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Tax Tips - Timing can save you money |
Many legal documents have tax consequences and can determine when income is assessed and deductions allowed. |
When a document provides for one party to pay what will be income to another, the way the document is drafted can impact on when that income is assessed for tax purposes. |
Conversely, where one party has to pay a tax-deductible amount to another, drafting can impact on the timing of deduction of the payment. If the document relates to disposal of an asset, one party might attempt to influence when it will be subject to capital gains tax. |
People often ask - particularly when they have agreed to dispose of an asset just prior to year end - what they can do to cause any capital gain they make not to be taxed in that year but in the next. The obvious answer is to be patient, though, of course, a vendor may want to lock in a purchaser. |
Normal tax accounting rules do not apply to capital gains tax - it is levied on an accruals basis. Tax is assessable when a taxpayer disposes of an asset and not when he or she gets paid. The time of disposal is when a taxpayer enters into a contract for disposal or, if there is no contract, when change of ownership occurs. |
Normally, there need not be consistency between the reporting of income and the claiming of deductions. For example, a taxpayer might both report income on a cash basis and claim deductions on an effective accruals basis. |
Special rules apply to prepaid expenses, and there may be special rules applicable to expenditure properly referrable to a subsequent year. Generally, where expenditure is incurred by a business and the services to which that expenditure relates are to be performed over more than a year, the deductions must be pro-rated. There are also antiavoidance provisions designed to stop associates entering into schemes where deductions are allowed one year but income is not returned until the subsequent year. |
