may be payable, it is always prudent to
seek foreign income tax advice.
11B
Non-resident individual tax rates
The following table outlines the tax rates that apply to non-resident individuals for the 30 June 2014 and 2015 income
years. There are no differences to the tax rates for these income years but the Temporary Budget Repair Levy of 2.0%
for income over $180,000 will apply for the 2015 income year. As noted at Chapter 5B, non-residents are not required
to pay the Medicare levy.
Taxable Income
Tax Payable
0 — $80,000
32.5%
$80,000 — $180,000
$26,000 + 37% of excess over $80,000
$180,001+
$63,000 + 45% of excess over $180,000
11C
Tax residency and source
On an annual basis, entities should consider their tax residency. For individuals, trusts and companies, the residency of
a taxpayer is dependent on many factors. For example, a company may need to consider its place of incorporation as
well as where central management and control is located. For treaty purposes, specific tie breaker rules can apply.
The consequence of a taxpayer being a resident is that the entity will be taxed on its worldwide income, subject to
available exemptions (e.g. for branch profits, non-portfolio dividends, etc.). A non-resident taxpayer will only be taxed
on its Australian sourced income.
Whether an amount is sourced in Australia is a question of fact and degree. The ATO has released a taxation
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determination providing rules for determining the source of gains from the disposal of shares. However, even where
income is sourced in Australia, Australia’s taxing rights may be limited by a Double Taxation Agreement (DTA) that is in
force.
Furthermore, different tax provisions can apply depending on whether an entity is a resident or non-resident. As a part
of your review, you should always also consider the effect of the application of a double tax agreement.
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TD 2011/24
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 You should carefully consider whether the relevant entity is a tax resident for 30 June 2014 and the tax
implications that may follow.
 Where the taxpayer is a non-resident, you should carefully consider the source of income (subject to any limitation
imposed by a DTA).
11D
Temporary resident exemption
Under Australian income tax laws, a foreign individual may be considered a resident where they reside in Australia or
where they are in Australia for at least 183 days. Subject to double tax agreements, this could result in the individual’s
worldwide income being taxed in Australia.
An exemption can apply if the individual is considered a temporary resident individual. Generally, an individual can be a
temporary resident if that person holds a temporary visa granted under the Migration Act 1958 and the person (and
their spouse) is not an Australian resident within the meaning of the Social Security Act 1991. Where the provisions are
satisfied, exemptions are provided for most foreign income (other than employment income), for most capital gains
(except for taxable Australian property), for interest withholding tax on interest paid to foreign residents and there is a
relaxation of some record keeping rules.
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According to a taxation determination , a New Zealand citizen who was in Australia and then departs Australia will not
lose their temporary resident status (when he or she returns to Australia).
Year-end planning considerations
 If you are a citizen of a foreign country and visiting Australia, you should consider whether this will make you a
resident of Australia.
 Where you are a resident of Australia, you should consider whether there is an opportunity to apply the temporary
resident exemption to your income for 30 June 2014.
 Where you are a citizen of New Zealand, consider the potential impact TD 2012/18 may have on your temporary
resident status.
11E
Changing residence
When a taxpayer ceases to be an Australian resident for tax purposes during the income tax year, a CGT event (i.e. a
deemed disposal) can occur for all CGT assets that are not taxable Australian property. Where the taxpayer is an
individual, a choice can be made to treat all assets as being taxable Australian property (subject to limitations placed on
Australia’s taxing rights under a double tax agreement).
When a taxpayer becomes an Australian resident for tax purposes, special rules can apply to treat non-taxable
Australian property as being acquired at that time, generally for its market value. This can also occur where an
individual ceases to be a temporary resident but remains an Australian resident.
Special rules also apply in respect of financial arrangements under TOFA that are held by the taxpayer at the relevant
changeover time. Accordingly, it is critical that you consider the tax consequences for all of your assets on a possible
change in residency.
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TD 2012/18
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Year-end planning considerations
83
Year-end planning considerations
 Consider the potential tax implications of a change in residency of the relevant taxpayer, if there is a risk that the
taxpayer has changed residency during the year.
11F
Foreign accumulation fund (FAF) regime
The foreign investment fund (FIF) rules have been repealed with effect from 1 July 2010. Foreign accumulation fund
(FAF) provisions have been earmarked to replace the FIF provisions. However, to date there is no indication of an
expected start date. We expect that the new provisions will target non-controlling interests in companies or trusts,
where “interest like” returns are accumulated in the entity. It is noted that the ATO can target deferral opportunities
obtained through foreign investment using its general anti-avoidance provision, Part IVA. Provided the investments are
not covered by these integrity provisions, the lack of any FAF provisions can allow for the possible deferral of foreign
income derived through a foreign entity.
Year-end planning considerations
 You should consider how the absence of the FAF provisions may affect your tax position for 30 June 2014 and for
investments to be made in 2014 and 2015.
 Where your investment is in a foreign fund that is a trust, you should consider whether the deemed present
entitlement rule in section 95A(2) may still attribute income to the beneficiary.
11G
Controlled foreign company (CFC) regime
The controlled foreign company (CFC) regime can apply to attribute income derived by a CFC to the Australian investor.
The provisions operate where a foreign company is controlled by an Australian resident(s). Accordingly, in some cases,
it can apply to Australian taxpayers that hold a minority interest in a CFC.
The complexity of these rules makes it easy for taxpayers to overlook whether they have invested in a CFC and the tax
consequences associated with the investment. The consequence of an incorrect assessment can be quite substantial
where the underlying entity has income that may be attributable under these rules.
While exposure drafts have been released on proposed CFC replacement rules, these rules have been put on hold by
the current Government.
