Maximising Your Deductions

Business Meeting NotesBusiness taxpayers

  • Taxpayers should review all outstanding debts prior to year-end to determine whether there are any debtors who may be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, the taxpayer could consider writing off the balance as bad debt.
  • The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the “continuity of ownership” test before deducting the prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the “same business” test.
  • A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.
  • Small business entities are entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset, subject to conditions.
  • The self-employed and other eligible persons are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the 10% rule.

Non-business taxpayers

  • Non-business taxpayers are entitled to an immediate deduction for assets used predominantly to produce assessable income and that cost $300 or less, subject to conditions.
  • The self-employed and other eligible persons are entitled to a deduction for personal superannuation contributions, subject to meeting conditions such as the 10% rule.

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TECHNICAL SUMMARY

Maximising deductions

Deductions are divided into general deductions and specific deductions. General deductions are allowable under s 8-1 of ITAA 1997, whereas specific deductions are those provided for by other sections of ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936). If an item of expenditure would be a deduction under more than one section, it is deductible under the provision that is most appropriate.

Meaning of “incurred”

In Taxation Ruling TR 97/7, the Commissioner outlines his view on the meaning of “incurred” for the purposes of s 8-1 of ITAA 1997. The following general rules assist in most cases in defining whether and when an outgoing has been incurred:

(a) a taxpayer need not actually have paid any money to have incurred an outgoing, provided the taxpayer is definitively committed in the year of income. There must be a presently existing liability to pay a pecuniary sum;

(b) a taxpayer may have a presently existing liability notwithstanding that the liability may be defeasible by others;

(c) a taxpayer may have a presently existing liability even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation;

(d) whether there is a presently existing liability is a legal question, to be determined in each case having regard to the circumstances under which the liability is claimed to arise; and

(e) if a presently existing liability is absent, an outgoing is incurred when the money is paid.

The phrase “presently existing liability” means that a taxpayer is definitively committed (or completely subjected) to the outgoing, ie the liability is more than impending, threatened or expected.

An outgoing is still incurred even if the amount cannot be quantified precisely, provided it is capable of approximate calculation based on probabilities.

TIP: An outgoing may be incurred in one income year even if the liability is not discharged until a later year. Therefore, a taxpayer can claim a deduction for the outgoing.

Bad debts

A debt that is written off as “bad” in an income year is an allowable deduction under s 25-35 of ITAA 1997, provided:

  • the amount owed was either previously brought to account as assessable income in the current or a former income year or lent in the ordinary course of a money-lending business of the taxpayer;
  • there is a bad debt in existence at the time of writing-off;
  • the debt is bad; and
  • the debt is written off as bad during the income year in which the deduction is claimed.

In Taxation Ruling TR 92/18, the ATO sets out a list of circumstances in which a debt may be considered to have become bad. These circumstances may include the disappearance of a debtor leaving little or no assets out of which the debt may be satisfied, or a corporate debtor going into liquidation or receivership with insufficient funds to pay the debt.

Before a debt can be written off as “bad”, a taxpayer must have taken appropriate steps in an attempt to recover the debt. In TR 92/18, the ATO lists the steps to be taken to establish that a debt is bad. These include attempting to contact the debtor, issuing reminder notices and taking more formal measures.

It is important to note that while the factors listed in TR 92/18 are indicative of the circumstances in which a debt is considered bad, the question of whether the debt is bad is ultimately one of fact and will depend on all the facts and circumstances surrounding the debt.

TIP: Taxpayers should review all outstanding debts prior to year-end to determine if there are any potential debtors who will be unable to pay their bills. Once a taxpayer has done everything in their power to seek repayment of the debt, the taxpayer could consider writing off the balance as bad debt. Ensuring bad debts are dealt with prior to year-end is crucial as a deduction is only allowable in the year in which the bad debt is written off.

TIP: If a bad debt is not deductible under s 25-35, it may be deductible under s 8-1.

