General year-end tax planning for business- from PwC Australia
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TaxTalk—Insights
www.pwc.com.au
General year-end tax planning for
business
1 June 2015
With 30 June fast approaching, now is the time for companies with a 30 June tax year end to consider
year-end tax planning strategies and issues. Some important issues to consider include:
Thin capitalisation
The thin capitalisation (TC) tax rules have the effect of denying a tax deduction for some or all of the costs
incurred in obtaining or maintaining ‘debt’. Generally, a taxpayer is thinly capitalised where ‘average
adjusted debt’ that gives rise to ‘debt deductions’ (i.e. tax deductions that would be available but for the
TC rules) exceeds the ‘average maximum allowable debt’.
Firstly, some taxpayers may find that due to the increase in the annual de minimus threshold from
$250,000 to $2 million of associate-inclusive debt deductions they no longer need to apply the TC rules
for this income year.
For those taxpayers that remain subject to the TC rules, in many cases, taxpayers will use the average ‘safe
harbour debt amount’ in determining the maximum allowable debt. It is important to note that because of
legislative changes to the calculation of the safe harbor debt amount that apply from 1 July 2014 for a
June balancer, which will generally have the effect of producing a lower safe harbor debt amount than in
prior years, some taxpayers may now need to consider the alternative methods for calculating maximum
allowable debt. These are the arm’s length debt amount and the worldwide debt amount. In the case of the
worldwide debt amount, it is also important to note that commencing with this tax year, the worldwide
debt amount method may be used not only (as in the past) by entities that are solely ‘outward investing’,
but also by entities that are either ‘solely inward investing’, or both outward and inward investing.
As a starting point, before the end of the year, taxpayers should check what their likely TC position will be
at the end of the year. If it is anticipated that adjusted average debt will exceed average maximum
allowable debt, some planning options may be able to be implemented to reduce the adverse
consequences under the TC rules, which will otherwise arise. Possible planning issues for consideration
before year end include repayment of debt from surplus assets, injection of equity, and repatriation of
profits from overseas controlled entities or foreign branches. Each of these and other options need to be
carefully considered before implementation as there are other tax rules that might be inadvertently
triggered (including those in overseas jurisdictions).
Taxpayers may also enhance their TC position by a revaluation of assets where the revaluation complies
with the ‘accounting standards’. Additionally the TC rules allow certain revaluations to be made
notwithstanding that the revaluations are not permitted under the accounting standards. While goodwill
cannot in any circumstance be revalued, it may be possible for other intangibles to be revalued for TC
purposes. It is important to note however that there are prescribed requirements with respect to the
valuations that must be complied with for TC purposes.
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Franking account
Companies should check the balance of the franking account to determine whether the company will have
a liability to pay franking deficit tax (FDT) at year end or have sufficient franking credits to enable the
payment of franked dividends before year end. The possibility of improving the account balance before
year end (such as through the receipt of franked distributions) would need to be considered on a case by
case basis.
Tax losses and net capital losses
Companies need to check whether tax losses and net capital losses are available for utilisation subject to
satisfying either the continuity of ownership test (COT) or the same business test (SBT). If neither test is
satisfied, the losses will not be able to be used. Tax consolidated groups also need to consider the impact
of specific loss utilisation rules including the ‘capital injection rule’ which may apply where there has been
a ‘capital injection’ after entry into consolidation.
Bad debts
The requirements for obtaining a bad debt deduction include that the debt must be bad and must be
written off as such (while the debt still exists) before the end of the year of income. Now is the time to
review debts owing to the company to determine if a bad debt deduction can be obtained by writing the
debt off before year end. Other requirements that need to be considered include satisfying specific COT or
SBT conditions.
Debt forgiveness
If your company has had a debt forgiven during the year, the debt forgiveness rules will need to be
considered as they can result in losses and deductions that would otherwise be available being reduced.
Note that a debt forgiveness is specifically defined in the tax law and includes, for example, an assignment
of a debt (with some exceptions) and the extinguishment of a debt through either a debt for equity swap or
the use of monies subscribed as share capital by a lender to enable the lender’s debt to be repaid.
Depreciating assets
Have you reviewed your asset register to identify ‘depreciating assets’ that may have been scrapped or
which are no longer used or installed ready for use? Generally, the cost of a scrapped depreciating asset,
which has not been claimed as a decline in value deduction (depreciation), can be claimed as a deduction
in the year in which the asset is scrapped. Similarly the undeducted cost of a ‘depreciating asset’ which is
no longer used or installed ready for use may be claimed as a deduction where there is no longer an
intention to again use the asset.
For remaining depreciating assets, have you checked the depreciation rate that is used to claim the
depreciation deduction? Perhaps it would be tax effective for you to self-assess the effective life of certain
assets instead of simply using the rates published by the Commissioner of Taxation. In some cases there is
a requirement for you to self-assess the effective life.
Consideration should be given to the timing of expenditure in relation to ‘in-house software’ as the
Government is proposing to increase the period over which capital expenditure on in-house computer
software can be depreciated from 4 to 5 years with effect from 1 July 2015. This measure is not enacted at
the time of writing.
Small businesses – defined as those with an ‘aggregated turnover’ of less than $2 million - should also
note the impact on the current year’s taxable income of this year’s Federal Budget proposal that will allow
an immediate tax deduction for the cost of a depreciating asset that has a cost of less than $20,000 where
the asset is acquired and held ready for use after 7.30pm (AEST) 12 May 2015. At the time of writing, this
proposal was not enacted.