Year-end planning considerations
 Where you have foreign investments, you should consider the application of the CFC provisions - even where you
only have a minority interest in the relevant entity.
11H
Transfer pricing
New transfer pricing provisions have been introduced with effect from 1 July 2013, which can apply to re-price all of
your international dealings (loans, service fees, etc). The amendments interpret the arm’s length principle in
accordance with international (i.e. OECD) guidance and ensure that the transfer pricing articles contained in Australia's
double tax treaties can operate independently of our unilateral domestic transfer pricing rules. These amendments are
on top of earlier amendments and together they affect all taxpayers engaged in related party cross-border transactions
(including permanent establishments). (Note, the first set of amendments applies retrospectively from income years
commencing on or after 1 July 2004)
As there are no safe harbours contained in the new legislation, taxpayers may need to review their positions to ensure
that they are not exposed (especially to the retrospective legislation which can apply from 1 July 2004).
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Additional funding has been provided for the ATO to increase compliance activity targeted at restructuring activity that
facilitates transfer pricing opportunities. With the information provided to the ATO by the International Dealings
Schedule (see Chapter 11I), and the extended powers given by the amendments to the transfer pricing rules, the ATO
will be in a strong position to challenge pricing methodologies adopted by taxpayers for their international related
party dealings.
This is another area where taxpayers should expect an increased level of scrutiny, and thus should ensure that their
transfer pricing documentation is both contemporaneous and robust. The 30 June 2014 income year is an ideal year to
start ‘getting your house in order’. Pitcher Partners can assist you in this process.
Year-end planning considerations
 If you have international dealings, you should ensure that you have appropriately considered the new transfer
pricing provisions.
 Ensure that you have adequate and appropriate transfer pricing documentation in place and that the transfer
pricing approach taken is fully and accurately reflected in the International Dealings Schedule for the 30 June 2014
income year.
11I
International dealings schedule
Entities with $2 million or more of related party dealings are required to complete an International Dealings Schedule
(IDS) – which replaced the old Schedule 25A and Thin Capitalisation schedules. As the IDS requires significant
disclosures to be made, we recommend that you contact your Pitcher Partners representative if you are required to
complete this form for the 30 June 2014 income year. Completion of this form should be done contemporaneously
with preparing your transfer pricing documentation and (due to its complexity) cannot be left until the lodgement of
your tax return.
Year-end planning considerations
 Consider the information required to complete the International Dealings Schedule (IDS) for the 30 June 2014
income year well in advance to lodging your return. Ensure that your IDS response is consistent with your transfer
pricing documentation.
11J
Conduit foreign income
The conduit foreign income (CFI) provisions enable an Australian company to make tax free distributions of certain
foreign income to non-resident shareholders in the form of unfranked dividends that are not subject to withholding
tax.
Examples of CFI income that can be flowed through an Australian company include section 23AJ dividends (nonportfolio dividends), section 23AH profits (foreign branch profits) and Subdivision 768-G capital gains (non-portfolio
participation exemption). Where other income was subject to foreign tax the grossed up value of the income may also
be considered CFI (i.e. the amount on which no Australian tax has been paid). The CFI provisions also require
consideration of offsetting expenses in determining the net amount that may be distributed. It is also possible to be
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89
TR 2014/D4 and Draft PSLA 3673
Draft PSLA 3672
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Under the new legislation, Australian taxpayers will be required to prepare transfer pricing documentation prior to
lodging their income tax return. The ATO has released draft guidance on the documentation that should be prepared to
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be compliant with the provisions . Where appropriate documentation is not prepared, penalties may apply if
adjustments are made in respect of the transactions. Under the new provisions, the ATO now has an even greater
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ability to adjust transfer prices and to apply penalties if adjustments are made .
85
able to access the CFI concession where the Australian entity is owned by a trust, where the trust distributes the
income to a non-resident.
Certain time restrictions apply in respect of when the CFI must be paid to the non-resident (typically the Australian
company must on-pay the CFI in a distribution made before it is due to lodge its income tax return).
Year-end planning considerations
 Where the Australian company is a conduit between two foreign entities (i.e. it is owned by a foreign entity or is
owned by a trust that has a foreign resident beneficiary) and the Australian company also owns a foreign company,
consider whether you can access the conduit foreign income exemption to reduce Australian tax paid.
11K
Foreign income tax offsets
Where the foreign income tax offsets (FITOs) rules apply, a taxpayer can claim a tax offset for the foreign tax paid on
their income against their Australian tax paid. Under the current rules FITOs cannot be carried forward. Accordingly,
excess FITOs can (easily) be wasted if there is inappropriate planning or consideration.
If you expect there to be excess FITOs in a year (e.g. in this year or another year), you should consider whether there is
other lowly taxed foreign income that could be derived (or brought forward) to offset against that excess.
As FITOs do not give rise to franking credits, strategies to maximise FITOs should also be compared with top-up tax
payable on the payment of the profit to shareholders through a dividend.
Year-end planning considerations
 Consider your FITO position for 30 June 2014 to determine whether there are any excess FITOs that will be wasted.
Strategies can be put in place to help reduce FITO wastage.
 Beware of flowing through FITOs to loss trusts or loss companies, which may result in wastage of the tax offset.
11L
Exempt type distributions and gains from non-residents
Distributions from a non-resident entity may be exempt or non-assessable and non-exempt income of an entity. For
example: branch profits received by a company (under section 23AH); dividends where there is an attribution account
surplus (under section 23AI and 23AK); non-portfolio dividends received by a company (under section 23AJ); and
capital gains made on the disposal of a non-portfolio active non-resident shareholding (under Subdivision 768-G). In
order to qualify for these exemptions, certain conditions may need to be satisfied.
