It has been an extraordinary end to the 2020 financial year with many businesses flourishing and others being forced into hibernation due to COVID-19.
The number one priority for most business owners right now is cash flow.
Tax minimisation & planning has never been more important ~ it’s critical to act before 30 June 2020.
With June 30 fast approaching you need to act quickly, and we encourage you to schedule a meeting as soon as possible to assess your options and the steps you need to take before the 30th June 2020.
To assist you we have put together a guide with a list of strategies for you to act on below, click here for a checklist.
The following list of tax minimisation / planning opportunities is not exhaustive and depending on your circumstances (including your turnover and whether you are on a cash or accruals method of accounting), specific conditions may apply to some of these suggestions.
If you would like to discuss your specific tax planning options we urge you to contact us today.
These strategies are only effective if they will not adversely affect your cashflow.
Firstly, determine if you are on the cash or accruals method for tax purposes.
Cash basis – taxable income is what is actually received less what has been paid for expenses.
Accrual basis – taxable income is what is invoiced (regardless of when the income is received) less what invoices have been received for payment (regardless of when you pay them).
Consider delaying invoices until after 30th June.
A one month delay will mean you will pay tax in the next financial year.
This may also mean that some clients will pay a month later.
Must: review your cashflow before you do this
Determine what income you may have received but not yet earned.
So that it can be excluded from this year & deferred until the next year.
Lump Sum Amounts
Where a lump sum is likely to be received close to the end of a financial year, you should consider whether this amount (or part thereof) can be delayed or spread over future periods.
Interest is generally income when it is received.
If you do have investments that are going to pay interest, try to structure the payment to be received after 30 June.
Bring forward Business Deductions
Prepayment of expenses – cash basis
Consider pre-paying expenses prior to 30 June. A tax deduction is generally allowed where the payment is made before 30 June for services to be rendered within a 12 month period. Even paying expenses in June that ordinarily be paid in July could save some tax this financial year.
Note: this strategy is only available if you have the cash-flow!
- Employee superannuation payments including the 9.5% superannuation guarantee contribution for the June 2020 quarter (this must be received by the superfund prior to 30 June)
- Superannuation for business owners, directors and associated persons
- Wages, bonuses, commissions & allowances
- Travel & accommodation expenses (assume we can travel soon!)
- Trade creditors
- Printing, stationery & office supplies
- Subscriptions and memberships to professional associations & trade journals
- Accounting fees
Invoice dates (accounts payable) – accruals basis
If you operate on an accruals basis and services have been provided to your business, ensure that you have an invoice dated 30 June 2020 (or before) so that you can claim the expense in your accounts for this financial year.
Instant asset write off
As part of the Government Stimulus Package the accelerated depreciation and instant asset write-off for small business has been revised and expanded.
Qualifying businesses with aggregated turnover of up to $500milion will be able to claim a tax deduction for each asset purchased and first used or installed ready for use per below. Click here for more details
Accelerated Depreciation Deductions
Newly acquired depreciating assets valued at more than $30,000 (or $150,000 post 12th March 2020) and not applied the instant asset write off deduction to, can be added to the general business pool.
As part of the backing business incentive, an accelerated depreciation deduction of 57.5 per cent for the business portion of the new depreciating asset applies for the cost of an asset on installation from 12th March 2020 to 30th June 2021 and existing depreciation rules apply (15 per cent for the first year and 30 per cent for subsequent years) to the balance of the asset’s cost and for subsequent years. There is no limit to the cost of a qualifying depreciating asset eligible for this concession, but the asset must be new and not second hand.
If a motor vehicle, piece of equipment or office needs some maintenance work done, have it completed before 30 June & claim it in this financial year. There is a difference between a repair & capital improvement, please talk to us if in doubt as some capital improvements are not tax deductible immediately.
Review your stock on hand and work in progress before 30 June to review its value. Any stock that is carried at a value higher than you could realise on sale (after all costs assocatied with the sale) should be written down to that net realisable value in your stock records.
Slow moving stock can be written down to market value.
Obsolete trading stock with no value can be written off and a tax deduction claimed this year
This has become even more relevant with the with the fluctuating exchange rates
If you are on the accruals basis you should write off bad debts from your debtors listing before 30 June. A bad debt is an amount that is owed to you that you consider is uncollectable or not economically feasible to pursue collection. Unless these are physically recorded as a bad debt in your system before 30 June a deduction will not be allowed this financial year.
Obsolete Plant & Equipment
This should be scrapped or decommissioned prior to 30 June, to enable the book value to be claimed as a tax deduction.
Employees superannuation contributions should be actually paid before 30 June to obtain a deduction & to avoid the superannuation guarantee charge. The tax office recommends paying prior to 23 June to ensure it is processed before 30 June.
You can claim a deduction for personal superannuation contributions.
If you have the cashflow to make additional contributions to super you can claim a tax deduction. The maximum about must not exceed the concessional cap which includes amounts compulsory amounts paid with your salary.
Note: this is one of the most advantageous tax deductions for you personally
As a separate legal entity a company has some tax advantages, separate from its directors and shareholders. Companies are governed by the Corporations Act and regulated by the Australian Securities & Investments Commission.
The current company tax rate for base rate entities is 27.5% this will reduce to 26% next financial year.
A base rate entity is an company that has 80% or less of its assessable income passive income and less than $50m aggregated turnover.
Check to see if you company has any tax losses carry forward from prior years. These will be able to be offset against this year’s income if the company passes either the continuity of ownership or the same business tests.