TIP: A bad debt does not need to be written off in the account books of a taxpayer. In the case of a company, the requirements of s 25-35 will still be satisfied in the following circumstances:

  • a board meeting authorises the writing-off of a debt, and there is a physical record of the written
    particulars of the debt and board’s decision before year-end, but the writing-off of the debt in the taxpayer’s books of account occurs subsequent to year-end; or
  • there is a written recommendation by the financial controller to write off a debt, which is agreed to in writing by the managing director prior to year-end, followed by a physical writing-off in the books of account subsequent to year-end.

TIP: A bad debt deduction is also available for a partial write-off of a debt, provided the requirements of
s 25-35 are satisfied. One debt may, over a period, be subject to several partial write-offs.

Additional requirements for companies

A company must pass either the “continuity of ownership test” (the primary test to be applied) or the “same business test” in addition to satisfying the requirements of s 25-35.

Companies that have undergone a change in underlying ownership due to a sale of the business during the year will need to pass the “same business test” to claim a deduction for bad debts.

  • STOP: A company cannot claim a deduction for a debt incurred and written off as bad on the last day of an income year.
  • STOP: Consideration must be given to the specific anti-avoidance provisions contained in Subdiv 175-C.
  • STOP: Where, as part of the purchase of a business, the purchaser takes over the vendor’s debts and those debts subsequently become bad, the purchaser is not allowed a bad debt deduction. This is because the debts have not been included in the assessable income of the purchaser, but rather (assuming the vendor is an accruals taxpayer) in the assessable income of the vendor: see Easons Ltd v C of T (NSW) (1932) 2 ATD 211.

Additional requirements for trusts

Special rules apply to deny trusts a deduction for bad debts unless certain strict tests are passed. The applicable tests will depend on the nature of the trust.

Carried forward losses

The deductibility of tax losses carried forward from previous income years will depend on the entity claiming the losses.

Corporate tax entities

The entitlement of corporate tax entities to deductions in respect of prior year losses is subject to certain restrictions. An entity needs to satisfy the continuity of ownership test before deducting the prior year losses. If the continuity of ownership test is failed, the entity may still deduct the loss if it satisfies the same business test.

TIP: A corporate tax entity can choose the amount of prior year losses it wishes to deduct in an income year. That is, the entity can choose to “ignore” the carried forward tax losses and pay tax for the income year to generate franking credits for its distributions.

  • STOP: The government has proposed to repeal the loss carry-back regime. (See Proposed repeal of loss carry-back regime on page 14.)

Other taxpayers

The method for deducting earlier tax losses incurred by other taxpayers is governed by s 36-15 of ITAA 1997. If a taxpayer derives net exempt income for an income year, the carried forward loss will firstly need to be offset against net exempt income before being available for deduction against assessable income.

TIP: It is net exempt income that is offset against any carried forward tax losses, and not exempt income. Net exempt income is defined in s 36-20 of ITAA 1997 and exempt income is defined in s 6-20 of ITAA 1997.

TIP: Try to avoid deriving exempt income in an income year if there are carried forward losses.

Depreciation (capital allowances)

A deduction may be available on the disposal of a depreciating asset if a taxpayer stops using it and expects never to use it again. Therefore, asset registers may need to be reviewed for any assets that fit this category.

The effective life of an asset can be recalculated at any time after the end of the first income year for which depreciation is claimed by a taxpayer, if it is no longer accurate because of changed circumstances relating to the nature of use of the asset. Therefore, consideration may be given to the use of an asset to determine whether its effective life can be recalculated, which may result in an increased or decreased rate of depreciation.

Immediate deduction

Non-business taxpayers

Non-business taxpayers are entitled to an immediate deduction for assets costing $300 or less, provided:

  • the asset is used predominantly to produce assessable income that is not income from carrying on a business;
  • the asset is not part of a set of assets that the taxpayer started to hold in the income year where the total cost of the set of assets exceeds $300; and
  • the total cost of the asset and any other identical, or substantially identical, asset that the taxpayer starts to hold in that income year does not exceed $300.

TIP: If two or more taxpayers jointly own a depreciating asset, a taxpayer is still eligible to claim an outright deduction, provided their interest does not exceed $300 (even if the asset costs more than $300).