Year-end planning considerations
 Consider whether non-resident distributions (including capital reductions) can or have been made to an Australian
entity in a tax free manner.
11M
Sale of assets by non-residents or temporary residents
The sale of a CGT asset by a non-resident may not be taxable where the asset is not taxable Australian property.
Generally, taxable Australian property includes land, land rich entities, assets used by a permanent establishment (PE)
and certain assets held by non-residents on changing residency. (Note, where the non-resident has a PE in Australia
this can deem a number of assets as being taxable Australian property).
These provisions can apply to indirect sales of land by non-residents or temporary residents. However, this will not
necessarily mean that a capital gain will be taxable in Australia. A review of the relevant double tax agreement is
required to determine Australia’s taxing rights. You should consider these provisions carefully if you are a non-resident
or a temporary resident disposing of Australian property. Please note that legislation has been introduced to remove
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On 14 May 2013, the former Government announced changes to the land rich provisions, by including intangible assets
(such as mining information and goodwill) connected to mining, quarrying or prospecting rights in the value of the
taxable Australian real property (TARP) thus increasing the TARP percentage of a group. The current Government is
deferring its decision as to whether to proceed with this announcement pending the outcome of ongoing litigation
related to this issue.
It is highlighted that the CGT exemption from the sale of non-taxable Australian property does not apply to revenue
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assets. However, careful consideration of the double tax agreement should also occur in this alternative case .
Year-end planning considerations
 Where non-residents or temporary residents are considering a sale of Australian assets, you should consider
closely whether such assets are non-taxable in Australia. This should include the announcement on 14 May 2013
which proposes changes to the land rich testing provision.
 Non-residents and temporary residents should consider obtaining a market valuation of their taxable Australian
property held at 8 May 2012 in order to claim a 50% discount on gains accrued prior to that date.
11N
Deductions in earning foreign income
Where deductions are incurred in earning exempt income or non-assessable non-exempt income, such deductions may
be denied. However, there are two exceptions for foreign income. The first is in relation to previously attributed
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income, where deductions are not precluded due to such income not being assessable . The second is in relation to
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debt deductions incurred in respect of previously attributed income and non-portfolio dividends paid to a company .
Note that interest deductions relating to branch income are not deductible. The Government is currently considering a
targeted integrity rule that may deny interest deductions claimed in deriving certain foreign NANE dividend income.
Where expenses do not meet the above exceptions, they could be denied as a deduction. Examples where this may
occur may be overhead expenses attributable to foreign operations or black hole expenditure deductions where the
group owns a foreign operation.
Year-end planning considerations
 Where there is a foreign operation in the group that produces exempt or non-assessable non-exempt income to
the group, closely consider whether any deductions incurred for the year will be denied.
11O
Deemed dividends from non-resident CFCs
Integrity provisions can operate to treat certain transactions made by a CFC as a deemed dividend to the shareholder
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or associate . These provisions are similar to Division 7A, however they take precedent to Division 7A and can operate
even where the transactions are at an arm’s length price.
Where the group has a CFC, related party transactions should be reviewed to determine whether the provisions may
apply to treat such transactions as a deemed unfranked dividend. There is no ATO discretion in respect of such
provisions. Where the ATO is not notified of the deemed dividend (by lodging the return or within 12 months of yearend), the provisions can operate to deny access to the foreign income tax offset provisions and attribution credit
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TD 2010/21 and TD 2011/25
Section 23AI(2) and 23AK(10) of the ITAA 1936
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Section 25-90 of the ITAA 1997
93
Section 47A of the ITAA 1936
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the CGT discount for non-resident and temporary resident individuals on capital gains accrued after 7:30 pm (AEST) on
8 May 2012 on taxable Australian property (see Chapter 9C).
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provisions. The provisions do not contain an exemption for benefits provided to other companies. However, limited
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relief may be available if the benefit is provided to a shareholder in certain circumstances .
Year-end planning considerations
 Closely consider related party transactions where benefits are provided by a CFC to a shareholder or associate of
the shareholder.
11P
Thin Capitalisation
Thin capitalisation rules are designed to ensure that multinationals do not allocate an excessive amount of debt to their
Australian operations. The provisions can apply to Australian entities that have foreign controlled operations and/or
investments (outbound) or to Australian entities that are foreign controlled entities (in-bound). Where the provisions
apply, deductible borrowings can be capped, whereby debt deductions (e.g. interest) on excess borrowings can be
denied.
The thin capitalisation rules do not apply where an entity (together with its associate entities) has debt deductions of
$250,000 or less for an income year. Draft legislation has been released, which will aim to increase the threshold to $2
million with effect from 1 July 2014.
In the case of outward investors, there is also an exception where the outward investing entity (together with its
associates) has 90% or more of the total average value of all its assets represented by Australian assets.
Where the thin capitalisation rules apply, the safe harbour debt to equity ratio of 3:1 is generally used to determine
whether the rules are satisfied. This means that assets must be funded by at least 25% equity and no more than 75%
debt. Where the safe harbour ratio is breached, taxpayers may be able to look at alternative methods of satisfying the
thin capitalisation rules (e.g. the worldwide debt test).
There are a number of actions that may be taken to improve a taxpayer’s thin capitalisation position before 30 June
2014. These include refinancing interest bearing debt with certain complying non-interest bearing debt, injecting
further capital into the taxpayer before 30 June 2014, or revaluing assets within the acceptable rules contained in the
provisions. However, consideration should be given to integrity provisions (See Chapter 13) that may also need to be
complied with prior to adopting such strategies.