Loans treated as dividends
Companies are allowed to make loans or payment to shareholders or associates (or even forgive debts). These do need to be setup on a commercial basis with interest, principal repayments and appropriate loan documentation witnessing the loan or there are onerous tax consequences.
Business owners who have borrowed funds from their company in prior years must ensure that the appropriate principal & interest loan repayments are made by 30 June.
Current year loans must either be paid back in full or have a loan agreement entered into before the due date of lodgement of the company return. Failure to comply risks having it counted as an unfranked dividend in the individuals tax return.
If you have a few companies that make up your group, you may want to consider consolidation the for tax purposes before the end of the year. The resultant single tax entity allows you to offset profits and losses from the different entities.
Individual tax rates can be much higher than companies. If you provide services through a company where those services are viritually all from your personal exertion, it is possible that the tax office views this as being your personal income and not the company’s. There are certain tests for this & if you consider this may be you, then prior to the end of year it is worth reviewing this to see if it is possible to change how the income is treated.
Distribute all income
A resolution on the type of incomes and how they are to be distributed needs to be documented by a trust minute and signed prior to 30th June every year.
If a valid resolution hasn’t been executed by 30 June, the default beneficiaries become entitled to the trust’s income and are then subject to tax at the highest marginal rate plus medicare (47% in 2020). Income derived but not distributed by the trust will mean the trust will be assessed at the highest marginal rate on this income.
Trust Deed update
The trust deed dictates how income is defined & can be distributed. Trust deeds need to be reviewed at least every few years to ensure that the full tax advantage can be achieved.
Unpaid present entitlements
If a trust has an unpaid present entitlement to a corporate beneficiary, complex tax issues arise. If you can, you should pay the entitlements back before you lodge the trust’s tax return.
Unpaid Present entitlement is a distribution from a trust which a trustee has decided to make, but has not yet paid out.
Concessional contributions are made into your super fund before tax. Including contributions like:
- compulsory employer contributions or any additional concessional contributions made by your employer
- salary sacrifice payments
- contributions you are allowed as an income tax deduction
- notional taxed contributions if you are a member of a defined benefit fund
- unfunded defined benefit contributions
Once the concessional contributions are in your super fund, they are taxed at the 15% rate. There are caps on the concessional contributions you can make each financial year. If you go over the cap, you may have to pay extra tax.
Note: contributions don’t count when the payment is sent, they only count once the payment is received by your fund. Make sure your fund receives all your contributions by 30 June.
Non-concessional contributions are made into your super fund from after-tax income. These contributions are not taxed in your super fund.
There are caps on the non-concessional contributions you can make each financial year. If you exceed your non-concessional contributions cap in a financial year, you must lodge a tax return for that year, and you may have to pay extra tax.
The tax-deductible superannuation contribution limit or cap is $25,000 for all individuals regardless of their age. From 1 July 2018, members can make ‘carry-forward’ concessional super contribution if they have a total superannuation balance of less than $500,000.
Make sure you don’t contribute more than the annual concessional contribution cap of $25,000 or risk being subject to an excess contributions tax.
Salary sacrifice to superannuation
If your marginal tax rate is 19% or more, salary sacrificing can be an effective way to boost your superannuation and also reduce your tax.
By putting pre-tax salary into superannuation instead of having it taxed at your marginal tax rate you may save tax. This can be particularly beneficial for employees approaching retirement age.
If your spouse receives an income of less than $40,000 pa. Consider making a spouse contribution to their superannuation & receive a tax offset. The maximum tax offset of $540 this financial year is for a contribution of $3,000 that would need to be made before 30 June.
Minimum pension payments
Certain superannuation pensions and annuities are subject to rules that determine minimum and maximum amounts to be paid in a financial year.
For many retirees, the significant losses in financial markets as a result of the COVID-19 crisis are having a negative effect on the account balance of their superannuation pension or annuity.
To assist retirees, the Government has reduced the minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities by 50% in the 2019–20 and the 2020–21 financial years.
Low income earners should consider making a personal superannuation contribution so that they qualify for the government’s superannuation co-contribution payment.
The governments co-contribution is designed to boost the superannuation savings of low & middle-income earners. If your income is within the thresholds listed below & you make a non-concessional contribution to your superannuation, you may be eligible for a co-contribution up to $500.
|Tax Year||Maximum Entitlement||Low income Threshold||High income Threshold|
Additional tax on super contributions for high income earners
An additional tax of 15% is payable on superannuation contributions where you earn more than $250,000 per annum. Where you are required to pay this additional tax, making super contributions within the cap is still a tax effective strategy. Super contributions are taxed at a maximum of 30%and investment earnings are super taxed at a maximum of 15%, both these tax rates are more favourable when compared to the highest marginal tax rate of 45% (plus medicare).
Recontribution – when drawing a pension
Currently strategies exist that allow you to draw a pension from your fund and re-contribute amounts to the fund, reducing tax significantly, while maintaining you same net cash.
Capital Gains Tax (CGT)
If you sell a capital asset, such as a business, real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it cost you to acquire the asset and what you receive when you dispose of it.
Capital Gains Tax discount
The discount is not available when you sell an asset that you have held for less than 12 months. Consider deferring the disposal of these assets until the 12 months threshold has past.
Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you’re under 55, the exempt amount must be paid into a complying super fund or a retirement savings account.
If you sell an active asset, you can defer all or part of a capital gain for two years, or longer if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.
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This information is intended to provide general information only and has been prepared without taking into account any particular person’s objectives, financial situation or needs. Before acting on such information, you should consider the appropriateness of the information