Welcome to part 2 of our blog series on tax planning. In Part 1 of we outlined some of the simple yet effective and practical tax planning measures that can make a difference to your tax position this financial year. Today however, we’ll delve into the intricacies of more sophisticated year-end planning, particularly when you have trusts and companies (and potentially other complex structures) as part of your group tax structure. As you approach year-end, it’s crucial to consider certain key factors that can greatly impact your tax strategy.
Some of the more sophisticated tax planning measures that apply at this time of year are outlined as follows:
- Division-7A – understanding the potential impact of division 7A on your group tax position, and the treatment of loan balances is critical at this time of year. Comprehending the regulations and their impact on your group entities is vital to ensure compliance and optimise your tax position by 30 June.
- Trust resolutions and dividend declarations – another timely element of an effective tax review process is the consideration of trust resolutions and potential declaration of dividends. Trusts and companies play significant roles in many tax structures, and carefully drafting resolutions and/or declaring dividends is necessary to outline important decisions that are made by 30 June. These decisions are not made in arrears, so careful consideration is required now.
- Portfolio review and Capital Gains Tax – it’s crucial to review your investment portfolio to maximize tax effectiveness when contemplating any portfolio divestments which may be long overdue or appropriate to be made for various commercial reasons. Evaluating your investment choices and aligning them with your tax goals can lead to enhanced outcomes and potential tax savings.
- Pensions and Contributions – whilst there is a mandated compliance requirements around pensions and superannuation contributions, there are also opportunities for many taxpayers to utilise which serve a purpose that it not only current but suitable and appropriate from a strategic perspective.
- Donations – philanthropic entities as well as wealthy and/or generous taxpayers have opportunities, as well as commitments via pledges and bequests, to donate on a financial year basis. Considering the technical conditions of giving to various Not-For-Profits, as well as the greater purpose and intention of giving, is important at this time of year.
1. Division 7A
Division 7A is a section of the Australian Income Tax Assessment Act 1936 that aims to prevent private companies from providing tax-free benefits to shareholders and associates. To avoid Division 7A issues in Australia, here are some tips:
A. Declare dividends: if your private company has made profits, it is generally appropriate to consider declaring dividends to shareholders rather than loans or other benefits. Dividends are taxed in the hands of the shareholders, with important but limited tax risks for the declaring company.
B. Pay interest on loans: if your private companies provides loans to shareholders or associates, make sure to charge them interest at the market rate. This can help to prevent Division 7A issues by demonstrating that the loan is commercial in nature.
C. Document loans and transactions: it is important to keep accurate records and documentation of all loans and transactions with shareholders and associates. This can help to demonstrate that any loans provided are commercial in nature and not intended to provide tax-free benefits.
D. Repay loans on time: if your private companies have provided loans to shareholders or associates, make sure to repay the loans on time or within the agreed-upon timeframe. Failure to do so can result in Division 7A issues.
E. Seek professional advice: Division 7A can be a complex area of tax law, and it is important to seek professional advice from a tax expert or financial planner to ensure compliance with the regulations and avoid any potential issues.
By following these tips, you can help to manage Division 7A issues and ensure that your private companies are compliant with the tax laws and regulations.
2. Trust Resolutions and Dividend Declarations
Trust Resolutions
A trust resolution refers to a formal documentation of a decision or action taken by the trustees of a trust. It is a document that outlines the trustees’ decisions regarding various matters related to the administration and management of the trust. Trust resolutions typically cover important issues such as distributions of trust assets and profits, appointment or removal of trustees, investment decisions, and any other matters that require the trustees’ attention and decision-making. Before 30 June 2023, trustees should review the trust’s financial position and consider any necessary distributions for the current financial year. Failure to do so may result in penalty tax for trustees and other adverse tax consequences.
Dividend Declarations
Every year, the Directors of a Company are responsible for evaluating whether to distribute a portion of the company’s retained earnings to its Shareholders. To make this assessment, the directors must review the Company’s retained earnings and cash positions to determine if there are sufficient funds for a dividend payment. Once the Directors have made the decision to pay a dividend, the Company must complete Dividend Declarations at the time of the declaration.
Dividend declarations specify the dividend amount, including the franked and unfranked portions, the franking percentage, and the date of the dividend payment. It is important to note that these declarations must be prepared when the dividend is declared and not retrospectively.
3. Review your investment portfolio
Before the end of the financial year, it is recommended that you assess your investment portfolio and contemplate disposing of underperforming assets. Whilst the tax aspect of the review process is important, there are many commercial reasons why it’s a timely process to undertake before 30 June. Any capital gains tax assets sold at a loss may offset potential capital gains tax resulting from the sale of other assets earlier in the year. Alternatively, if you intend to sell profitable assets, you might want to carefully time the transaction to postpone any capital gains and thereby decrease your tax liability until the subsequent tax year.
4. Pensions and Contributions
During the pension phase of a superannuation fund, members are required to withdraw a minimum annual pension payment, which is a percentage of their account balance. The percentage varies based on the member’s age. However, for the financial year ending on June 30, 2023, the Australian Government has temporarily reduced this requirement by 50%. This reduction has been in effect since 30 June 2020, and FY23 marks the final year of this reduced minimum payment. Members must ensure that they withdraw the reduced amount before 30 June 2023.
Regarding superannuation contributions, individuals have the option to make concessional contributions, which are contributions made to a super fund using pre-tax dollars. These contributions are typically taxed at a lower rate within the super fund. There is an annual cap on concessional contributions, and exceeding this cap may result in additional tax liabilities. For the financial year 2023, the concessional contribution cap is set at $27,500.
Additionally, individuals may make non-concessional contributions if their total superannuation balance is below or equal to the general transfer balance cap. Non-concessional contributions are made with after-tax dollars, meaning they have already been subject to taxation at the individual’s marginal tax rate. Similar to concessional contributions, there is an annual cap on non-concessional contributions, and exceeding this cap can lead to additional taxes. For FY23, the non-concessional contributions cap is set at $110,000. However, if eligible, individuals may be able to utilise the bring-forward arrangements, which allows for a higher cap. To be eligible for the bring-forward arrangements, individuals must be under 75 years of age, have a balance below the general transfer balance cap, and not already be in an active bring-forward arrangement.
5. Donations
In Australia, in order for a donation to be tax deductible, the recipient organisation must have Deductible Gift Recipient (DGR) status. DGR status is usually granted by the government to nonprofit organizations that meet certain criteria and serve charitable, educational, religious, or other public purposes.
When an organisation has DGR status, individuals or businesses making donations to that organisation can claim a tax deduction for the donated amount on their tax returns. The deduction reduces their taxable income, resulting in a potential reduction in their overall tax liability.
It is important for donors to verify the DGR status of the recipient organisation before donating and claiming a tax deduction.
Summary
Given the complexity of these tax planning aspects, we strongly recommend seeking professional advice if you have any doubts about their impact on you, your entities and/or your broader group structure. Consulting with tax experts like ourselves will ensure you navigate these complexities effectively and make informed decisions tailored to your specific circumstances.
