2019 Tax Checklist

As 30 June is almost upon us, now is an optimal time to check that all year end tax planning measures are in place the 2018/19 financial year.

It is important to ensure all appropriate elections and choices have been made and the correct documentation is in place for transactions that have or are to be finalised before 30 June 2019 and don't forget that 30 June 2019 is a Sunday.

2019 TAX HIGHLIGHTS

Tax Relief for Individuals

The Government announced another round of tax relief for low and middle-income earners. The changes are reflected in the offsets detailed below.

There are a number of changes to the instant asset write-off to both the maximum asset value that qualifies for the immediate write off and to the turnover threshold for qualifying taxpayers. 

From 1 July 2018, taxpayers with a turnover less than $10 million can write off assets costing less than $20,000.  From 29 January 2019, taxpayers with a turnover less than $10 million can write off assets costing less than $25,000.  From 2 April 2019 (7.30pm), taxpayers with a turnover less than $50 million can write off assets costing less than $30,000 (to 30 June 2020).

2018-19 Individual tax rates

Threshold Rate

1st rate $0 - $18,200 0.0%

2nd rate $18,201 - $37,000 19.0%

3rd rate $37,001 - $90,000 32.5%

4th rate $90,001 - $180,000 37.0%

5th rate $180,001 +45.0%

In addition, the Medicare levy is 2% of taxable income. Therefore, the top marginal tax rate for resident individuals will be 47% (including Medicare levy).

A new Low and Middle Income Tax Offset (LMITO) will also be available, providing a benefit of up to $255 for individuals earning under $37,000 and up to $1,080 for individuals earning between $48,000 and $90,000.  The offset reduces by 3 cents for every dollar in excess of $90,000.  There is no offset for taxpayers earning in excess of $126,000.

2018-19 Non-Resident tax rates

Threshold Rate

1st rate $0 - $90,000 32.5%

2nd rate $90,001 - $180,000 37.0%

3rd rate $180,001 +45.0%

Backpacker tax rates

2018-19 Backpacker tax rates

Threshold Rate

1st rate $0 - $37,000 15%

2nd rate $37,001 - $90,000 32.5%

3rd rate $90,001 - $180,000 37.0%

4th rate $180,001 +45.0%

Small Businesses

From 1 July 2016, the small business turnover threshold has increased from $2 million to $10 million.  However, thresholds for the small business CGT concessions remain at $2 million turnover or $6 million net asset test, and small business tax discount has a $5 million turnover threshold.

From 1 July 2016, the income tax rate applicable to qualifying companies reduced to 27.5%.  The reduction progressively applied to companies based on their aggregated turnover in the years in question.

The 27.5% tax rate will apply to companies as follows:

Year ended 30 June Turnover

2017 $10 million

2018 $25 million

2019 $50 million

To qualify for the reduced income tax rate, companies must satisfy the passive income test (derive no more than 80% of their income from passive sources, as defined in the legislation). 

In addition to prescribing the income tax rate applicable to companies, the turnover and base rate entity passive income test is also relevant to determining the rate at which companies can frank their dividends for an income year.  It is important to note that, under the legislation, a company may have an income tax rate that is different from its franking rate.

From a franking perspective, a company's maximum franking rate is determined according to its corporate franking tax rate.  For 30 June 2019, the company will have a 27.5% corporate franking tax rate where its turnover for 30 June 2018 is less than $50 million and it satisfies the base rate entity passive income test based on its 30 June 2018 income.

If the company pays a franked dividend based on profits of a previous year where the company's tax rate was higher than the franking rate for the current year, there may be trapped franking credits e.g. previous year rate 30% and current year franking rate 27.5%, then 2.5% franking credits trapped in company.

Shareholders in companies that pay 27.5% franked dividends will have to pay higher top-up tax because the franking offset they receive will be lower than if the dividend was franked at 30%.  Generally, this means the company tax cut is clawed back by the government when dividends are paid to resident shareholders.

For example, a company has $100 profit and pays 30% tax, and pays the $70 balance as a franked dividend to the shareholder.  If the shareholder's marginal tax rate in 47%, they will pay tax on the $70 franked dividend of $17 (after franking offset) leaving the shareholder with $53 after tax. 

However, if the company pays tax at 27.5% tax on the $100 income, it can pay a $72.50 franked divided franked at 27.5%, in which case the shareholder pays $19.50 on the $72.50 franked dividend leaving the shareholder with the same $53 after tax. 

From 1 July 2016, small businesses (<$10m turnover threshold) can use the small business restructure relief, which allows eligible taxpayers to transfer assets between related entities, including companies, trusts and individuals, without any income tax or CGT consequences.  While this rollover can be very beneficial to a small business, care needs to be taken as the eligibility rules can be complex in some cases.

