Tax Updates

Given that the tax year for 2010 is coming to a close, it is always sensible to consider what steps you could be taking to identify that you are MAXIMISING YOUR TAX BENEFITS, ensuring your ASSET PROTECTION STRUCTURES ARE WORKING APPROPRIATELY, and checking that your CURRENT STRUCTURES ARE UP-TO-DATE.

To assist with this process, we have provided below a list of the things you should be considering prior to 31 March 2010 so that everything is in place before the end of the financial year.

You can also read our following pages:

• Key Dates: This page enlists the key dates of year to file your GST, Income Tax etc

• Tax Facts: This page gives you more information on Tax related information.

There are different considerations depending on what your current circumstances are (and some of you may need more specialised advice), but generally you will fit into one of the following three categories; INDIVIDUALS, TRUSTEES OF FAMILY OR INVESTMENT TRUSTS, or BUSINESS/COMPANY OWNER OPERATORS.

These different categories are discussed below.

1. INDIVIDUALS

2. TRUSTEES OF FAMILY OR INVESTMENT TRUSTS

3. BUSINESS/COMPANY OWNER OPERATORS

INDIVIDUALS

For individuals earning salary or wages, there are probably two main considerations you need to make.

Special Tax Code Declarations

For those of you utilising special tax codes in order to obtain any tax loss benefits you may be entitled to from investment properties, LAQC's or businesses, you should be preparing to file new declarations for the coming 2011 financial year. Given that the Government is in the throws of making potential changes to the taxation of property investments, it would sensible for those of you utilising special tax codes to consider whether you include the normal claims you make for depreciation of rental properties in the calculation. This is because it appears more likely than not that the Government may be removing the ability to claim the same "generous" depreciation claims that have been available in the past, in the next financial year. If they do remove such claims, it would be preferable that those have not been included in your special tax code calculations , so that you are not faced with penalties for use of money interest or over-estimating losses.

Other Income Earned

Now is also a good time to be considering whether you are likely to receive any income distributions from trusts, or shareholder salaries from companies you have an interest in, for the 2010 (current) tax year. If you are likely to receive such income for the year ended 31 March 2010, then you will need to include those in your tax returns, and it could increase the amount of tax you should have paid for the year. This should be taken into account to determine whether you should make voluntary provisional tax payments now, to try and reduce any penalties or use-of-money interest that may apply to underpayments of personal tax.

These considerations are also important if you are likely to earn any dividend income, as the normal imputation credits available on such income are 30% tax, whereas your top personal rate could be 38% (creating a potential tax shortfall of 8% on such dividend income).

TRUSTEES OF FAMILY OR INVESTMENT TRUSTS:

For those of you who have interests in trusts, whether they be family trusts or investment/trading trusts, you should consider the following:

Inter-Entity Interest Charges

For people who have trusts and investment companies linked by way of loan facilities or credit-line agreements, now is an important time to decide whether interest should be demanded on such loans. Most inter-entity loan documentation will have what are known as Marshall clauses which are clauses allowing the lender to demand interest each year based on the money lent. Where a trust has been used to lend money borrowed against a family home to an investment company for rental property purposes, charging interest on such loans can provide increased asset protection for your structure and also additional tax benefits personally. This is because interest charged by the trust will provide more wealth/value to the trust while at the same time generating additional tax losses for the rental structure. This achieves the best of both worlds - asset protection and personal tax minimisation.

Private versus Business/Investment Debt

The end of the tax year is also a sensible time to review your current debt position to check what levels of debt may be private (with non-deductible interest) versus business/investment (with tax deductible debt). It is always wise to try and have your debt working for you, rather than not working at all. Remember, for every $100 of interest you can get a tax deduction for, that could equate to $38 in your pocket.

Trust Distributions

If you manage a trust which derives income, whether it be through investments or simply from charging interest on inter-entity loans (such as those discussed above) it is worthwhile considering what distributions will be made for the tax year. While the trustees of a trust have a six-month window within which to make such decisions, it is often sensible to make them earlier rather than later, given they may impact personal provisional tax obligations for the 2011 year, and also cash flow decisions for the trust.

Trustees can distribute income earned by the trust for the tax year to beneficiaries of the trust, and provided they are 16 years old or over, and have low incomes personally, that income could be taxed at the beneficiary's lowest marginal tax rate. This could provide major savings in tax, given that the current trustee rate of tax is 33%! These types of distributions could also be utilised to pay for specific expenses for children, especially educational costs, etc.