Small business entities

A small business entity (see Small business entities on page 16) that chooses to apply the capital allowance rules contained in Div 328 of ITAA 1997 is entitled to an outright deduction for the taxable purpose proportion of the adjustable value of a depreciating asset if:

(i) the asset is a “low-cost asset”; and

(ii) the taxpayer starts to hold the asset when the taxpayer is a small business entity.

A depreciating asset is a “low-cost asset” if its cost as at the end of the income year in which the taxpayer starts to use it, or installs it ready for use, for a taxable purpose is less than $1,000.00. The entity is also entitled to an immediate deduction for any addition to a low-cost asset, provided the cost of the addition is less than $1,000.00. If an asset costs more than $1,000.00, the entity is required to pool the asset in the general small business depreciation pool. (See Pooling below.)

Note the that government has recently increased the Immediate Write-Off threshold to $20,000.00 for the items acquired after 12 May 2015

Business taxpayers

For business taxpayers that are not small business entities, all capital items must be written off over their effective lives under Div 40 of ITAA 1997, regardless of the cost (including low-value items). However, the ATO has adopted an administrative practice allowing an outright deduction for low-cost capital assets in certain cases (see ATO Practice Statement Law Administration PS LA 2003/8).

Broadly, an expenditure of $100 or less (inclusive of GST) incurred by a taxpayer to acquire a capital asset in the ordinary course of carrying on a business will be assumed to be revenue in nature and therefore deductible in the year of the expenditure. It is important to note that because the threshold includes GST, the threshold is effectively $90.91 for a business registered for GST.

Note that the administrative practice does not apply to expenditure incurred in establishing a business or building up a significant stockpile of assets, nor to a variety of assets, including those held under a lease, hire purchase arrangement or similar agreement, certain assets included in an assets register, trading stock, spare parts and assets that are part of another composite asset.

Pooling

Certain depreciating assets can be pooled, with the result that the decline in value is calculated for the pool instead of the individual assets.

From the 2014–2015 year, there is one general small business depreciation pool for a small business entity (ie the “general pool” and the “long-life pool” are consolidated). A taxpayer may write off the total balance of the pool when it falls below $1,000. Note that provisions allow for the General Pool balance less than $20,000 to be written off in certain circumstances.

For other taxpayers, there is the option of pooling “low-cost” and “low-value” assets to a low-value pool. A “low-cost” asset is a depreciating asset that costs less than $1,000. A “low-value” asset is a depreciating asset that has been depreciated using the diminishing value method, has an opening adjustable value of less than $1,000 in an income year, and is not a “low-cost” asset. If a taxpayer sets up a low-value pool, all low-cost assets must be allocated to the pool. However, low-value assets do not need to be allocated to the pool.

Category of taxpayer Assets allocated to pool during year are depreciated at: Assets allocated to pool in a previous income year are depreciated at:
Small business entity – General pool (from 2012–2013) 15% 30%
Other taxpayers – Low-value pool 18.75% 37.5%

TIP: Taxpayers should review their tax asset registers to identify any low-cost and/or low-value assets that may be pooled to access an accelerated rate of depreciation.

TIP: If two or more taxpayers jointly own a depreciating asset, a taxpayer can set up a low-value pool to take advantage of the accelerated rate of depreciation even though the asset costs more than $1,000, provided the taxpayer’s interest is less than $1,000.

“Blackhole” expenses under section 40-880

Special provisions (s 40-880 of ITAA 1997) provide systematic treatment for certain business expenditure of a capital nature – sometimes termed “blackhole” expenses – incurred on or after 1 July 2005. In Taxation Ruling TR 2011/6, the ATO sets out the Commissioner’s views on the interpretation of the operation and scope of s 40-880. It identifies the key issues that need to be resolved in order to establish entitlement to a deduction under s 40-880.

If capital expenditure is deductible under s 40-880, the deduction is spread over five years in equal proportions (ie 20% of the expenditure each year), commencing with the year in which the expenditure is incurred. Further, if a taxpayer is wound up, the entitlement to deduct any remaining undeducted expenditure is lost for income years after the one in which the taxpayer is wound up: see ATO ID 2009/6.

Donations

Gifts and donations valued at $2 or more (whether cash or property) are deductible under s 30-15 of ITAA 1997 if the rules in Div 30 are satisfied.