Multinationals and taxpayers engaged in international dealings should be aware of various new rules that are now in effect.  These new rules include a Diverted Profits Tax, Hybrid Mismatch rules, Country-by-Country reporting, Transfer Pricing amendments and increased penalties for multinationals that do not keep the required documentation or fail to lodge documents and returns by the due date.

Taxpayers should confirm the extent to which the new compliance requirements and penalties apply to them, and confirm the relevant due dates for lodgment of the required documents. 

In addition, the Government has extended the application of the definition of significant global entity beyond multinational groups controlled by public and selected private companies to groups controlled by all private companies, as well as groups controlled by trusts, partnerships and investment groups.

Specialist advice should be sought in relation to these requirements.

IMPORTANT YEAR END PLANNING ISSUES

Company directors should review their companies' reporting mechanisms to ensure they are adequately informed of their companies' financial position.  The director penalty provisions may leave directors personally liable where their company fails to make PAYG Withholding and SGC payments by the respective due dates.

Defences against director liabilities include situations where the director has been ill, has taken all reasonable steps to ensure the outstanding liabilities have been paid, or in limited circumstances, the director has been appointed to the company in the last 30 days. However, good evidence will be required for these defences.

Private company directors are reminded to ensure they comply with Division 7A where they provide loans or other financial assistance to shareholders and associates or allow them to use company property.

Loans made by private companies to their shareholders or associates will be treated as deemed dividends under Division 7A unless the loan is repaid by the earlier of the date of lodgment or due date for lodgment for company's tax return for the year, or the loan is converted to a formal loan with the following features:

Is under a Division 7A complying written agreement and on commercial terms by the earlier of the company's lodgment day or due date;Has a minimum benchmark interest rate; and Has a term of no more than 7 years, or 25 years for registered mortgages over real estate.

Other important Division 7A issues:

Ensure minimum loan repayment amounts are paid in years after the loan is made; any shortfall will be a deemed dividend in that year.A Division 7A deemed dividend is generally unfranked.Payments and debt forgiveness to a shareholder or associate can also be a deemed dividend.The private use of company owned assets for less than market value consideration can be a deemed dividend under Division 7A.These rules apply to shareholders and associates, which includes relatives of shareholders and trusts, companies and partnerships of the shareholders or their associates.There is a Commissioner's discretion for non-complying loans not to be treated as a deemed dividend or to be treated as a franked dividend if it resulted from an honest mistake or inadvertent omission. Loans for income-producing purposes can be caught as a deemed dividend under Division 7A – there is no otherwise deductible rule.Make sure all Division 7A loans made in the 30 June 2018 tax year were either repaid or put under a complying Division 7A loan agreement by the earlier of the lodgment date or due date of the company's 2018 tax return.If the company has an unpaid present entitlement from a trust, it may be a deemed dividend to the trust and/or the shareholder or their associate in some circumstances (see comments under 'Trusts' below).The Government announced in the 2019 Budget that the amendments to Division 7A have been deferred to commence from 1 July 2020.  The extent of the amendments has not been announced.  Those potentially affected should discuss these issues with their adviser once the amendments have been released.

Trusts

Distributions made by trusts to associated private companies that remain unpaid at the end of the following year may be deemed to be a loan to the trust and become subject to Division 7A.

For the 2019 tax year, unpaid distributions to a private company that arose in the 2018 tax year may be a deemed dividend to the trust for the 2019 tax year unless the trustee:

• Has put the amount in a sub-trust for exclusive benefit of the private company by the earlier of the lodgment date or due date for lodgment of the trust's 2018 tax return (usually 15 May 2019);

• Converts the amount to a Division 7A complying loan by the earlier of the lodgment date or the due date for lodgment for the 2019 company tax return; or

• Pays the amount to the company by the earlier of the lodgment date or due date for lodgment for the company's 2019 tax return.

For unpaid distributions that have been placed into a sub-trust, the annual return on the sub-trust investment must be paid to the private company by 30 June 2019.

The taxation of unpaid present entitlements under Division 7A is subject to the current review of the provisions.  As noted above, the new Division 7A is scheduled to commence from 1 July 2020, although the amendments have not yet been released.  It is recommended that those who may be affected discuss their options with their adviser once the new Division 7A rules are released to ensure their UPE arrangements continue to satisfy Division 7A.

Trustees are also reminded of the application of s 100A of the ITAA 1936, especially where a trust has made a distribution of income to a private company.

Where the Tax Office determines that s 100A applies to an arrangement, the net income that would otherwise have been distributed by the trustee is instead assessed to the trustee at the highest marginal rate.

