EOFY – Year End Tax Planning Tips 2019-2020
The fringe benefits tax (FBT) year ended on 31.3.2020. If you operate through a company or trust, carefully consider whether all FBT matters have been attended to and whether an FBT return needs to be lodged. The most common fringe benefit supplied to staff is a motor vehicle benefit. In a small business audit, the two main areas of ATO focus are fringe benefits and Division 7A loans – see below.
Check eligibility for small business tax regime
Small businesses (sole traders, partnerships, companies and/or trusts with a turnover of less than $2 million) may be eligible for a range of tax benefits including immediate write of assets costing less than $150,000, a 27.5 per cent company tax rate, simplified depreciation, capital gains tax concessions and accounting on a cash basis.
In 2017 these measures were extended to business with a turnover of less than $10 million with notable exception of the CGT Small Business Concessions.
Maximise depreciation deductions
From 12.3.2020 to 30.6.2020, small businesses can get an immediate tax deduction for nearly all individual assets purchased costing less than $150,000, to the extent such assets are used for an income producing purpose and are installed ready for use by the end of the financial year.
For businesses registered for GST, the $150,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.
Review salary sacrifice arrangements
Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either a packaged car for fringe benefits tax (FBT) purposes, or they can make additional superannuation contributions.
We note that the option for employees to make tax deductible contributions themselves became law on 29.11.2016 and took effect from 1.7.2017.
Make trust resolutions by 30 June
Trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2019-2020 financial year by 30 June.
In the event a valid distribution is not made then a default beneficiary may be assessable. If there are no default beneficiaries, then the trustee will be assessable at the highest marginal rate.
Seeking professional advice when starting a business
Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the year those expenses are incurred rather than deducted over a five-year period as was the case prior to 1.7.2015.
Small business restructure rollover relief
Since 1.7.2016, small businesses have been able to change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another. This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used or held ready for use, in the course of carrying on a business. Seek professional advice.
Stream trust capital gains and franked dividends
Trustees of discretionary trusts may be able to stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts, the trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
Private company loans
Income tax law can potentially treat a payment or a loan by a private company to a shareholder or an associate as an unfranked deemed dividend unless an exemption applies.
The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.
Prior to 30 June you should carefully review such debit loans on the company’s balance sheet.
Prevent deemed dividends in respect of unpaid trust distributions
An unpaid distribution owed by a trust to a related private company beneficiary that arises from 1.7.2017 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in 2019-2020 and prior.
However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2019-2020 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the solve benefit of the private company, and other conditions are satisfied.
These rules are complex, and we can assist in this matter.
Write-off bad debts
Businesses can only obtain income tax deductions for bad debts. If the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as a bad in the accounts no deduction will be available. The debt must also be uncoverable and written off in the accounts as bad prior to 30 June. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.
Year End “tax effective” investment products
Proceed with caution and make sure you get independent professional advice.
In general, individual income is derived and deductions are incurred on a receipt’s basis. The following suggestions may reduce your current year tax liability.
Prepayment of deductible expenses
An individual can claim a deduction for prepaid expenditure for a period not exceeding 12 months. The most common types for prepayment include:
- Income protection insurance
- Interest on investment loans
- Interest on share portfolios
- Investment properties
- Membership and subscriptions
- Investment property expenses
- Corporate Body levies
- Repairs and maintenance
Prior to year-end an individual should review the gains and losses on each asset within their investment portfolio. There may be opportunities to:
- Make sure assets have been held greater than 12 months before sale so the 50% discount can be applied to the gross capital gain – remember this is from “contract” to “contract” …not settlement.
- Realise capital losses to offset any capital gains that were made earlier in the income year.
- Defer realisation of capital gains until July.
Salary Packaging Arrangements
An effective salary sacrifice arrangement will reduce an individual’s marginal rate of tax.
The contractual arrangements should be documented or amended before year end as an individual cannot make a retro perspective salary sacrifice arrangement for income already earned. A typical salary sacrifice arrangement may include following components:
- Motor vehicle expense
- Additional superannuation contributions
- School fees
The top marginal tax rate applies on income in excess of $180,000. With the “mark-up” factors, fringe benefits tax effectively applies the top marginal rate regardless of your income. However, for taxpayers not on the top marginal rate it is still possible to take advantage of FBT concessions.
Ongoing Tax Planning Issues
Kindly note, there is no tax deduction from non-concessional contributions.
2020 Contributions Caps from 1 July 2018
- Concessional contributions (employer contributions) $25,000.
- Non-concessional contributions (personal contributions) $100,000 or 3-year limit of $300,000.
- Again, if you want to contribute more than $100,000 in non-concessional contributions contact your Accountant as this involves a 3-year average and you need to be certain you are eligible.
Salary Sacrifice Bonus into Superannuation
You may be able to optimise your tax position by salary sacrificing any prospective end of year bonus into super. Seek advice to ensure it is tax effective and that the contributions caps are not breached.
Superannuation – income
Individuals aged over 60 and retired are generally not taxed on any payments from a superannuation fund. Individuals aged between 55 and 60 will generally be taxed concessionally.
Superannuation – rebate
A rebate up to $540 is available for superannuation contributions made during the 2020 year for your spouse where you spouse’s income is less than $37,000 p.a. (this rebate reduces for income amounts up to $40,000 p.a.).
