End of financial year – Are you ready?

With 30 June 2017 not far away, thoughts turn towards what needs to be done by the end of the financial year. Following the federal budget being handed down, what needs to be done this year and what impacts strategies going forward?

In this article we provide some ideas and tips that might assist with your end of financial year housekeeping. The two (2) areas of focus relative to property are:

1. Housing Affordability Measures
2. Depreciation Deductions

And just for good measure we have also thrown in the following topics:

1. Superannuation Issues
2. Capital Expenditure Write off
3. Company Tax Cuts

Housing Affordability Measures

Contained in the Federal Budget were some housing affordability measures:

• A limited amount of an individual’s superannuation contributions made from 1 July 2017 may be withdrawn from 1 July 2018 onwards for a first home deposit.
• A person aged 65 or over can contribute up to $300,000 from the proceeds of the sale of their home as a non-concessional contribution into superannuation, from 1 July 2018.
• Deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017.
• The foreign resident CGT withholding rate will be increased to 12.5% and will apply to Australian real property and related interests valued at $750,000 or more from 1 July 2017.
• Foreign owners of vacant residential property, or property that is not genuinely available on the rental market for at least six months per year, will be charged an annual levy of at least $5,000. The measure will apply to persons who make a foreign investment application for residential property from 7.30pm (AEST) on 9 May 2017.
• A 50% cap on foreign ownership in new developments will be introduced through a condition on new dwelling exemption certificates. The cap will be included as a condition on new dwelling exemption certificates where the application was made from 7:30pm (AEST) on 9 May 2017.

The current certificates do not limit the amount of sales that may be made to foreign purchasers.

Depreciation Deductions

Another measure announced in the Federal Budget was plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties from 1 July 2017.

Plant and equipment items are usually mechanical fixtures or those which can be “easily” removed from a property such as dishwashers and ceiling fans. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.

These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.

Superannuation Issues

End of financial year would not be the same without superannuation being mentioned.

Below is a table highlighting how much superannuation can be contributed for FY17.

Regardless of the Super Fund type, for contributions to be claimable as a tax deduction in the FY17 year, the money must be deposited into the Fund’s bank account by 30 June 2017.

The contributions tax of 15% applies to all deductible contributions made to superannuation this financial year.

From 1 July 2017, a concessional contribution cap of $25,000 will apply regardless of age.

From 1 July 2017, a non-concessional contribution cap of $100,000 will apply. The 3yr bring forward rule will also change and not be as attractive.

Capital Expenditure Write off

The $20,000 instant asset write-off for small business will be extended by 12 months to 30 June 2018, for businesses with an aggregated annual turnover of less than $10m.

Small businesses will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 provided they are first used, or installed ready for use, by 30 June 2018. Only a few assets are ineligible (such as horticultural plants and in-house software).

Depreciating assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year, and 30% for each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

Company Tax Cuts

Legislation has been passed that reduces the company tax rate for a small business entity to 27.5% applying from 1 July 2016.

The definition of small business entity for this tax cut, is a business with an aggregated turnover of less than $10million.

Please note the increase in aggregated turnover does not extend to the Small Business CGT concessions – the aggregate turnover threshold for these concessions remain at $2million.

With the reduction in the company tax rate to 27.5% commencing 1 July 2016, a corresponding change in the level of imputation credits will also reduce to 27.5%. This reduction in imputation credits only applies to dividends paid from a Small Business Entity (SBE).

Other companies will still pay tax at 30% and payout franked dividends at 30% for FY17. Corporate beneficiaries and investment companies fall into this category.

“Top up” tax will apply in some instances when corporate beneficiaries receive dividend income from a SBE or a Trust that received a dividend from a SBE.

Based on the new position, consideration needs to be given to which company in a family group will pay dividends to individual family members. Groups that have a SBE and a corporate beneficiary may find it more cashflow effective to pay the dividends from the corporate beneficiary before paying any dividends from the SBE company.

The information contained in this article is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document please consult with your financial adviser.

This article was contributed by Ian Walker of Archer Gowland Chartered Accountants.