TIP: A gift or donation is not deductible under Div 30 unless the taxpayer has written evidence of the gift or donation (eg a receipt from the charity). However, documentary evidence is not required if the gift does not exceed $10 (and if the total of all deductible amounts not exceeding $10 (ie not just deductible gifts) does not exceed $200 for the income year), or if it would be unreasonable to expect the taxpayer to have obtained documentary evidence: s 900-125. An example would be a “bucket donation” to a deductible gift recipient (DGR).

TIP: In order for a gift to be deductible, the giver must not receive a material benefit in return. According to Taxation Ruling TR 2005/13, the giver may still be regarded as having received a material benefit if the value of the benefit to the giver is less than the value of the property transferred. However, the cost of attending a fundraising event or the amount bid at a charity auction may be deductible.

A taxpayer is able to spread a deduction over five years for a gift of money or a gift of property to an eligible charity or Cultural Gifts Program valued by the Commissioner at more than $5,000: Subdiv 30-DB (ss 30-246 to 30-249D).

TIP: A taxpayer must specify in a written election the percentage (if any) to be deducted each year. If a taxpayer anticipates an increase in assessable income in a future year, a taxpayer may consider allocating a greater percentage to that year. However, as a general proposition, try to avoid making donations in a year of losses.

In certain circumstances, a deduction is available under s 30-15 for a gift of trading stock valued at $2 or more, subject to special conditions being met. If the trading stock was purchased during the 12 months before the gift was made, the amount deductible is the lesser of the market value (excluding GST) on the day the gift was made and the purchase price.

Donations to a DGR made under salary-sacrifice arrangements that are prima facie expense payment fringe benefits are exempt benefits: s 148(2A) of the Fringe Benefits Tax Assessment Act 1986. In contrast, donations collected through an employer’s Workplace Giving arrangements are made from an employee’s after-tax income and are not fringe benefits.

Legal expenses

It is difficult to formulate an all-encompassing “rule” as to the deductibility of legal expenses because each expense must be considered on its own merits. However, in accordance with general principles, legal expenses are deductible under s 8-1 if incurred in gaining or producing assessable income, or if necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. In general, the courts have established that if the advantage that is sought to be gained by incurring the legal expenses is of a revenue nature, the expenses will also be of a revenue nature, and if the advantage that is sought is of a capital nature, the expenses will also be of a capital nature.

TIP: The success or failure of legal proceedings has no bearing on the deductibility of expenses incurred in those proceedings.

TIP: Certain legal (or legal-related) expenses (eg obtaining tax advice, preparing leases and discharging mortgages) are specifically deductible under various provisions of ITAA 1997.

TIP: Certain legal costs that are capital in nature (termed “blackhole expenditure”) may be deductible over five years under s 40-880. (See “Blackhole” expenses under section 40-880 on page 6.)

Non-commercial losses

An individual taxpayer should consider whether a loss from their business activity (whether carried on alone or in partnership) will be deferred under the non-commercial loss rules, which are contained in Div 35 of ITAA 1997. This is because the individual’s overall tax position will be impacted when the loss is deferred.

In essence, an individual may only offset a loss arising from a business activity against other income derived in the same income year if the business activity satisfies at least one of the four commerciality tests – the assessable income, profits, real property, or other assets tests. If the individual does not satisfy at least one of the tests, the loss is carried forward and applied in a future income year against assessable income from the particular activity.

TIP: Business activities of a similar kind may be grouped together as one activity. This is not compulsory, although it is likely to benefit the taxpayer. For example, an olive grower who produces and sells olive oil may also start an olive-bottling business. These are similar activities and may be treated as one activity. However, if the olive grower also produces an insecticide for olives and earns royalties from their patent, that activity is of a different kind so would be treated separately.

It is a question of fact and degree whether business activities are of a similar kind. Taxation Ruling TR 2001/14 states that this involves a comparison of the relevant characteristics of each business, eg the location(s) where they are carried on, the type(s) of goods and/or services provided, the market conditions in which those goods and/or services are traded, the type(s) of assets employed in each and any other features affecting the manner in which the activities are conducted. The ruling also states that the broader in nature any business activities are, the more likely it is that they will have similar characteristics. However, note the Administrative Appeals Tribunal’s (AAT) decision in Re Heaney and FCT [2013] AATA 331, in which it was held that the taxpayer’s cattle and sheep farms constituted discrete business activities and not a single farming business.

