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Assumptions
Bank interest is not taxed as it is taxed at source-withholding tax which is final
Franked dividends and credits are taxed at the company
Capital gains are taxed a withholding tax at source which is final
This entails the arrangement of the tax affairs of Scott in such a way that he pays minimum tax. This uses the concept of tax avoidance, which is legal as compared to tax evasion, which is illegal. In this Scott will anticipate the tax implications of all the business decisions and then using the existing tax laws, selects the course of action which will result minimal tax (Hoover, 2000).
Delay Payments
Scott may delay his payments until after end of June in the event that he is experiencing financial cash flow difficulties. Wages and salaries that are paid to employees after end of June 2012 remain deductible in the tax year 2011/12 as long as the employment services where provided before 30th June. Bonuses on the other hand remain deductible even if they are post 30th June payments. His payroll tax liability may also be reduced by use of salary packaging exempt fringe benefits, provision of zero fringe benefits and payments of dividends to associates rather than wages.
Hire purchase vs. cash settlements
Hire purchase transactions unlike cash are more attractive in tax avoidance. Presently, businesses that use cash based transitions claim GST progressively on hire purchase transactions. The new law however, stipulates that cash taxpayers will be in line with the accrual tax payers in claiming GST upfront. This only applies to those transaction entered into on or after 1st July 2012.
New Carbon law
Increased instant asset write-off threshold
As from 1 July SMEs will be in a position to write-off depreciating assets whose value is below $6,500 in the year of income in which the asset is under use or installed. Thus as a tax avoidance Scott may delay purchase of assets till this time.
Streamlined pooling provisions
With effect from 1 July the SMEs long life pool will be no more. Thus, assets (apart from buildings) will be depreciated at a rate of 30%. The balance of ones long life pool and the general SME pool as 30 June will be carried forward and added as the opening balance in 2012/13 tax year.
Special rules for cars
As from 1 of July 2012 SMEs had been in a position to write off $5,000 of any car whose cost was $6,500 or even more in the financial year the car is under use. This applies to both new and used cars. The remaining value of the car is to be depreciated at 15% in year one and 30% in later years. This therefore can be a benefit to those purchasing when this window is open (Ellentuck, 2002).
Lease vs buy
Scott will make a decision whether to purchase an asset and earn capital allowances or lease the asset and enjoy the lease tax shield. The option that will be preferable to him will be used.
Debt vs equity financing
Scott will weigh between an option of financing the organization using debt capital or equity financing. Using debt financing, he will have interest expenses being allowable expenses or equity where dividends are not allowable.
He will also decide if he will produce for local consumption where goods attract a value added tax charge or produce for export only where exports are zero-rated.
Others include
SMSF double deduction
Avoid the traps for personal deductible contributions
Direct a transitional termination payment into superannuation
Split contributions to keep superannuation below $500,000
Get a 100 per cent co-contribution
Building the spouse’s superannuation
In the financial markets, spouse’s contribution provides a guaranteed 18% return on investments up to $3000. A low-income earning spouse will attract a non-refundable offset of up to $540.
Salary sacrifice with the new tax rates
Sole trader – It is cheap easy and simple to establish. However, incase of loss all is borne by the sole trader.
Partnership – Under this there should be a drawn up agreement, as whilst all gains are shared, a party may end up bearing the debts or liabilities o the other.
Company- this is based on the principle of separate legal existence. In this losses are used to offset future profits while the profits are taxed at the corporate 30%. However, a shareholder cannot use the profits unless paid out to him inform of wages or dividends and taxed at ones marginal tax rate. Strict laws on taking money as loan or drawings also exist (Wiener, 1998).
Trust – This can take the form of a discretionary trust where entitlement to capital and income is at the discretion of trustees, or a unit trust where the allocation of income and capital is on set percentages. The major benefits in trusts is protection of personal assets that are not in the fund and in the vent of bankruptcy a court cant force a trust to pay funds held by it to creditors. They also save tax by distributing income splitting to other relatives and that church-gifs can be given out of the pre-taxed income (Dailey, 1997.)
I would recommend Scott to adopt a company as his effective tax structure. This is due to the tax benefits associated with establishing a company as compared to the rest. A company enjoys many capital allowances, and tax benefits as compared to individuals who despite the graduated tax scale have fewer benefits to enjoy.
Managed fund- equities
Market price = $60000
Cost = $70,000
Capital loss to be offset against profits = $10,000*50% = $5000
Investment unit
Present cost = 290 000
Initial cost =190 000
Capital gain = 100 000-2000 = 98 000*50% = $49,000
The gain will be added to the taxable income of Scott while the loss will offset the taxable profit for the year.
Long-Term Capital Gains
Scott will be paying taxes on capital gains realized on investments in stock markets. Where the shares do not perform, such losses are carried to offset taxable income while gains are taxed at the graduated scale of income tax. Where he hold stocks for more than a year this will attract more favorable taxes as a final 15% tax rate is applicable. Besides, it will attract no tax where the taxable income is below a certain set limit.
Qualified Dividends
Dividends follow similar tax structure to capital gains. These are further classified into ordinary and qualified dividends. The ordinary are taxed at the graduated income tax scale where as the qualified are taxed at a fixed rate or tax-free.
Thus, Scott will decide the option to exercise by either selling the shares for a capital gain or holding the security for dividends.
5. Margin loan = $300,000
LVR = 70%
Portfolio = $428,600
New value after fall = $400,000
(a) Let p be the minimum amount that they must sell and repay
300 000 – p = 0.7(400 000 – p)
300 000 – p = 280 000 -.7p
.3p = 20 000
p = $66 667
Thus they must resell and repay at = $66 667
(b) Proving the answer
233 333/333 333 =0 .7
Thus, LVR of 70% is well used in the resell and repayment option.
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