Gifting

As an annual reminder, please check whether your trust's gifting programme is still being undertaken. If not, this should be rectified as soon as possible to avoid unnecessary prolonging of the overall programme. It is vitally important you are keeping up with the minimum gifting of $27,000 per person per year, so that the trust is protecting your assets sooner rather than later. Basically, a trust is only as good as its gifting programme, so careful attention needs to be given to the gifting plan.

Updated Documents

While you are reviewing your current financial affairs it also makes sense to look through your current trust deed and personal wills to make sure that things are still appropriate for your changing circumstances. Are the beneficiaries listed in your trust still appropriate? Does your will cover off all the gifts/bequests you wish to make on death? Are your executors still valid? Do you have the correct people listed as taking control of your trust if something happens to you? Is your remaining gifting programme on your trust covered off in your will?

BUSINESS/COMPANY OWNER OPERATORS

If you are a business owner or company shareholder/operator the following are important items to consider for the end of the financial year. These decisions effectively revolve around the timing of expenses and income. For those of you wanting to boost the level of profits shown, then you would prefer to reduce the level of expenses as best you can and book as much revenue as possible at the end of the financial year. For those of you wanting to reduce the profits for the year, then this would mean ensuring costs are incurred in this financial year and income is deferred (where possible) to the 2011 tax year. The details below are based on those trying to reduce the overall annual profit, but the reverse would apply to those wanting to show better profits for 2010.

Bad Debts

If your business has already identified what debts are likely to be un-recoverable, now is the best time to write those off. The bad debts actually written off are deductible to you in the 2010 year, assuming that they have been recorded as income already.

If it ends up that you do actually recover the debt in the next financial year, that will simply be income derived in 2011, so the write-off is effectively reversed in the next year.

Claiming Depreciation

You should do a simple review to make sure that all valid depreciation claims are being made on assets used in the business or investment properties owned in LAQC's. If you have claimed depreciation on business assets in the past you are required to continue to claim it, so doing so is important.

For people with new assets bought into the business in the current financial year, now is the time for making the decision as to whether to depreciate or not. Remember, by depreciating an asset you will be achieving a current tax break, but this can be simply a timing difference if a depreciation-clawback arises when you ultimately sell that same asset. This often happens with assets that are appreciating rather than depreciating!

Booking Expenses Now

If you are wanting to reduce your level of profit in the 2010 tax year, then now is the time to be incurring those expenses that you have possibly been putting off. If they are expenses you would be incurring very soon anyway, then by incurring them in March rather than April or May, you will get the tax deductibility of them in this financial year.

Deferring Income to 2011 tax year

If possible, you should also consider whether you can defer some of your income until next financial year, i.e. 1 April 2010 onwards. This could be extremely sensible if you have major projects that you can bill in the 2011 year rather than now. Obviously cash flow requirements often have a bearing on this, but the more income you can book into 2011 rather than in March, the lower your profit will be for this financial year.

Stock-takes

Another action that may identify deductible expenses for you at this time of the financial year is the undertaking of a stock take. This could show that you have lost stock or that there are obsolete items that may be able to be written off for tax purposes in this financial year.

Staff bonuses

If possible, you should also be looking into whether you can pay staff annual bonuses that may be due, in March rather than April. There may be some calculation issues, but if you already know what bonuses, if any, you are going to be paying, doing so now will provide extra expenses for the 31 March 2010 year. Once again, cash flow considerations may need to be taken into account.

Clearing Out Current Account Balances

If you run your business with large current accounts owing to you as shareholders, it is sensible that these be cleared out as best possible, or at least assigned to your trust structure for asset protection purposes. This is sensible for two reasons:
(1) Borrowing funds in your company to pay out a personal current account can be a good way to retire private debt and make your debt work for you;
(2) Assigning current accounts to your trust can ensure that the trust's wealth is growing rather than your personal wealth - a key aspect to asset protection strategies.
If you fall into the second category it is vitally important that you check the existence of, or implement a security interest between your trust and your company, so that your trust is a secured creditor of your business. This adds even more weight to your asset protection strategy.

Declaring Dividends

You may also want to consider declaring dividends from your company if you have retained earnings and imputation credits available. This can be extremely important to bolster your over-all asset protection strategy, especially if you have your business company's shares owned by your trust structure. It can also be a good way to utilise imputation credit balances that may be accumulating to large extents. These are at risk to loss of continuity issues if you decided to sell shares to other investors, or if you decided to sell shares to one of your other entities, i.e. your investment trust.

Declaring dividends in this financial year may also be sensible if your overall personal income levels are low. This is a way to extract value from the company as shareholders at a time when the impact on your personal income position can be minimised. This is because an imputed dividend will have 30% tax credits attached to it, thus providing some advantages to personal shareholders whose income is lower in the current financial year in comparison to other years.