The Commissioner has the discretion to override the provisions of Div 35. Further, an exemption is available for individuals who carry on a primary production or professional arts business and whose assessable income for the year from other sources (eg salary and wages) does not exceed $40,000.

TIP: The $40,000 threshold excludes net capital gains derived by a taxpayer.

High-income earners

Losses incurred by individuals with an adjusted taxable income of $250,000 or more from non-commercial business activities will be quarantined even if they satisfy the four commerciality tests. The effect of this is that they will not be able to offset excess deductions from non-commercial business activities against their salary, wages or other income.

The “adjusted taxable income” is the sum of an individual’s:

  • taxable income;
  • reportable fringe benefits;
  • reportable superannuation contributions; and
  • total net investment losses.

Any excess deductions from a non-commercial business activity that are subject to Div 35 are to be disregarded in working out the adjusted taxable income of the individual.

While an individual with an adjusted taxable income of $250,000 or more is precluded from accessing the four commerciality tests, they may apply to the Commissioner to exercise his discretion to not apply the non-commercial loss rules where they can satisfy the Commissioner that, based on an objective expectation, the business activity will produce assessable income greater than available deductions within a commercially viable period for the industry concerned.

Prepayments

One of the simplest methods to accelerate deductions is the prepayment of deductible expenses.

TIP: The deductibility of audit fees is dependent on the terms of the audit contract. Taxpayers should consider agreeing to prepay their audit fees under their audit engagement at the start of the audit, in order to claim a deduction for the full expense in the current year. Taxation Ruling IT 2625 considers the deductibility of audit fees.

Expenditure that is deductible under s 8-1 of ITAA 1997 is generally allowable in full in the income year in which it is incurred. However, Subdiv H of Div 3 in Pt III of ITAA 1936 (the “prepayment rules”) modifies the operation of s 8-1 by preventing the immediate deductibility of certain advance (“prepaid”) expenses. Where Subdiv H applies, the prepaid expenditure must be deducted on a straight-line basis over a period of time not exceeding 10 years.

  • STOP: It is important to note that the prepayment rules merely alter the timing of certain deductible amounts. They do not affect the underlying entitlement to the deduction or the amount of the allowable deduction.

Excluded expenditure

Various expenses are specifically excluded from the prepayment rules. In these cases a taxpayer is able to claim an outright deduction. Excluded expenditure includes:

  • expenditure of less than $1,000;
  • expenditure that is required to be made under a court order or by law (eg car registration fees); and
  • expenditure that is for salary or wages.

TIP: If a taxpayer is entitled to an input tax credit in respect of an expenditure, the $1,000 is the GST-exclusive amount. If the taxpayer is not entitled to an input tax credit, the $1,000 is the GST-inclusive amount.

Small business entities and non-business individuals

Small business entities and non-business individuals are able to access the 12-month prepayment rule. If the prepaid expenditure is not excluded expenditure, it is deductible outright in the income year it is incurred, subject to two provisos: the eligible service period must not exceed 12 months, and must end in the expenditure year or the income year immediately following. If the prepayment has an eligible service period of greater than 12 months, the expenditure will be apportioned over the relevant period (on a daily basis) up to a maximum of 10 years. The eligible service period is the period over which the relevant services are to be provided.

Other taxpayers

If the eligible service period covers only one income year, the expenditure will be deductible in that particular year. If the eligible service period covers more than one income year, the expenditure is apportioned (on a daily basis) over those years up to a maximum of 10 years in accordance with this formula:

Expenditure x No. of days of eligible service period in the year of income
Total no. of days of eligible service period

Speculators and losses from shares

Generally, speculators are denied a revenue deduction for any losses arising from the disposal of shares unless a speculator is carrying on a business in relation to the shares.

By way of example, in AAT Case 6297 (1990) 21 ATR 3747, the AAT concluded that a taxpayer’s share activities did not amount to carrying on a business and that, as a result, the taxpayer was not entitled to a deduction for losses arising from the disposal of his shares.