Draft legislation has been released which will reduce the safe harbour gearing ratio to 1.5:1 from 1 July 2014, and will
reduce the world-wide gearing ratio for outbound investors from 120% to 100%. However, inbound investors will also
be given an opportunity to apply the world wide gearing ratio. Given that the safe harbour calculations rely on the
balance sheet numbers as at 1 July 2014, it extremely important that the impact of these proposed changes is
considered before 30 June.
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Section 23AJ or 23AI of the ITAA 1936
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 Perform high-level calculations to see whether debt deductions exceed $250,000 (for both inward and outward
investors) and whether the value of Australian assets represents at least 90% of all worldwide group assets for the
year (only for outward investors who fail the $250,000 test) to determine whether the thin capitalisation rules are
likely to apply.
 Where the thin capitalisation measures are likely to apply, perform a high-level thin capitalisation calculation
based on 31 May 2014 figures to determine whether there may be a denial of debt deductions for the 30 June
2014 year.
 Consider various strategies to improve your thin capitalisation position before 30 June 2014, taking into account
the various integrity provisions that apply.
 Consider the significant proposed changes to the thin capitalisation regime. Due to the drastic nature of the
changes, it is recommended that you consider your thin capitalisation position before 1 July 2014.
11Q
Deductions where withholding tax payable is not paid
For certain payments made to a non-resident (e.g. interest and royalties), withholding tax may be payable. Where an
entity fails to withhold and pay the withholding tax to the ATO, a deduction may be denied for the relevant payment to
the non-resident. Accordingly, you should ensure that you have considered the withholding tax obligations in relation
to payments made for the 30 June 2014 income year.
Year-end planning considerations
 Ensure that you have complied with the withholding tax provisions so that deductions for payments to nonresidents (e.g. interest and royalties) are not denied for the income year.
11R
Non-resident beneficiaries
If a trust has a non-resident beneficiary that is presently entitled to the income of the trust, the trustee will be assessed
on that non-resident beneficiary’s share of the net income of the trust. Where the income consists of interest,
dividends, royalties or conduit foreign income, special withholding tax rates may apply. Due to the decision in the
Bamford case and the ATO’s view on streaming (refer to Chapter 6J), this may impact on your ability to stream such
income to non-residents. The ATO has indicated that while it still may be possible to stream income from a trust that is
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subject to the withholding rules, this may give rise to anomalous results .
Legislation has been introduced denying the CGT discount to capital gains made by non-residents and temporary
residents after 8 May 2012 (see Chapter 9C). The legislation specifically applies to capital gains on CGT assets
distributed through a trust to a non-resident or a temporary resident beneficiary.
Year-end planning considerations
 Where trusts in the group distribute income to non-resident and temporary resident taxpayers, consider the
income tax implications of those distributions, including withholding tax issues.
 Where streaming is required in respect of certain classes of income, consider carefully whether income subject to
the withholding rules can be streamed to non-residents and temporary residents (e.g. interest income and
unfranked dividends), given the ATO’s views on streaming.
 Under recent legislation, the CGT discount is denied to non-residents and temporary residents on capital gains
flowing through trusts. You need to consider these rules if you are distributing capital gains to non-residents and
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Refer to ATOID 2002/93 and 2002/94.
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Year-end planning considerations
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temporary residents.
11S
Non-resident trusts and other offshore assets
An interest in a foreign trust may give rise to a number of taxation issues including the application of the transferor
trust provisions, the proposed foreign accumulation fund (FAF) provisions or the deemed present entitlement
provisions in section 95A(2) (where the trust is a fixed trust at law). These provisions may deem you to have an amount
of assessable income for the 30 June 2014 income year attributable to the foreign trust. Therefore, you should consider
the application of these provisions closely if you have had any interest in a foreign trust during the income year.
Furthermore, you should also closely consider these provisions where either: (a) non-resident relatives control a
foreign trust (i.e. whereby the class of beneficiaries may be wide enough to encapsulate Australian residents); or (b)
you have recently changed residency to being an Australian resident (i.e. which may result in you having an interest in a
foreign trust).
Year-end planning considerations
 Consider whether you have an interest in a foreign trust for the 30 June 2014 income year. You may be required to
include income in your tax return under the transferor trust provisions or the deemed entitlement provisions
(where the trust is a fixed trust at law).
11T
Offshore assets and ATO disclosure opportunity (Project DO IT)
On 27 March 2014, the ATO announced an initiative to allow eligible taxpayers to come forward and voluntarily
disclose unreported foreign income and assets. Under this initiative, the ATO will generally only assess the last four
income years and has stated that it will only use the information for calculating how much tax should be paid.
Essentially, the ATO has indicated that this will mean that it will not be seeking to apply fraud or evasion to the
taxpayer and will not be seeking criminal prosecution.
Furthermore, the ATO has committed to remitting the tax shortfall penalty to 10%, (or in full where additional income
is $20,000 or less in a tax year). Shortfall interest charges are to apply at normal rates.
In order to access these benefits, eligible taxpayers must come forward before 19 December 2014. If you are
concerned about your treatment of foreign income in the past, Pitcher Partners can assist you in reviewing your
position and whether you should consider this opportunity.
Year-end planning considerations
 If you have offshore assets or investments that you have not previously disclosed to the ATO, you should consider
taking advantage of the current ATO offshore asset voluntary disclosure initiative to avoid steep penalties and the
risk of criminal prosecution for tax avoidance.