Section 100A will not apply to ordinary commercial or family dealings.

In a recent publication, the Tax Office indicated the following arrangement, referred to as the washing machine, would attract s 100A:

• The trustee owns all the shares in a private company.

• The company is also a beneficiary of the trust and undertakes no activity but derives a small amount of bank interest on its own account.

• The directors of the private company and the trustee company are the same individuals or related individuals.

• The trustee resolves to make the company presently entitled to some or all of the trust income in year 1 and distributes that to the company prior to the lodgment of the trust's tax return in year 2.

• The company includes the distribution in its assessable income for year 1.

• Division 7A does not apply to the arrangement because the company's entitlement is paid before the lodgment of the income tax return.

• The company pays a fully franked dividend in year 2 to the trustee.  This forms part of the trust's income in year 2.

• The trustee makes the company presently entitled to all of some of the trust income at the end of year 2.

• The arrangement is repeated.

The reimbursement agreement results in the distribution benefitting a party other than the beneficiary (it instead benefits the trustee).  The reimbursement agreement provides for the payment of income from the trustee to the company on the understanding (implied from the repetition in each income year and their common control) that the company would pay a dividend to the trustee of a corresponding amount (less the tax paid).

The agreement is designed to achieve a reduction in tax that would otherwise be payable had the trustee simply accumulated the income.

This agreement is not an ordinary commercial dealing because the ownership structure and, particularly, the perpetual circulation of funds, serve no commercial purpose.

There are hybrids of this scheme that involve money flowing from the company via interposed entities, ultimately ending up back in the trust.  These have also been identified by the Tax Office as possibly giving rise to a s 100A determination.

Where there are unpaid distributions to a private company (including those under sub-trust) that have not been converted into a Division 7A loan, and the trustee has made loans or payments to shareholders of the private company (or their associates), these loans or payments may also be subject to Division 7A.

A loan from a trust will be a deemed a dividend where:

• The trust has made a distribution to a company;

• The trustee has not paid the distribution to the company that is presently entitled to the distribution; and

• The trust makes a loan to company's shareholder or associate;

The loan is deemed to have been made by the company to the company's shareholder or associate and will be subject to the Division 7A rules as discussed above;

Loans will not be deemed dividends if they are repaid or put on a commercial footing before the lodgment day for the trust tax return.

Most trust deeds for discretionary trusts require trustees to make their distribution determination for the year ended 30 June on or before 30 June, or sometimes earlier.  It is essential that trustees make these determinations prior to 30 June or earlier date if required in the trust deed (notwithstanding the requirements of the trust streaming rules discussed below).

The Tax Office has stated it expects there to be evidence of the trustees making determinations in accordance with their trust deeds by the date as stated in the trust deed. 

We suggest that written evidence of the 2018-19 trustee determination of income of the trust (preferably in the form of a trustee resolution) be prepared by 30 June 2019 (or whatever earlier date is required by the trust deed).

Under the trust streaming provisions, trustees are able to stream franked dividends and capital gains to specific beneficiaries, rather than distributing these amounts as part of the general distribution to beneficiaries.

To stream franked dividends and capital gains, the trust deed must not prevent the trustee from streaming these amounts to specific beneficiaries.  The trust accounts must also separately account for the streaming of the capital gains and franked dividends to the specific beneficiaries. 

In addition, the beneficiaries who are to receive these amounts must be specifically entitled to them, and the trustee must record the streamed distributions in the accounts or records of the trust.

The trustees' distribution resolution in favour of the specifically entitled beneficiary would generally be sufficient for this purpose.

Where beneficiaries are streamed franked dividends, this must be recorded by 30 June 2019.  Where beneficiaries are streamed capital gains, this must be recorded by 31 August 2019.  However, where capital gains are included in the 'income of the trust' (accounting / trust law income) the trust deed will usually require the trustee's distribution determination to be made by 30 June 2019 (or earlier).

Where the definition of income in the trust deed includes capital gains and franked dividends, the determination to stream these amounts must be done prior to making the determination to distribute the balance of the trust income.  For example, where the distribution of streamed franked dividends and/or capital gains is in the same resolution as the distribution of the balance of the income of the trust, make sure the distribution of the streamed franked dividends and capital gains is mentioned before the distribution of the other income of the trust.

Trustees of resident discretionary trusts, family trusts and other closely held trusts are reminded that they are required to report new beneficiaries' tax file number (TFN) and certain personal information to the Tax Office.  For 30 June 2019, the TFN report of new beneficiaries must generally be made to the Tax Office by 21 July 2019.