By contrast, in AAT Case (2011) 84 ATR 659, the AAT held that a taxpayer was not a passive investor in relation to share trading activities, and was carrying on a business of share trading for the relevant year. Some of the significant factors in determining whether a person is a share trader include:

  • whether there is an intention to buy and sell at a profit rather than hold for investment;
  • the frequency and volume of transactions;
  • whether the taxpayer is operating to a plan;
  • the setting of budgets and targets and keeping of records;
  • whether the taxpayer maintains an office;
  • whether the share transactions are accounted for on a gross receipts basis; and
  • whether the taxpayer is engaged in another full-time profession.

If the taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not a share trader, indexation or the CGT 50% discount may apply to reduce the capital gain.

Trading stock

The tax treatment of trading stock, which is contained in Div 70 of ITAA 1997, impacts year-end tax planning. This is because a taxpayer is required to either include in or deduct from its assessable income for an income year the difference between the opening and closing value of the trading stock.

Valuation of trading stock

A taxpayer can elect to use the cost, market selling value or replacement value to value each item of trading stock on hand. However, this does not apply to obsolete stock or to certain taxpayers.

There is no requirement to adopt permanently any one of the three methods of value.

TIP: There is no compulsion to use the same method to value all closing stock. A taxpayer can use different methods for different items of trading stock to maximise its deductions or minimise its assessable income.

Small business entities

If a small business entity elects to apply the trading stock concession under Div 328, it is permitted to ignore the difference between the opening and closing value of trading stock if the difference between the opening value of stock on hand and a reasonable estimate of stock on hand at the end of that year does not exceed $5,000. The effect of electing to apply this concession is that the value of the entity’s stock on hand at the beginning of the income year is the same as the value taken into account at the end of the previous income year.

However, a taxpayer could choose to account for changes in the value of trading stock even if the reasonably estimated difference between opening and closing values was less than $5,000.

TIP: Accounting for the difference between the opening and closing stock is a good tax planning method to avoid a large adjustment in the calculation of taxable income in a future year when the benefit of Div 328 is not available, or to claim a deduction in the current year for a reduction in the value of trading stock.

Obsolete stock

A deduction may be available for obsolete stock. Therefore, a taxpayer should review its closing stock to identify whether any obsolete stock exists. In Taxation Ruling TR 93/23, the ATO states that obsolete stock is stock that is either:

  • going out of use, going out of date, becoming unfashionable or becoming outmoded (ie becoming obsolete); or
  • out of use, out of date, unfashionable or outmoded (obsolete stock).

When valuing obsolete stock, a taxpayer does not need to use any of the prescribed methods (ie cost, market value or replacement value). Rather, provided adequate documentation is maintained, the ATO will accept any fair and reasonable value that is calculated taking into account the appropriate factors: see s 70-50 of ITAA 1997.

Repairs and maintenance

A deduction is available for repairs to premises, a part of premises or a depreciating asset (including plant) held or used by a taxpayer solely for the purpose of producing assessable income: see s 25-10(1) of ITAA 1997. If the relevant premises or assets are used or held only partly for income-producing purposes, expenditure on repairs is only deductible to the extent that it is reasonable in the circumstances: see
s 25-10(2).

A common issue that arises is the distinction between restoration of an item to its former condition (which is deductible) and improvement of the item (which is capital and thus not deductible). It is important to understand that the mere fact that different materials from those replaced are used will not of itself cause the work to be classified as an improvement, particularly in circumstances where the previous materials are no longer in current use. If the change is merely incidental to the operation of the repair, the deduction, generally, will be allowed.

Initial repairs, the replacement of the entire item, and improvements are not deductible, but may qualify for a periodic write-off under the capital allowance provisions. In addition, the expenditure may form part of the cost base of an asset for capital gains tax purposes.

TIP: The ATO has stated that if a taxpayer replaces something identifiable as a separate item of capital equipment, the taxpayer has not carried out a repair. Therefore, the taxpayer is required to depreciate the item over its effective life.

TIP: Taxpayers should seek an itemised invoice to separate the costs of work if the work includes both repairs and improvements.