11U
Investment manager regime (IMR)
The Investment Manager Regime (IMR) will apply to widely-held managed funds resident in a country that is an
information exchange country (IEC). To qualify for the IMR, foreign funds will be precluded from carrying on or
controlling a trading business in Australia (which will be relevant for private equity type funds). For funds that qualify
for the exemption, gains made on portfolio investments in “passive assets” will be exempt from Australian tax
(excluding gains on certain land rich investments and amounts subject to withholding tax - e.g. if the amount is interest
or dividend income).
The Government has continued to release amendments to the IMR. Due to the technical nature of the provisions, and
the annual testing requirements, it is critical that compliance with these measures is continually reviewed and tested.
For example, there is a requirement that the fund be resident of an information exchange country, and also that the
fund provide an information statement to the ATO in respect of an income year in order to qualify as an IMR foreign
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Year-end planning considerations
 If you are a non-resident widely held fund or an Australian investment manager, broker or custodian, you should
consider the possible application of the new IMR regime for 30 June 2014.
 In light of the proposed changes to the IMR regime, you may wish to reconsider your ability to apply the IMR
regime to the applicable foreign fund.
11V
Managed Investment Trust (MIT) fund payments
For the 30 June 2014 year, the withholding tax rate for fund payments made by a MIT to a resident of an Exchange of
Information (EOI) Country is 15%, while it is 30% for all other non-EOI countries.
However, from 1 July 2012, MITs that hold one or more newly constructed energy-efficient commercial buildings (i.e. 5star Green Star rating or a predicted 5.5 star NABERS (National Australian Built Environment Rating System) rating) are
eligible for a 10% withholding tax rate on fund payments made to foreign investors residing in countries with which
Australia has effective exchange of information arrangements. The reduced withholding rate will only apply where
construction of the building commences on or after 1 July 2012.
Year-end planning considerations
 The withholding tax rate on fund payments to non-residents during the 2014 income is equal to 15% for EOI
countries and 30% for non-EOI countries. Ensure that you comply with the withholding tax rates and obligations
for MITs in respect of the 30 June 2014 income year.
 Consider the ability to access the reduced 10% withholding tax rate for energy efficient buildings constructed after
1 July 2012.
11W
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
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90
fund for that income year. Furthermore, a trust or partnership that is an IMR foreign fund must provide a written
notice containing information in respect of its status as an IMR foreign fund for the income year to each of its foreign
resident beneficiaries or foreign resident partners.
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12 Super and GST
Superannuation
12A
Deductions for superannuation contributions
An employer must contribute to a complying superannuation fund or retirement savings account, in respect of an
employee, before year-end (i.e. 30 June) in order to obtain a tax deduction for superannuation contributions.
The Superannuation guarantee (SG) contribution rate for the 30 June 2014 financial year remains unchanged at 9.25%
of an employee’s “ordinary time earnings”. An employer does not have to make SG contributions in respect of
employee’s salary over a “maximum salary base”. For the year-ending 30 June 2014 the maximum salary base is
$48,040 per quarter.
There are essentially two types of contributions. Concessional contributions are deductible to the payer and are
taxable in the receiving superannuation fund at 15%. Non-concessional contributions are not deductible to the payer
and are not taxable when received by a superannuation fund. Employers cannot make non-concessional contributions.
Year-end planning considerations
 To claim a deduction for super contributions, they must be made (i.e. received by the super fund) on or before 30
June 2014.
12B
Superannuation guarantee
Employers have to make a contribution of 9.25% of each employee’s ordinary time earnings (OTE) and have to pay this
amount within 28 days of the end of the quarter. An employer who fails to do this will have to pay a non-deductible
superannuation guarantee charge - comprising of a superannuation guarantee shortfall, interest and an administration
fee.
The rate of contributions under the superannuation guarantee increases 0.25% to 9.50% with effect from 1 July 2014.
The 2014/15 Federal Budget proposed to delay legislated superannuation guarantee increases. The legislated and
proposed future contribution rates are as follows:
Minimum Legislated Contribution
Minimum Proposed Contribution
1 July 2013
9.25%
9.25%
1 July 2014
9.50%
9.50%
1 July 2015
10.00%
9.50%
1 July 2016
10.50%
9.50%
1 July 2017
11.00%
9.50%
1 July 2018
11.50%
10.00%
1 July 2019
12.00%
10.50%
1 July 2020
12.00%
11.00%
1 July 2021
12.00%
11.50%
1 July 2022
12.00%
12.00%
From
In addition, from 1 July 2013 the upper age cut-off under superannuation guarantee is removed, i.e. super guarantee
applies on eligible earnings regardless of the age of the employee/director.
Pitcher Partners – Year-end tax planning toolkit
 If you are an employer, ensure you pay the required compulsory superannuation guarantee on each employee’s
ordinary time earnings within 28 days of the end of each quarter.
 Consider if you have to make superannuation guarantee payments in respect of bonuses paid to employees and
payments made to non-employees (e.g. contractors, consultants or members of the board who are not paid via the
payroll).
12C
Contribution caps
Each individual has caps on the amount of contributions that can be made by them or for them each year before tax
penalties are applied. The annual concessional contribution cap for the 2014 income year is $25,000. Individuals aged
59 and over on 1 July 2013 have a concessional contribution cap of $35,000.
From 1 July 2014, the annual concessional contribution cap will increase to $30,000. Individuals aged 49 and over on 1
July 2014 will have a concessional contribution cap of $35,000 from 1 July 2014.
Currently the annual non-concessional contribution cap is $150,000. From 1 July 2014, the annual non-concessional
contributions cap will increase to $180,000. Consequently individuals under the age of 65 can contribute up to
$540,000 at any time across a fixed three year period from 1 July 2014.