If the beneficiary has not provided their TFN to the trustee, the trustee will have to withhold tax from the distribution. The beneficiary will be entitled to claim a credit on the tax when they lodge their income tax return.

The report of the new beneficiaries' TFNs to the Tax Office must be made by no later than the end of the month after the end of the quarter in which the trustee received the TFN.

The trustee only has to report each TFN once.  Trustees only have to report the TFN for beneficiaries they have not previously reported to the Tax Office. 

Affected beneficiaries include individuals, companies, partnerships and other trusts, except for non-residents and beneficiaries under a legal disability, such as minors (the trustee is generally assessed on distributions to non-residents and beneficiaries under a legal disability).

The Government has introduced a system of reporting for third parties in addition to the existing income tax, BAS and PAYG withholding reporting systems and Annual Investment income reports by investment bodies.

The system requires reports be provided to the Tax Office for:

State and Territory revenue and Land Titles Offices to report all land or leasehold transfers (from 1 July 2016).ASIC, market participants and trustees of trusts with an absolutely entitled beneficiary must report on transactions relating to shares and units of unit trusts (from 1 July 2016).Government Grant Payments (from 1 July 2017).Administrators of payment systems must report on electronic business transactions (from 1 July 2017)

Since 1 July 2014, Australian financial institutions have had to report to the ATO details of the accounts and other investments held by US Citizens.  The ATO then reports that information to the U.S. Internal Revenue under the Foreign Account Tax Compliance Act (FATCA).

From 1 July 2017, this has been extended to all non-resident account holders and investors in Australian financial institutions under the Common Reporting Standard developed by the OECD.  Therefore, from 1 July 2017, financial institutions must report these details to the ATO, which will on-report to the relevant foreign country.  The ATO will also receive such reports of Australian citizens with accounts and investments with foreign financial institutions.   

The definition of financial institutions for this purpose is very wide and, in addition to Banks, it can include: managed funds, private equity groups, investment advisers, brokers, spread-betters, custodians, certain insurance entities, personal investment companies and certain trusts.

From 1 July 2018, employers with more than 20 employees are required to provide real time reports to the Tax Office of salary and wage payments, SGC contributions, ordinary time earnings of employees and PAYG withholding amounts.

From 1 July 2019, this system will extend to all employers.

Reports will be provided to the Tax Office using an approved format.  Most popular software packages are being upgraded to accommodate the new Tax Office requirements.

There will be no change to the due dates for payments of SGC contributions and PAYG withholding remittances, although employers may elect to pay (early) using the new software when they report to the Tax Office.

Superannuation

The rate for superannuation contributions by employers on behalf of their employees under the SGC for the year ended 30 June 2019 is 9.5%. 

Employers must make superannuation guarantee contributions for their employees on a quarterly basis within 28 days after the end of each quarter (September, December, March and June).

Tax Planning Tip

Although the June 2019 quarter SGC does not have to be paid until 28 July 2018, tax deductions for the superannuation contributions will only be available in the 30 June 2019 tax year if the contribution is received by the superannuation fund by 30 June 2019. And don't forget that 30 June 2019 is a Sunday.

ONGOING YEAR END ISSUES

Is the taxpayer eligible to be Small Business Entity i.e. for 2018-19, annual turnover less than $10 million (aggregated with connected entities and affiliates).Benefits of being a small business entity include:

• Small business CGT concessions (subject to a lower turnover threshold);

• Simplified depreciation rules;

• Accelerated write-off of assets;

• Simplified trading stock regime;

• 100% deduction for certain prepaid expenses; and

• Two-year amendment of assessment period.

Consider whether the amount is income or capital - Income and capital gains have different tax timing rules. What is the appropriate method of income recognition for each type of income: cash or accruals? Cash generally for income from personal services, rent, interest, dividends and other income from non- business investments;Accruals generally for trading income or other business income that relies on circulating capital, or staff or equipment to produce income. Consider specific rules to determine when income derived. Consider whether income can be deferred until after 30 June 2019. Alternatively, if a taxpayer is in a tax loss, consider whether they should accelerate income receipt prior to 30 June to recoup losses that may not be available in future years.

Income received in advance may not be derived (and taxed) until the services are provided. Income received in advance should be credited to an unearned income account. This rule will generally not apply if payment is not refundable if services are not provided.Income received in advance must be released to profit when services are provided, or if services are not provided, when it is determined the services will not be provided and no refund is claimed by customer.

Expenses are generally deductible if incurred by 30 June 2019.  This requires a presently existing liability. Provisions are generally not deductible. Some accruals are not deductible. There are specific rules that determine when some expenses are deductible (in particular, see prepayment rules below). Interest paid after business ceases may be deductible.

