With 30 June approaching, this article draws your attention to year-end tax planning strategies and compliance issues you need to consider to ensure you are in the best possible tax health.
A number of new tax issues arise this year from the measures enacted to combat the economic impact of COVID-19.
Taking into account the most recent tax changes, this planner will focus on the most important issues to consider by small-to-medium businesses and individuals to best manage their tax exposure in respect of the 2020 income tax year.
Where relevant, mention will also be made of proposed tax changes that may affect your tax position in 2020 or later years.
Tax planning is generally about managing risks, and capitalising on opportunities, to appropriately manage your tax exposure. This document is mainly about opportunities, of which there are many. Whether it is managing the timing of when assessable income arises, or when deductions will be incurred, or taking advantage of a specific concession, the key is awareness.
Whilst tax planning is all-year-round, there’s no doubt that coming up to 30 June heightens sensitivity to possible opportunities. This year also presents new issues to contend with from various COVID-19-related measures.
If you would like to discuss anything in this article, please talk to your trusted Nexia Edwards Marshall advisor.
JobKeeper payments are assessable income when received. For example, JobKeeper amounts received by 30 June 2020 for the months of April and May are assessable in the 2019/20 income year. The JobKeeper amount received after 30 June 2020 for the month of June will be assessable in the 2020/21 year. Wages paid to employees in your business will be deductible in the ordinary course, including any top-ups to the minimum $1,500 per fortnight funded by JobKeeper.
You must keep records supporting your predicted 30%+ decline in turnover for five years.
Cash flow boost amounts received or credited are not assessable income to your business. However, some or all will likely be extracted from your business ultimately in a taxable form (eg, dividend). Although the boost amount is calculated based on certain PAYG withholding obligations, it has no impact on the deductibility of wages paid.
Businesses have until 7 September 2020 to pay any unpaid employee superannuation for the period 1 July 1992 to 31 March 2018, and it will remain tax deductible. Failure to take advantage of the amnesty will result such unpaid superannuation reverting to being non-deductible, plus a 100% penalty, and with a $20 per-employee, per-quarter administrative penalty.
Due to the COVID-19 situation, the profession has called for the amnesty deadline to be extended, but that will require changing the law.
As illustrated in the table below, company tax rates are falling in Australia.
|Income tax year||Turnover less than||Company tax rate|
|2018/19 - 2019/2020||$50m||27.5%|
Companies with group-wide business turnover below $50 million and no more than 80% of their income comprising passive income will be subject to company tax at a rate of 27.5% in 2020. All other companies are subject to the 30% rate.
Dividends can have tax credits attached by franking them at either the 30% rate (ie, dividend x 30/70) or 27.5% rate (dividend x 27.5/72.5). The rate at which a dividend is franked and the company’s income tax rate for the year are determined independently of each other. Accordingly, a company might pay tax at one rate for a year, yet frank a dividend paid in that same year at the other rate. This can cause over-taxation, or leave you with unusable franking credits.
We can assist with managing your franking outcomes.
Businesses that are small business entities (group-wide turnover below $10 million) may qualify for the following tax concessions in the 2020 income tax year:
This year, many additional businesses will also have the benefit of the instant asset write-off for most new or second-hand depreciating assets.
As part of the government’s COVID-19 stimulus measures, the write-off threshold was increased from 12 March 2020, and expanded to businesses with group-wide turnover below $500 million. The cost of a depreciating asset is fully deductible if acquired for a cost (net of any GST credit) below the relevant threshold where it was first used or installed ready for use during these time periods:
|Date||Threshold - Less than||Turnover below|
|01/07/2019 - 11/03/2020||$30,000||$50m|
|12/03/2020 - 30/06/2020||$150,000||$500m|
For small business entities (group-wide turnover below $10 million), the instant deduction is available only where they have opted into the abovementioned simplified depreciation rules.
For those businesses, that means depreciating assets costing $30,000/$150,000 or more during the relevant time periods are pooled in a general small business pool, treated as a single depreciating asset, and depreciated at:
From 1 July 2020, the instant deduction threshold will revert to the original $1,000, and be available only for small business entities (group-wide turnover below $10 million). For all other businesses, the depreciation pooling treatment for depreciating assets costing less than $1,000 will also return.
Also part of the government’s COVID-19 measures, this applies to depreciable assets (new only) acquired 12 March 2020 to 30 June 2021, where your group-wide turnover is below $500 million. The first 50% of the cost is instantly deductible, and the other 50% is depreciated in the normal way as if that were the stand-alone cost of the asset.