Year-end planning considerations
 Make sure you have complied with the annual concessional and non-concessional contribution caps.
 If you are planning related party asset transfers to a superannuation fund you should consider the rules covering
superannuation funds as they may impact on when the transfer needs to be completed or how the transfer needs
to be structured to comply.
 You may consider deferring non-concessional contributions to on or after 1 July 2014 - from which time individuals
under the age of 65 may be able to contribute up to $540,000 (across a fixed three year period).
12D
Personal superannuation contributions
Individuals can make concessional contributions. An individual is eligible for a tax deduction for personal
superannuation contributions when less than 10% of their income (being assessable income plus reportable fringe
benefits plus reportable employer contributions) is from employment activities.
An individual must lodge a valid “section 290-170 notice” with the receiving fund within specified time periods. The
notice tells the fund of the individual’s intention to claim a deduction for a specified part of their contributions. The
fund must acknowledge the notice in writing before the individual can claim the deduction.
There are penalties for breaching the relevant caps (see Chapter 12E).
Year-end planning considerations
 Consider whether the individual is eligible to make a deductible concessional contribution before 30 June 2014 and
ensure notice requirements are met within time.
12E
Excess contributions tax
From 1 July 2013 if concessional contributions exceed an individual’s concessional contribution cap, the “excess”
contribution will be included in the individual’s assessable income and taxed at their marginal tax rate plus an interest
charge. The individual will have the choice of paying the excess contributions tax personally, through their super fund
or fully release the after tax excess concessional contribution from superannuation. In terms of non-concessional
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92
Year-end planning considerations
93
contributions, currently contributions made in “excess” of the non-concessional contributions cap are taxed at the top
marginal rate plus Medicare (46.5%).
The 2014/15 Federal Budget proposed that for any “excess” non-concessional contributions made after 1 July 2013, the
Government will allow individuals to withdraw the excess contributions and associated earnings. The earnings will be
assessed as part of the individual’s assessable income and taxed at their marginal tax rate. If excess non-concessional
contributions are left in superannuation they will be taxed at the top marginal tax rate.
Year-end planning considerations
 When reviewing your superannuation strategy for year-end, carefully consider whether payments to the
superannuation fund are within your concessional and non-concessional contributions caps. Penalties can apply if
you are in breach of the contributions caps.
12F
Additional contributions tax for higher income earners
Individuals with income (as defined) in excess of $300,000 are liable for an additional 15% tax on contributions,
bringing the effective rate of tax on concessional contributions to 30%. Income broadly includes taxable income,
reportable superannuation contributions (superannuation guarantee and salary sacrifice contributions), adjusted fringe
benefits, and total net investment loss. If you are aged 55 to 59 years old, you exclude any taxed element of a super
lump sum, other than a death benefit, which you received that does not exceed the $180,000 low rate cap amount.
If an individual’s income excluding their concessional contributions is less than $300,000 but the inclusion of their
concessional contributions pushes their income over $300,000 the higher tax rate will apply to the part of their
contributions above $300,000.
The higher contributions tax rate does not apply to excess concessional contributions. Individuals will have the choice
of paying the additional tax personally or by their super fund.
Year-end planning considerations
 Individuals with income exceeding $300,000 pay an additional 15% contributions tax (i.e. 30%) on contributions for
the 30 June 2014 year. You should take this into consideration when making super contributions prior to year-end.
12G
Taxing of employment termination payments
The Government has limited the concessional taxation treatment of certain affected ETPs, such as golden handshakes,
so that only that amount which takes a person’s taxable income (including the ETP) to no more than $180,000 will
receive the ETP tax offset. Any amount of an ETP which takes the employee’s total income above the $180,000 cap will
be taxed at the employee’s marginal tax rate, typically 46.5%.
Certain ETPs such as genuine redundancy payments are taxed at a maximum rate of 16.5% for those over preservation
age (currently 55 years of age) and to a maximum rate of 31.5% for those under preservation age, up to an indexed cap
– which is $180,000 in 2013/14.
Pitcher Partners – Year-end tax planning toolkit
 If you have received an ETP during the 30 June 2014 income year, you should consider the taxation treatment of
such payments.
12H
Receipts from legal settlements on employment termination
Amounts received in respect of legal costs incurred in a dispute concerning the termination of employment will not
form part of an employment termination payment (ETP) where the amounts can be separately identified as relating to
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legal cost .
However, the ATO holds that where the amount of the settlement is an un-dissected lump sum, where the legal cost
component cannot be determined separately, the whole amount will be treated as being received in consequence of
termination of employment.
If the legal costs are deductible under section 8-1, the settlement or award may also need to be included in the
97
recipient's assessable income as an assessable recoupment .
Year-end planning considerations
 Consider whether amounts received in respect of legal costs incurred in disputes concerning the termination of
employment can be treated as an eligible termination payment (which may be subject to concessional treatment).
Goods and Services Tax (GST)
12I
GST adjustments for bad debt adjustments written off
Where you have written off bad debts during the year or the debts have been overdue for at least 12 months, you will
be able to make a decreasing adjustment (which decreases your GST liability to the ATO) in the BAS relating to the
period in which you wrote off the bad debts or the period in which the debts become overdue by at least 12 months.
However, if you have previously made a decreasing adjustment in relation to a bad debt written off but the bad debt is
subsequently recovered, an increasing adjustment (which increases your GST liability to the ATO) will be required in the
BAS that relates to the period in which the bad debt is recovered.
Year-end planning considerations
 If you write off a bad debt during the year, a debt has been overdue for at least 12 months or you recover a bad
debt previously written off during the year, you may need to make a GST adjustment in the relevant BAS.