Incur repairs on or before 30 June 2019 to obtain the deduction in the 2018-19 income year, but they must not be:

• Initial repairs;

• Substantial replacement of an asset;

• Improving an asset.

Donate to deductible charities before 30 June 2019. Ensure the payment is to an endorsed deductible gift recipient (DGR). Donations are not deductible if a benefit is received by the donor, unless the contribution was made at eligible fundraising event for a DGR and contribution is more than $150:

• -Deduction will be reduced by value of any benefits received at the event.

• GST inclusive value of benefits received must not exceed lesser of 20% of contribution and $150.

Review bad debts before 30 June 2019. Remember the rules for deducting bad debts.

Write-off bad debts before year end to get deduction in that year (provision for doubtful debts not deductible) .

Bad debts may not be deductible if there has been a change in ownership or control of a company or trust (unless company passes the same business test).

Consider an appropriate valuation method – you can choose cost, market selling value or replacement price.

Identify any obsolete stock – special valuation rule.

Scrap unwanted stock by 30 June 2019.

If you are a small business entity, stock valuation is not required if the difference between opening and estimated closing value of trading stock for the year is $5,000 or less.

Losses from businesses carried on by individuals (or partnerships which have individuals as partners) are quarantined and deductible only against income from that business, or a related business unless the tests below are met. 

For individuals with adjusted taxable income less than $250,000, at least one of these tests must be met:

• Assessable income from the business of $20,000 or more;

• Profit from the business in 3 out of the 5 previous years, including the current year;

• Real property of $500,000 or more, or other assets of $100,000 or more used in the business; or

• The Commissioner exercises his discretion.

For individuals with adjusted taxable income in excess of $250,000, you must rely on the Commissioner's discretion (you will have losses quarantined unless they can satisfy the Commissioner the loss was the result of unusual circumstances beyond the control of the taxpayer or because of the nature of the business).

Home office expenses may be deductible where you carry on a business or employment activities at home. Portion of interest, rent and insurance are not deductible unless the taxpayer is carrying on business from home and the area is separate and distinguished from private living areas. If carrying on business from home, deductibility of interest, rent etc. may be determined by the space occupied by the home office, as well as extent the space is used for income producing purposes.

Converting the spare room is not sufficient to be classified as a home office. Power, heating and depreciation can be claimed at a flat rate established by the Tax Office even if the room is not exclusively set aside for a home office. If an office is provided by the employer, working from home as a convenient place to do part of the work may not be sufficient to claim home office expenses. There have been a number of recent Tribunal cases looking at the deductibility of home office costs.  This issue has been identified by the Tax Office as a risk area that may be subject to increased audit activity.

A measure that is in only its second year of operation, and therefore should not be forgotten, is that, from 1 July 2017, taxpayers can no longer claim travel expenses related to inspecting, maintaining or collecting rent for a residential rental property, unless they are an excluded entity.

Rental property deductions are a red flag area for the ATO and it has warned that it will double the number of audits scrutinising such deductions this year. The ATO says that a random sample of returns with rental deductions found that 9 out of 10 contained an error.

The ATO said it expects to more than double the number of in-depth audits this year to 4,500, with a specific focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing.

If an income-producing asset, such as an investment property, is damaged or destroyed, the taxpayer will need to work out the correct tax treatment of insurance payouts they receive and their costs in rebuilding, repairing or replacing the assets.

If claiming actual expenses, check the logbook is current and that logbook details are correct. Ensure year-end odometer readings are taken. Ensure all relevant receipts have been kept.

If you are seeking to claim deductions for employment-related expenditure, you should be aware of an increase in audit activity by the Tax Office in relation to personal employment-related deductions.

When you are claiming these deductions, you should ensure:

• You are actually entitled to claim the deduction (is the amount deductible?).

• You can substantiate the expenditure they are seeking to deduct (does the taxpayer have the appropriate receipts, tax invoices, diaries etc.

• Have you restricted your deduction to the business/employment related portion of the deduction (have you excluded the private/non-deductible amounts and can you substantiate business/employment use)?

If expenses are not subject to the prepayment rules, prepay deductible expenditure by 30 June 2019. The prepayment rules spread a pro-rated deduction over more than one year, where the expenditure provides benefits after end of the current income year. The prepayment rules do not apply to excluded expenditure, which includes:

• Salary;

• Amounts required to be paid by law or a court; and

• Expenditure under $1,000.

Small business entity taxpayers and non-business individuals are allowed prepayments in the year incurred if the benefit does not extend beyond 12 months.