It’s relevant for assets costing $150,000+ until 30 June 2020, and $1,000+ from 1 July 2020, as assets costing below these amounts would be subject to the other measures above.
The government announced on 9 June that the $150,000 instant asset write-off threshold will be extended beyond 30 June, until 31 December 2020.
The ATO announced a series of administrative measures for businesses experiencing financial difficulty during the COVID-19 crisis period, including:
The above measures are not automatic, and affected businesses, or their tax agent, must contact the ATO and request the benefit of one more measures.
Integrity rules exist to combat accessing company funds in a tax-preferred manner that have been taxed at the company tax rate, instead of by extracting as a dividend. The rules exist due to the wide gap between the company tax rate of 30%/27.5% and the top personal tax rate of 47%.
Care must be taken when a private company makes a loan or payment to a shareholder (or the shareholder’s associate), or forgives a debt owed by a shareholder (or associate). Also, where a trust appoints trust income to a private company beneficiary without the cash payment to the company; such unpaid present entitlements (UPEs) made from 16 December 2009 by a trust to a company may be treated as either a loan by the company to the trust or remain a UPE (if put on sub-trust).
To assist during the COVID-19 crisis period, the profession has called on the government to provide temporary relief from 2020’s minimum yearly loan repayments.
This is a very complicated area of tax law, but is relevant for many businesses, so please speak to your Nexia advisor regarding any form of advance or credit from trusts or companies to associated parties.
Trustees must generally make valid resolutions before 30 June (or an earlier date if specified in the trust deed) to appoint trust income to beneficiaries. If trustees fail to make valid appointment resolutions before 30 June, the trustee can potentially be assessed on all the Trust’s taxable income at the top marginal tax rate (i.e. 47%).
Also note that beneficiaries must quote their TFN to trustees before a trustee appoints trust income to them for the first time – failure to do so will result in the trustee being liable to withhold tax at 47% from the trust income appointed to the beneficiary
To ensure that valid trustee income appointment resolutions are made, the terms of the Trust Deed must be complied with.
Before 30 June, outstanding debtors should be reviewed to determine the likelihood of not receiving payment and whether attempts to recover the debts will be successful (keep documentation to evidence that the debt is considered to be non-recoverable). If the debt is irrecoverable and if income is reported on an accruals basis, the debt can be regarded as a bad debt for which a tax deduction may be claimed. This process must occur before 30 June.
This same methodology applies to scrapping obsolete plant and machinery. In such a case you should review your asset register, identify, scrap (i.e. physically dispose of) and claim a deduction for the written down value of such assets.
The valuation of trading stock at year-end may impact on the amount to be included in assessable income for the 2020 income tax year.
Because a lower closing value for trading stock may result in a lower taxable income, taxpayers have the choice of valuing trading stock on hand at 30 June as the lower of cost, market selling value or replacement value.
If your business has suffered a reduced level of profit this year, or even a loss, consider this alternative. You can choose amongst the three valuation options for year-end stock on hand on an item-by-item basis. You can possibly achieve a better tax outcome by increasing 2020’s taxable income to a more optimal level, or eliminate a tax loss, thereby avoiding the need to address complex integrity rules for carrying forward tax losses. The law expressly allows you to make these choices, and whilst they produce only a timing difference for your business’s taxable income, the right combination of choices can achieve a permanent tax saving.
All employers are now required to run their payroll and pay their employees through accounting and payroll software that is Single Touch Payroll (STP) ready. A small concession is afforded to employers with 19 or fewer employees – “closely held” employees (eg, directors, family members, beneficiaries) only have to be reported through STP-enabled software from 1 July 2021 (all other employees have to be reported through STP).
If you are still having STP issues, please talk to us so that we can assist you with your STP compliance.
Businesses in the building and construction, cleaning, courier, road freight, IT, and security, investigation or surveillance industries must lodge a taxable payments annual report (TPAR) by 28 August 2020. The report includes the total payments made to contractors.
For virtually all foreign residents, your (former) home is now fully subject to capital gains tax. The fact that it was your home for any part of the time you owned it no longer matters. The profession has been very critical of this draconian law. A transitional rule applies if you acquired your home before 9 May 2017 – if you execute a sale contract by 30 June 2020, the rules will apply as they were before this change. That means a full or partial exemption would still be available for most people.
Of course, at this late stage, and compounded by COVID-19 social restrictions, selling your former home by this 30 June is almost impossible. The profession has been calling for the transitional deadline to be extended by at least a year, but that will require changing the law.