12J
Accounting for GST on a cash or accruals basis
If you currently account for GST on a cash basis, you may have to change your basis of accounting if you no longer meet
the eligibility criteria for the cash basis of accounting. You are eligible to account for GST on a cash basis if you meet
any of the following criteria:
•
You are a small business with an annual turnover (including the turnover of your related entities) of $2 million or
less.
•
You are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less.
•
You account for income tax on a cash basis.
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97
TR 2012/8
Subdivision 20-A of the 1997 Act
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Year-end planning considerations
95
•
You carry on a kind of enterprise that the ATO has determined is able to account for GST on a cash basis,
regardless of your GST turnover.
•
Regardless of your GST turnover, you are either an endorsed charitable institution, a trustee of an endorsed
charitable fund, a gift-deductible entity or a Government school.
If you change from accounting for GST on a cash basis to a non-cash basis (accruals), you may be required to make an
adjustment in relation to your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.
Year-end planning considerations
 If you currently account for GST on a cash basis you should consider whether you still satisfy the eligibility
requirements for cash basis accounting.
 Where you change your basis of accounting for GST from cash to accruals, you may need to make an adjustment to
your acquisitions and supplies in the last BAS in which you account for GST on a cash basis.
12K
Financial acquisitions threshold
If you make financial supplies, such as buying and selling securities or lending money, a calculation is required to
determine if input tax credits can be claimed on all expenses incurred in relation to making the financial supplies. This
test is known as the financial acquisitions threshold (FAT) test.
If the FAT is exceeded, you will not be able to claim full input tax credits for acquisitions that relate to making financial
supplies. There are two limbs of the FAT test that determine whether you exceed the FAT. The FAT can be exceeded
under either limb. In testing both limbs you should look at the current month and the previous 11 months as well as
the current month and the next 11 months (each a “relevant 12 month period”). As a minimum, the FAT test should be
done each time a BAS is prepared.
You will exceed the FAT in a particular period if the GST amount that you pay on acquisitions that relate to making
financial supplies (financial acquisitions) is more than:

$150,000 in the relevant 12 month period; or

10% of the total GST amount that you pay on all your taxable acquisitions (including financial acquisitions) during
the relevant 12 month period.
If the FAT is not exceeded, you will be entitled to full input tax credits in respect of your acquisitions that relate to
making financial supplies. However, if the FAT is exceeded you will not be entitled to claim full input tax credits but
may still be entitled to claim reduced input tax credits (RITC) for certain specified acquisitions.
Year-end planning considerations
 If you make financial supplies, you should consider whether you have exceeded the financial acquisitions threshold
in order to determine whether you can claim full input tax credits in relation to your acquisitions.
12L
GST adjustments for changes in use
Where you have changed the use of something that has been acquired or imported, you may have to make an
adjustment in your business activity statement (BAS) for the period ended 30 June. Generally, you use goods or
services for a creditable purpose if you use them in carrying on your business. However, you do not use goods or
services for a creditable purpose to the extent that they are either used to make input taxed supplies, or for private or
domestic use. The extent to which you use something that you have acquired or imported for a creditable purpose may
change over time.
An example of a change in use is where you have previously claimed input tax credits on acquisitions relating to the
construction of new residential premises on the basis that your original intention was to sell the premises on
completion. In this situation the acquisitions relating to the construction would be for a creditable purpose as the sale
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Year-end planning considerations
 If you have changed the extent to which an acquisition or importation is used for a creditable purpose, you should
consider whether a change in use adjustment is required in the BAS for the period ended 30 June.
12M
Reporting requirements for the building and construction industry
It is also relevant to note the compulsory reporting system in place that requires businesses in the building and
construction industry to report to the Commissioner the details of the payments they make to contractors for the
supply of building and construction services.
Such payments will need to be reported annually within 21 days after the end of the financial year (i.e. the report will
be required by 21 July 2014). The Pitcher Partners TPAR system allows an automatic upload of information from a
client’s trial balance, to help simplify the preparation of the report. Please speak to your Pitcher Partners
representative to find out more.
Year-end planning considerations
 Consider reporting requirements to the Commissioner for payments made to contractors for the supply of building
and construction services.
 If you are required to prepare a TPAR, Pitcher Partners has a system that allows an automatic upload of
information from a client’s trial balance. Pitcher Partners can assist you in meeting this reporting requirement.
12N
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
96
of new residential premises is a taxable supply. However, should your intention change from selling the units to leasing
the units or the units are actually leased, there may be a change in use adjustment required. This is because a lease of
residential premises is input taxed and acquisitions for the purpose of making an input taxed supply are not made for a
creditable purpose.
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13 Integrity provisions
13A
Part IVA
As tax planning strategies may reduce your taxable income, it is always prudent to consider the potential application of
the general anti-avoidance provision contained in Part IVA to any strategy. Part IVA can apply to arrangements that
simply defer the tax payable, where the commercial reason for entering into the arrangement is only an incidental
98
purpose (e.g. split loan arrangements ) and where an Australian resident company uses a scheme to convert interest
99
income which would be assessable, into NANE dividends .
The Government amended Part IVA to broaden its application for schemes entered into or carried out after 16
November 2012. One of the main aims of the amendments is to increase the number of arrangements that result in a
“tax benefit”. Accordingly, for any arrangements contemplated during the 2013/14 tax year, you should carefully
consider whether Part IVA may apply to your arrangement.
Year-end planning considerations
 You should consider Part IVA in relation to any material tax planning strategy that may be implemented for the 30
June 2014 income year.