The prepaid investment expenses rules apply to all taxpayers. There is an exception for interest expenditure on:

• Real estate investments;

• Shares in listed companies; and

• Units in widely held unit trust (at least 300 beneficiaries).

Deductions for prepayments of managed investments are spread over the service period if:

• Expenses of investment exceed the income of the investment for that year;

• The taxpayer does not have day-to-day control over investment;

• There is more than one investor in same capacity or a manager manages similar arrangements.

Audit accruals are not deductible unless the audit contract creates a presently existing liability before 30 June 2019 (subject to the prepayment rules)

Businesses in building and construction are required to record payments to contractors and report these payments to the Tax Office. 

From 1 July 2018, businesses engaged in the courier or cleaning industries were also required to make these reports. 

From 1 July 2019, the rules will extend to businesses engaged in IT, road (freight) transport, and security industries.

The annual report is due to be lodged by 21 July 2019.

Some of the following super fund issues require advice from a qualified financial adviser:

Employee superannuation guarantee quarterly contributions are required by 28 July 2019;

• Ensure at least the minimum pension payments have been made for those in pension phase;

• Before making any contributions prior to year-end, ensure awareness of the relevant contribution caps;

• Make sure you takes into account contributions already made and ensure contributions made for the year do not exceed the concessional and non-concessional contribution limits.

• Ensure that contributions made near the end of the year are actually received by the fund by 30 June to ensure deductibility [remember that 30 June 2019 is a Sunday].

• Review salary sacrifice arrangements, especially if the taxpayer has more than one employer, to ensure they do not breach their concessional cap in total.

Employers need to ensure they make super contributions for all eligible employees, including certain independent contractors for Superannuation Guarantee Charge ('SGC') purposes.

Under SGC, 'employee' includes individuals who are employees in the ordinary sense (PAYG) and independent contractors engaged under a contract primarily for the provision of labour.

Where contractors are engaged, the contracts should be reviewed to determine whether the individuals are treated as employees for SGC purposes.

Conduct shareholders' meetings before 30 June 2019 to approve directors' fees and bonuses in order to receive deductions for the 2018-19 year. Ensure arrangements for employee bonuses based on 2018-19 results are in place before 30 June 2019 in order to receive the deduction for the 2018-19 year. Ensure employee salary packages that include fringe benefits and/or additional employer super contributions are reviewed and in place before the sacrificed salary is earned by the employee.

Employers are required to report (on PAYG payment summaries) reportable super contributions. These are contributions in excess of the amount required under the SGC (industrial award or law where the amount exceeds the SGC amount) where the employee influenced the additional contribution (salary sacrifice). Contributions out of post-tax salary are not included.

Check to ensure companies and trusts seeking to claim a deduction for current year or prior year losses satisfy the company loss and trust loss rules by 30 June. Don't forget that a new "similar business test" now applies for income years starting on or after 1 July 2015. Like the same business test, the focus of the similar business test is on the identity of the business. It is not sufficient for the current business to be of a similar "kind" or "type" to the former business. For example, it is not enough to say that the former business was in the hospitality industry and the current business is in the hospitality industry. Instead, the test looks at all of the commercial operations and activities of the former business and compares them with all the commercial operations and activities of the current business to work out if the businesses are "similar".

Where a debt owed by the taxpayer is released prior to 30 June, ensure there are no adverse consequences from the application of the commercial debt forgiveness rules. These rules operate where a debt is released and interest on the debt is deductible, or if the debt is interest free, interest would have been deductible if interest was charged. The beneficiary of the release may forfeit tax losses, future deductible amounts and/or CGT cost bases. In certain circumstances, there may be advantages in deferring the forgiveness until the following tax year.  Where consideration is being given to releasing debts, the optimal timing of the release should be considered.

Ensure the promoter has obtained a product ruling and operated the scheme in accordance with the product ruling. Consider if investment is the subject of a Tax Office Taxpayer Alert. Consider impact of the general anti-avoidance rules and integrity rules. The Tax Office has stated schemes should be considered in the light of these warning signs:

• Arrangement contrived or artificial;

• Limited or non-recourse funding;

• Minimal cash outlay;

• In-built exit strategies;

• High management fees or promoters' commission;Arrangement not economically viable without tax benefit;

• The arrangement has not been independently assessed for economic viability; and

• There are prepayments involved (these may not be fully deductible in current year).