Superannuation contributions

Deductions for employer contributions

Employers are entitled to a tax deduction for contributions made to a complying superannuation fund or a retirement savings account (RSA) for the purpose of providing superannuation benefits for their employees. The contributions are only deductible for the year in which they are made: see s 290-60(3) of ITAA 1997. To maximise the deductions available, employers should ensure that the contributions are paid to their employees’ superannuation funds or RSAs before 30 June.

TIP: Taxation Ruling TR 2010/1 sets out the Commissioner’s views regarding specific rules about deducting superannuation contributions.

TIP: For employees reaching 75 years of age, the contribution must be made by the employer within 28 days after the end of the month in which the employee turns 75. However, the age limit does not apply in respect of a deduction for an amount that is required to be contributed under certain industrial awards, determinations or agreements: s 290-80. From 1 July 2013, an employer is able to deduct the amount of a contribution that reduces the superannuation guarantee charge (SGC) percentage in respect of an employee aged 75 years or over, following the abolition of the superannuation guarantee age limit.

  • STOP: The mere accrual of a superannuation liability or a book entry is not sufficient to qualify for a deduction.

Change to the minimum level of employer support

The prescribed minimum level of superannuation support required of employers is currently legislated to gradually increase to 12% (by 1 July 2019). At the time of writing, the rate for 2013–2014 is legislated at 9.25%, increasing to 9.5% for 2014–2015. The government has proposed to “pause” the rate at 9.25% for 2014–2015 and 2015–2016 so that the rate would not increase to 9.5% until 2016–2017. It would then gradually increase by 0.5% each year until it reached 12% on 1 July 2021 (ie a two-year delay). (See also the Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 – defeated in the Senate at the time of writing.)

  • STOP: This year, the ATO is targeting the management advice and consulting, hairdressing and beauty, and clothing retail industries to ensure they meet their superannuation guarantee obligations. According to ATO Assistant Commissioner Emma Haines, these industries have been identified as being at risk of not meeting their obligations. She said extra effort was being made to help businesses get their superannuation guarantee payments correct before audit activity focusing on these industries starts in July 2014.
  • STOP: In certain cases, a person who describes herself or himself as an “independent contractor” may in fact still be an “employee” for superannuation guarantee purposes in a similar manner as for PAYG purposes and for some of the state payroll tax laws.

Superannuation guarantee charge

The SGC is imposed if an employer does not make sufficient quarterly superannuation contributions for each employee by the relevant quarter’s due date. The SGC is also imposed where the employer pays the contributions after the due date, even if there is no shortfall for the quarter.

Employers who have made a contribution for an employee after the due date for the quarter and who have an outstanding SGC for the employee for that quarter may elect (using the approved form) to use the late payment offset to reduce their SGC liability. (The election is irrevocable.)

However, the late contribution can only be offset against an SGC that relates to the same quarter and to the same employee. The offset cannot be used to reduce the administration component. If an employer has been assessed on its SGC for a quarter, the employer can seek an amendment of the assessment to elect to use the offset. However, the amendment must be made within four years after the employer’s SGC for the quarter became payable.

  • STOP: The SGC and late payment offset are not deductible to an employer. Therefore, the employer still has a strong incentive to continue making its superannuation guarantee quarterly payments on time.
  • STOP: Directors have been made personally liable for their company’s unpaid SGC amounts following the extension of the director penalty regime. The Commissioner can make an “estimate” of the unpaid SGC for a quarter under Div 268 of Sch 1 to the Taxation Administration Act 1953 (TAA) and recover the estimated amount through a director penalty under Div 269 of Sch 1 to TAA. The extension of the director penalty regime to SGC liabilities applies in respect of superannuation guarantee statements due and payable from 28 August 2012.

TIP: The SGC is the only tax that the Commissioner wants employers to avoid paying.

Personal superannuation deductions

The self-employed and other eligible persons are entitled to a deduction for personal superannuation contributions if less than 10% of their total assessable income, reportable fringe benefits and reportable employer superannuation contributions for an income year is attributable to activities that result in the taxpayer being treated as an “employee” for superannuation guarantee purposes.