 Be aware that Part IVA has been amended in relation to schemes entered into or carried out after 16 November
2012 and that these amendments broaden the scope of the anti-avoidance provisions.
13B
Promoted schemes
As noted above, many tax planning strategies may reduce taxable income. However, beware of schemes or
arrangements that are promoted around year-end. The ATO has produced guidance as to common schemes that are
promoted, what to look out for and what will attract the ATO’s attention as being tax ineffective arrangements.
Year-end planning considerations
 Be careful of schemes that are promoted to taxpayers to reduce their taxable income for the income year.
Consider the ATO guidance on what to look out for.
13C
Related party deductions
Where a tax planning opportunity gives rise to a differential in the timing of income and deductions between two
related parties, you need to consider the application of special integrity provisions that may apply. These provisions
100
or may deny deductions where the income is also not brought
may deny deductions for certain prepaid expenditure
101
to account in the same year .
98
TD 2012/1
TD 2011/22
100
Section 82KJ of the ITAA 1936
101
Section 82KK of the ITAA 1936
99
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Year-end planning considerations
 Where tax planning arrangements involve related party transactions, consider carefully the application of the antiavoidance provisions that may deny deductions incurred by one of the related parties.
13D
Wash sales
102
The ATO may apply Part IVA to “wash sale” arrangements
where CGT assets – for example shares – are sold for the
purpose of realising a capital gain or loss and substantially the same assets are reacquired shortly thereafter. The ATO
states that this rule does not apply where (for example) a taxpayer disposes of shares in one company and purchases
shares in a competitor company that carries on a similar business, as shares in the two companies do not constitute
substantially the same assets.
Year-end planning considerations
 Consider the ATO’s view on wash sale arrangements where assets are disposed of for a loss or gain and
(subsequently) substantially the same assets are re-acquired.
13E
Franking credit trading arrangements
A number of provisions can deny franking credits where an arrangement seeks to provide a franking credit benefit to a
103
taxpayer . Accordingly, where a return to a shareholder is calculated with reference to franking credits, care needs to
be taken that the arrangement does not fall foul of the specific anti-avoidance provisions.
The ATO has announced that it will apply the anti-avoidance provisions to deny franking credits received through a
dividend washing arrangement. These are arrangements that seek to take advantage of franking credits on shares
acquired cum-dividend under a Special Market. The ATO believes the arrangement is a scheme entered into for the
104
purpose of obtaining franking credit benefits . In addition, the Government has released legislation that will
introduce a specific anti-avoidance provision targeting these arrangements.
Year-end planning considerations
 You should review any arrangements that purport to provide a return that is calculated with reference to franking
credits. Such arrangements may fall foul of the franking credit benefit provisions.
13F
Trust streaming to exempt entities
Two specific anti-avoidance rules have been introduced to prevent exempt beneficiaries being used to inappropriately
reduce the amount of tax payable on the taxable income of a trust.
Under the first rule, an exempt entity that has not been notified of its present entitlement to income of trust estate
within two months after year-end will be treated as if it was not presently entitled to that amount. This will generally
result in the trustee being liable to pay tax on the relevant distribution.
Under the second rule, where an exempt entity's share of the taxable income of a trust estate exceeds a prescribed
benchmark percentage, the excess will be (generally) taxable to the trustee. This rule is aimed at preventing an exempt
entity from receiving a disproportionate share of the trust's taxable income relative to the exempt entity's actual
entitlement under the trust deed. For example, where an exempt entity receives 100% of the taxable income of a trust
yet only receives 1% of the actual economic benefits of the trust.
102
Cumins v FCT [2007] ATC 4303, TR 2008/1 and TA 2008/7
For example Subdivision 204-D or section 177EA
104
TD 2014/10
103
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Year-end planning considerations
 Consider the trust anti-avoidance rules that apply to distributions made to exempt entities.
13G
Trust distributions and the trust stripping provisions
The ATO has indicated that it will release a fact sheet on the application of the trust stripping provisions. These
provisions can tax the trustee at 46.5% in cases where the trustee distributes income to one beneficiary (that pays little
or no tax), where the economic benefits of the distribution are instead provided to an alternative taxpayer.
Typically, the trust stripping provisions have only been applied in promoter scheme type cases, typically involving loss
trusts and exempt entities. The ATO has indicated that (in its view) the provisions can apply more broadly to family
trust arrangements. Accordingly, care needs to be taken where amounts are distributed to a beneficiary in
circumstances where the beneficiary is unlikely to ever call on the funds (or be paid those funds).
Year-end planning considerations
 The ATO are soon to release a fact sheet that could indicate that it may apply the trust stripping provisions more
broadly to family trust arrangements. Care needs to be taken where income is distributed to a beneficiary, where it
is unlikely that the beneficiary will ever call on the funds (or be paid those funds).
13H
Notes relating to items in this chapter
Place any notes or additional information here for further reference with your discussion with your Pitcher Partners
representative.
Pitcher Partners – Year-end tax planning toolkit
The contents of this document are for general information only and do not consider your personal circumstances or situation.
Furthermore, this document does not contain a detailed or complete explanation of the law, as provisions or explanations have been
summarised and simplified. This document is not intended to be used, and should not be used, as professional advice.
If you have any questions or are interested in considering any item contained in this document, please consult with your Pitcher Partners
representative to obtain advice in relation to your proposed transaction. Pitcher Partners disclaims all liability for any loss or damage
arising from reliance upon any information contained in this document.
© Pitcher Partners Advisors Pty Ltd, June 2014. All rights reserved. Pitcher Partners is an association of independent firms. Liability limited
by a scheme approved under Professional Standards Legislation.