Where CGT assets will be realised for a gain, consider delaying making the contract for sale until after 30 June unless the taxpayer has losses that may be lost because of the loss integrity measures. Caution is required if capital losses are crystallised to offset against capital gains just before 30 June 2019 as this may result in the loss being denied if the taxpayer continues to have effective control of the loss assets, or the assets are replaced with substantially identical assets (wash sales). Timing of disposal under a contract for CGT purposes is generally the date of making the contract. If assets are held for less than 12 months by individuals, trusts or super funds that are eligible for the CGT discount, consider delaying sale until 12 months has passed.Take care if using options to defer the date of sale of an asset to pass the 12-month rule for CGT discount or to delay CGT event until the next year, as certain options may not be effective for these purposes. Recoup capital losses against indexed capital gains before discounted gains.

The concessions are:

• 15-year exemption,active asset reduction,

• retirement exemption, and

• small business rollover.

To qualify for the basic concessions, the you must either pass the $6 million net asset value test, or be a small business entity with an aggregate turnover of less than $2 million; and the assets must satisfy the active asset test used in the relevant business. To qualify for the 15-year exemption, the you must also be retiring or permanently incapacitated and assets must have been held for at least 15 years. To qualify for retirement exemption, if you are less than 55, the exempt amount must be contributed to a super fund. If a trust or company, special rules determine if the entity can access the concessions. If you sell shares in a company or interests in a trust which conducts a business, there are rules to determine whether the sale qualifies for the concessions. There are special rules where an asset owned by one entity is used in a business by a related entity. Also, consider the small business Restructure rollover relief that applied from 1 July 2016. Be aware of the amendments to the basic conditions where the asset being sold is a share in a company or an interest in a trust.  The amendments took effect from 1 July 2017.

• Scrap all obsolete items by 30 June 2019 to claim undepreciated cost.

• Consider reassessing the effective life if the asset has excessive use.

• Balancing adjustment on disposal – excess assessable or deficit deductible – rollover is available.

• Consider delaying disposal of items for a profit until after 30 June and bringing forward disposal of items for a loss to before 1 July.

• Plant costing less than $1,000 - option to allocate assets to a low value pool:

1. Depreciated at diminishing rate value of 37.5%;

2. First year rate 18.7% diminishing value; and

3. New low value assets must go into low value pool.

• The replacement cost of items costing less than $100 each can be deducted in the conduct of a business where the items have a short life and may be subject to breakage or loss .

Small businesses can claim an immediate deduction for assets they start to use or install ready for use, subject to the new asset costs thresholds.

A small number of assets are not eligible for the immediate write-off, including horticultural plants and in-house software allocated to a software development pool. In most cases, specific depreciation rules apply to these assets.

Assets valued in excess of the asset write-off thresholds may be placed in the small business depreciation pool and depreciated at 15% in the first year and 30% in subsequent years.

The pool can be immediately deducted if the balance falls below the relevant thresholds over the period (including existing pools).

Software mainly used as a business tool rather than for sale (in-house software) is depreciated over 4 years if acquired before 1 July 2015 and over 5 years if acquired after that date.

Immediate deduction for items less than $300 (non-business taxpayers) for:

• Income-producing assets used predominantly for non-business, e.g. tools of trade or briefcase, or small items of furniture in rental property;

• Not part of set of assets costing more than $300; and

• Not substantially identical to other assets which in total cost more than $300.

If you, or an entity you work for (personal services entity), receives income for the reward for personal efforts or skills (e.g. consultants), the PSI rules may limit the deductions that you or the personal services entity (PSE) may be entitled to claim, and the you may be taxed on the PSI received by the PSE.The rules do not apply to a personal services business (PSB) if the you or the PSE:

• Pass the results test (engaged to produce a result); or

• Do not receive more than 80% or more of PSI from one source and pass one of the PSB tests:

(i) Unrelated clients test;

(ii) Employment test; or

(iii) Business premises test.

Where more than 80% of the PSI is derived from a single client and the taxpayer does not pass the results test, they may apply for Tax Office discretion to be classified as a PSB.

If the accounts close before or after 30 June, a tax adjustment may be required unless the taxpayer has an approved substituted accounting period.

Consider paying a redundancy or long service leave to employees - must be arm's length if paid to associate. Defer retirement payment beyond 30 June if employee will be on a lower marginal rate in the following year. Consider whether small business concessions, rollovers, or super contributions will still be available. Consider whether expenses incurred after a business ceases will still be deductible.

Project costs can be pooled and deducted over the life of project using diminishing value. The costs include:

• upgrade community infrastructure;

• site preparation for depreciating asset;

• feasibility studies; environmental assessment;

• obtaining information associated with project. 

Mining and transport project capital expenditure not otherwise deductible may be amortised over project life.

Other costs that are not otherwise deductible, not included in the CGT cost base of an asset, nor included in the depreciable cost of an asset, may be deductible over 5 years – they must be directly related to a business that is, was or proposed to be carried on, for taxable purposes (blackhole expenditure).