Taxpayers who are over-claiming work-related expenses (e.g. vehicle, travel, internet and mobile phone and self-education) are on the ATO’s hit list.
Although a myriad of tax law considerations is involved when claiming work-related expenses, the three main rules are:
In response to COVID-19, many people have been working from home for an extended period. From 1 March to 30 June 2020 only (might be extended), a temporary, simplified method is allowed for calculating your allowable deduction arising from working from home.
You can claim a deduction of 80 cents for each hour you work from home due to COVID-19, as a representation of all additional deductible running expenses as a result of working from home. However, you must be working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls.
You do not have to have a separate or dedicated area of your home set aside for working, such as a private study.
There are two other alternative methods for calculating your deductible running expenses:
If suitable, delay the exchange of contracts to sell an appreciating capital asset until after 30 June 2020. That way, the capital gain will only be assessable in the 2021 income tax year.
If you have already made a capital gain this year, you may wish to crystallise capital losses (e.g. by selling shares that have declined in value) to reduce the capital gain. However, when adopting this strategy, ensure that you are not engaging in “wash sales” (where you sell shares shortly before 30 June solely to realise the capital loss, and then buy the shares back shortly after 30 June).
Also, a capital gain will be eligible for the 50% CGT general discount to the gross gain if the asset has been held for at least 12 months before sale.
Donations of $2 or more to a deductible gift recipient are tax deductible. Donations of property to such recipients may also be tax deductible. Donations to overseas charities may not be tax deductible.
Both employees and self-employed individuals can claim a tax deduction annually to a maximum of $25,000 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2020 and the individual has provided their superannuation fund with a notice of intention to claim.
Payments to a superannuation fund should be made sufficiently in advance of 30 June to ensure there is time for the payment to be processed and credited to the fund’s bank account by 30 June. If it is not credited to the fund’s bank account by 30 June, the deduction will be deferred to the next income year.
If your superannuation balance is below $500,000 as at the previous 30 June, you can contribute more to superannuation than the annual $25,0000 deductible contribution cap where your contributions in prior years were below $25,000. Employer contributions are counted for this purpose, and there are contribution and timing limits.
Employees and sole traders economically disadvantaged in the COVID-19 period can make a one-time withdrawal from superannuation of up to $10,000 by 30 June 2020. A further one-time withdrawal of up to $10,000 can again be made from 1 July to 24 September 2020.
You can do this only in certain circumstances, such as being unemployed, receiving JobSeeker or other income support, made redundant, work hours reduced by 20%+, sole trader’s business suspended or turnover fallen by 20%+.
You can apply through myGov, and any amount released is not assessable income to you. This option is generally regarded as a last resort, and you should seek financial advice.
Here is a short summary of the most important superannuation rates and caps that apply for the 2020 income tax year:
Important superannuation numbers for the 2019/20 tax year
|Lifetime CGT cap for non-concessional contributions||$1.515 million|
|Concessional (ie, deductible) contributions cap||$25,000|
|Non-concessional contributions cap||
$100,000 (or $300,000 under the 3-year bring forward rule for people under 65)
|General transfer balance cap||$1.6m|
|Total superannuation balance threshold||$1.6m|
Remember that employed people can make concessional (ie, deductible) contributions directly to their superannuation fund. They do not need to enter into a salary sacrifice arrangement with their employer.
A first home buyer can salary sacrifice a maximum of $15,000 a year (take care not to breach the $25,000 concessional contributions cap) to save for a deposit to buy a first home. The maximum amount that can be saved in such a way is $30,000 across all years. Provided the buyer’s partner does not already own his or her first home, the couple can put in a maximum of $60,000 ($30,000 x 2) to buy a first home.
Money saved in this way can only be withdrawn from the superannuation fund with strict rules applying on how to use such withdrawn money (e.g. must buy a home within a certain time and the ATO must be notified of the withdrawal).
Withdrawn funds are subject to income tax at your marginal rate, less a 30% rebate.
Tax is complicated and is constantly changing. Quite possibly strategies used in the past have become outdated and may not work for you anymore. The COVID-19 pandemic has also caused immense disruption to businesses, and business models. However, despite the difficult circumstances, we believe there is a pathway to recovery, and beyond to prosperity.
We hope that this Tax Planner helps you to identify some extra ideas for tax time to assist you in operating your business more tax efficiently and effectively.
Please speak to your trusted Nexia Edwards Marshall advisor if you would like to discuss any of the strategies mentioned above or would like us to perform a financial and tax health check on your business.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.