Tax Planning for the Legal Profession: Tips, insights and what to watch out for

By Ben Lethborg - June 13, 2018

All practitioners should now be attending to tax planning. Consequently, we share with you our tips and insights for consideration to fully capitalise on recent announcements.

The extent of opportunity and relevance for each of these changes will be dependent on individual circumstances and we would encourage you to give us a call to discuss what the appropriate strategies for you will be.  But be quick, 30 June is approaching fast, and some changes are due to take effect from 1 July 2018, so there is only a short window of opportunity to act.

Professional income splitting guidelines

The ATO removed the Professional income splitting (and Everett Assignment) guidelines as of 14 December 2017 due to their concerns that they had been inappropriately applied. Legal practices and practitioners who entered into arrangements before 14 December, complying with the guidelines and not exhibiting “high risk factors” should be able to rely on those guidelines. 

If you are uncertain about how the law applies to your existing circumstances, contact a Pitcher Partners’ advisor as soon as possible.

Everett Assignments

The Government announced that as of 8 May 2018 partners assigning rights to future income (Everett Assignments) will no longer be able to access small business CGT exemptions. Whilst details are currently limited, if concessions are no longer available to partners of partnerships to reduce or eliminate a capital gain as a result of the assignment of a right to the future income of a partnership, the cost of a restructure will likely be greater.

No changes were outlined for the CGT small business concessions themselves, indicating a specific integrity provision is likely to be introduced to address the government’s concerns.

Superannuation considerations

Changes to superannuation contributions and caps have the potential to significantly impact on how much you:

  • contribute this year
  • contribute next year

As part of tax planning preparations so far, we are finding many clients are taking advantage of the abolishment of the 10% maximum earnings condition by making personal superannuation contributions and claiming a deduction. But this deduction is only available if contributions are received by the fund – there is still time to arrange for this to occur, but you need to act now. 

From 1 July 2017, the concessional contribution cap applying to all individuals will be $25,000. The non-concessional cap will be $100,000 per annum with a three-year bring forward cap of $300,000 (subject to your entire balances being less than the $1.6m general transfer balance cap).

Individual marginal tax rates

Changes to marginal tax rates will determine how much you can distribute this year and next year as they have the potential to have a significant impact. Call Pitcher Partners for assistance in establishing what will work best in your favour.

Reduced corporate tax rates

Lower corporate tax rates (CTR) will impact eligible business, described as those businesses with:

Aggregated Turnover < $25 million     +        Passive Income < 80%            =        27.5% CTR

In 2018/19, the turnover threshold will increase to $50 million, which may have implications, or conversely, represent opportunities for your organisation.  Pitcher Partners will be able to assist you determine what is most appropriate for your tax planning this year.

Word of warning for incorporated legal practices – consider how the passive income tests will affect your eligibility for the reduced corporate tax rate.  Taxpayers receiving practice income through a trust with a corporate beneficiary need to assess whether the company qualifies for the reduced corporate tax rate when receiving practice income.

Tax planning approach

An effective approach to tax planning involves both preparation and planning.

Step 1 – Prepare

 

Step 2 – Plan

 

Preparation of a preliminary taxable income estimate for the year ending 30 June 2018, incorporating:

  • Forecasting profits
  • Identifying opportunities

 

Gain a proper understanding of outcomes sought:

  • Discuss desired goals and how they might be achieved
  • Perform a mini health check on your legal practice and personal position
  • Forward plan your tax affairs

Tax planning is more than consideration of income and deductions for the year.  It represents an opportunity to ensure you are up to date with tax governance given recent ATO activity in this area.  This means satisfying requirements including making elections within the time requirements and the preparation and maintenance of appropriate documentation such as trust net income resolutions.

Critically, though it involves consideration of both practice and practitioner’s circumstances at the individual and holistic level (see below table).

Practice

Practitioner

Professional services income splitting guidelines – Practice profit sharing policies

Professional services income splitting guidelines – Personal tax implications

Year end tax forecasting to assist with cash flow management

Year end tax forecasting to assist with cash flow management

TFN withholding and trustee reporting for new equity partners

TFN withholding and trustee reporting for new beneficiaries of family trusts

Year end trust income distribution resolutions and dividend statements (where applicable)

Year end trust income distribution resolutions and dividend statements

ATO service trust guidelines

Concessional and non-concessional superannuation contributions considerations

Accounts receivable review for bad debts

Personal concessional superannuation deductions for eligible spouses

Review of depreciation schedules for obsolete items and eligibility of small business concessions

Division 293 Higher Superannuation Tax – Division 293 threshold is $250,000 (w2017: $300,000)

Timing of income ie timing of billings and work in progress

Variation of PAYG instalments

 

Shareholder loans, unpaid present entitlements and Division 7A

Contact your Pitcher Partners’ advisor to assist with this important strategic exercise and ensure you consider all the relevant aspects of your tax affairs.


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