Review all shares, loans and other financial instruments used to raise finance to determine whether they are debt or equity. This may include traditional non-debt or equity interests (contracts with remuneration contingent on profit are considered financing arrangements). Closely associated debt and equity transactions may be combined and treated as a whole as debt or equity. Year-end actions to consider for debt/equity rules:

• Consider whether payments on instruments are deductible debt deductions (interest) or non-deductible dividends.

• A non-share capital account needs to be established if instruments other than membership interests (shares) issued by the company, which are treated as equity.

• At-call loans made on or after 1 July 2005 to a company from a connected entity may be equity.  Companies with a turnover of less than $20 million are exempted from this rule.

Consider whether thin capitalisation rules apply to reduce deductions for interest and debt deductions if the taxpayer:

• has a foreign investment;

• has a foreign owner; or

• is a non-resident investor.

Thin capitalisation applies to all debt deductions, not just related foreign party debt deductions (includes unrelated Australian or foreign debt).

If the entity's debt exceeds maximum allowable debt, a proportionate amount of the entity's debt deductions may be disallowed.Consider whether the de minimis rules apply:

• Interest amounts less than $2,000,000; or

• Foreign assets constitute 10% or less of the taxpayer's combined total assets (applies to outward investors that are not also inward investors).

Year-end steps to meet thin capitalisation at 30 June:

• Review all entities to ascertain whether they are caught by the definitions of inward or outward investing entity;

• Calculate value of assets, liabilities and equity to determine maximum debt levels;

• Valuation must comply with relevant accounting standards;

• Identify and value assets.  If possible, consider revaluing upwards, to maximise the asset base;

• Identify and value liabilities with a view to revaluing them downwards;

• Review hybrid debt/equity instruments to determine whether they are debt or equity;

• Obtain reasonable valuation from a professional valuer as Commissioner can substitute values if assets are overvalued or liabilities undervalued.

For companies paying less than 100% franked dividends, benchmark franking percentage rules apply.

The franking percentage chosen for the first frankable dividend paid in a franking period establishes the benchmark percentage.

The franking period is usually the income year for private companies and 6 months for public companies.

All frankable dividends paid during the franking period must be franked in accordance with the benchmark percentage.

Companies should determine whether a franking account is in deficit and whether they are liable for Franking Deficit Tax (FDT), payable by 31 July 2019 for year ended 30 June 2019.

Where the franking deficit exceeds 10% of the franking credits for the company in the year, the company's entitlement to a tax offset for FDT is reduced by 30%. 

If shares were acquired after 1 July 1997 and are not held at risk for at least 45 full days, the franking offset may not be available (except for individuals whose franking offset is less than $5,000).

If shares were acquired by a trust after 31 December 1997, both the trustee and the beneficiary have to pass the 45-day holding period rule in order to obtain the benefit of franking credits. 

Trust beneficiaries that have a vested and indefeasible interest in the shares or a fixed interest in the corpus on which the dividends were paid will pass the 45-day holding period rule if the trustee does. 

Beneficiaries of a non-fixed trust (e.g. discretionary trust) will not pass the 45-day rule unless a family trust election is made, or the Commissioner exercises his discretion to deem the trust to be a fixed trust, or the beneficiary is an individual whose franking offset is less than $5,000.

As noted above, the changes to the small business company income tax rate affect the imputation rules.

Specifically, the maximum franking amount (amount of franking credits that can be attached to a fully franked dividend) will be either 30% or the reduced 27.5%. Refer to earlier discussion regarding the calculation of the franking rate.

Where the company has a 27.5% franking rate, its maximum franking amount will be lower than if its franking rate was 30%.  This means the company will not be able to provide shareholders with as many franking credits on a fully franked dividend than it could if it had a 30% franking rate.

Companies will need to consider their turnover levels prior to 30 June to determine whether they will suffer a lower franking rate in future tax years. 

Companies that are impacted by a changing rate may seek to pay higher fully franked dividends prior to 30 June to free up excess franking credits.

If the taxpayer is a company with 100% owned subsidiary companies, partnerships or trusts, consider making a consolidation election before lodging the head company's first consolidated tax return.

Company groups have to consolidate to be able to:

• Transfer losses between members;

• Pay unfranked dividends between members without paying income tax; and

• Rollover assets between members without paying CGT or income tax.

There are various valuations and calculations that need to be done and documented in calculating the allocated cost of the entities joining or leaving a consolidated group – ensure these calculations and documents are finalised before the lodgment of the group's relevant tax returns.

Please note, this is not a comprehensive checklist. Before acting on any of the information above you need to consider your individual circumstances. Make sure you consult us before taking action.