  • STOP: Income attributable to a taxpayer’s employment activities also includes worker’s compensation payments, unused long service leave and annual leave payments, to the extent they are assessable in the income year: Taxation Ruling TR 2010/1.

The contribution is only deductible for the year in which it is made. The contribution is deductible in full, subject to the restriction that the maximum amount that is deductible is the amount stated in the notice of intention to claim a deduction that is given to the trustee of the relevant superannuation fund. However, excess contributions tax may apply to contributions above the taxpayer’s contributions cap. Note that with effect from 1 July 2013, excess concessional contributions tax has been abolished and a new taxing regime has been introduced. Excess non-concessional contributions tax continues to apply where relevant. (See Excess concessional contributions – new regime from July 2013 on page 20.)

TIP: A deduction for personal superannuation contributions should only be made towards the end of the income year when it is certain that a taxpayer will satisfy the 10% rule (and other eligibility conditions) and will not breach the taxpayer’s concessional contributions limit.

TIP: A taxpayer who has not engaged in an employment activity in the income year in which they make a contribution is not subject to the 10% earnings test. For example, a person receiving worker’s compensation payments (but who is no longer employed) is not subject to the 10% test: see Taxation Ruling TR 2010/1.

TIP: A taxpayer who realised a significant capital gain during the year should evaluate their eligibility to claim a deduction for personal superannuation contributions. If the taxpayer is eligible, they should consider contributing an amount of the capital gain to superannuation, which may reduce the tax payable on the capital gain derived.

Valid notice to claim deduction

In order to be eligible for a deduction for a personal superannuation contribution, the individual must give a notice to the fund trustee or RSA provider of their intention to claim a deduction and must receive an acknowledgment of receipt of the notice: s 290-170 of ITAA 1997. The notice must be given by the time the person lodges their income tax return for the year in which the contribution is made or, if no return has been lodged by the end of the following income year, by the end of that following year.

A notice will not be valid where:

  • the person is no longer a member of the fund (eg because the person’s benefits have been paid to them or they have rolled over their benefits in full to another fund);
  • the trustee no longer holds the contribution;
  • the trustee has commenced an income stream based in whole or part on the contribution; or
  • the taxpayer has made a spouse contributions-splitting application that has not been rejected.

If the member has chosen to roll over a part of the superannuation interest held by a fund, a valid deduction notice is limited to a proportion of the tax-free component of the superannuation interest that remains after the roll-over.

A valid notice cannot be withdrawn or revoked, but it may be varied so as to reduce the amount stated in relation to the contribution (including to nil). A notice of intent to vary a deduction cannot increase the amount to be claimed.

The ATO provides a “Notice of intent to claim or vary a deduction for personal super contributions” form (NAT 71121-06.2012) on its website at www.ato.gov.au/uploadedFiles/Content/SPR/downloads/
spr86434n71121.pdf.

  • STOP: The ATO says it will only accept notices that include all of the mandatory information and the member declaration.
  • STOP: Note that a deduction is not available in respect of any financing costs on a loan connected with a personal superannuation contribution.

Managed investment schemes

Expenses incurred in a managed investment scheme (MIS) are generally deductible. In Hance v FCT (2008) 74 ATR 644, the Full Federal Court allowed two taxpayers deductions relating to their investment in an almond MIS. In that test case, the Full Court concluded that the relevant outgoings of the taxpayers would be incurred as operating expenses in carrying on each taxpayer’s business and that they were deductible pursuant to s 8-1 of ITAA 1997.

TIP: The ATO has issued a number of taxation determinations dealing with various scenarios and whether MIS participants are entitled to the relevant deductions. These include Taxation Determinations TD 2010/7, TD 2010/8, TD 2010/9, TD 2010/9, TD 2010/14 and TD 2010/15. Taxpayers seeking to claim a deduction should ensure that the facts surrounding their circumstances are similar to the examples set out in the taxation determinations.

TIP: It may be advisable to invest only in an investment scheme for which a Product Ruling has been issued by the ATO. However, a Product Ruling is only binding to the extent that the arrangement is implemented as proposed in the application for the ruling. In addition, the ruling does not guarantee the viability of a project, whether charges are reasonable or represent industry norms or whether projected returns will be achieved or are reasonably based.