Superannuation – government co-contribution
The maximum co-contribution amount that you received is $500, based on an after-tax contribution of $1,000 (i.e. for every $1 contribution made, the government contributes $0.50). This is reduced by the 3.33 cents for each $1 of income over $38,564 p.a. up to$53,564 p.a. As there are also other qualifying criteria, you should contact your accountant if you wish to access this benefit in 2020.
Eligibility for super concessional contributions
The 2019-20 financial year is the first year when carry forward provisions come into effect, where you can carry forward unused contributions for five consecutive years.
To be eligible, your Total Superannuation Balance (TSB) must be less than $500,000 at 30 June of the previous year. This is assessed at 30 June of the prior year for each year in the rolling five-year period in which you intend to use the unused cap.
This strategy can be used for taxpayers expecting to have higher taxable income in an income year and would like to reduce the tax liability they have to pay, whether it’s for work bonuses, large capital gains, retirement payouts or large trust distributions.
Individuals aged 65 to 74 and who meet the work test (and TSB test) will also be eligible to access the catch-up concessional contributions.
Transition to retirement income streams
If you are 55 or older at 30 June 2020, you may be eligible to commence a “Transition to retirement” pension. Benefits may include:
- Receiving pension income while still working.
- Ability to salary sacrifice to superannuation to access lower tax rates; and
- Concessional tax treatment within your super fund.
Note that up to 30.6.2017, the income from assets supporting a transition to retirement income stream was tax exempt. Since 1.7.2017 this exemption no longer applies.
Medicare Levy Surcharge (MLS) and Private Health Insurance Rebate (PHIR)
The thresholds for the imposition of the MLS (If not covered by private hospital insurance) are broadly as follows:
- Singles (no dependants) – $90,000 pa; and
- Families – $180,000 pa (plus $1,500 for each dependant child after the first)
There are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions and investment losses counted in calculating these thresholds.
Further, there is a “tiered” system for calculating MLS in the 2020 income year. The rate of MLS will be between 1% and 1.5% depending on the extent to which income exceeds the relevant thresholds.
In addition, PHIR is also means tested in the 2020 income year under a “tiered” system. The rate of rebate will be between 0% and 30% depending on income levels. This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional liability upon lodgement of their return.
ATO recovery from Higher Education Loan Program and Trade Support Loan Debt
The Higher Education Loan Program (HELP) and Trade Support Loan (TSL) repayment rules to debtors who reside overseas have been extended by assessing their repayment obligations on their worldwide income. Repayment obligations commenced from 1 July 2017.
Since January 2016, HELP and TSL debtors who are going overseas for more than 6 months were required to register with the ATO. Debtors already living overseas had until 1 July 2017 to register.
ATO Data Matching
The ATO’s extensive data matching capabilities is based on information it receives from various sources including banks, share registries, employers, government agencies and via its network of global information exchange agreements.
In terms of focus areas for compliance activities, the ATO continues to closely monitor:
- Claims for work-related expenses that are unusually high relatively close to others across comparable industries and occupations.
- Excessive rental properties expenses.
- Non-commercial rental income received for holiday homes.
- Interest deductions claimed for the private proportions of loans; and
- People who have registered for GST but are not actively carrying on a business.
Incur Expenses Before Year End
Expenses that are incurred before year end can reduce taxable income. Consider forthcoming liabilities and the value in incurring them before year end.
If you have rental property, consider whether you are maximising claims for capital works deductions on the property. A report from a quantity survey or suitably qualified specialist will maximise your entitlements.
Pay income protection insurance premiums before year end.
Motor vehicle expenses
There are now only two methods which can be used to claim a deduction for motor vehicle expenses.
- The cents per km method (for up to 5,000 business kilometres travelled); and
- The logbook method (logbook kept over 12 weeks and updated every 5 years).
For the year ended 30 June 2020 the single rate of deduction determined by the Commissioner is 68 cents per kilometre.
Detailed records assist in maximising deductions.
Zone Tax Offset
Since 1 July 2015, the zone tax offset has been limited to those taxpayers whose usual place of residence is within the designated zones. The zone tax offset is a concessional tax offset available to individuals against their income tax liability in recognition of the isolation, extreme climate and high cost of living associated with living in designated zones.
This means “fly-in-fly-out” and “drive-in-drive-out” employees, whose usual place of residence is located outside of the zone, are ineligible to claim the zone tax offset for the 2016 income year and later income years.
Claiming Travel Allowance Deductions
An audit focus continues by the ATO on travel allowance expenses being claimed by individual taxpayers. If you intend to use the exception for retaining substantiation for these claims the following must apply:
- You must be receiving a bona fide travel allowance from your employer.
- You must be working away from home (on overnight stays) in the course of performing employment duties.
- You must calculate the claim correctly for your salary level and location of work; and
- You must be able to show that you are incurring travel expenses.
Other Business Considerations
- Cash or accruals reporting – recognition of income on a receipt’s basis will generally defer the point of derivation.
- Review service contacts – do the terms of the contract mean income can be recognised periodically when the services are performed?
Write off bad debts in the books of accounts prior to 30 June 2020.
Ensure all bonuses are determined and properly documented before year end.
- Scrap obsolete items of plant and equipment.
- Utilise depreciation pools to their full extent; and
- For SBEs (see above) consider taking advantage of the immediate write-off up to $150,000 for each individual asset acquired after 12.3.2020 until 30.6.2020.
Note that from 12.3.2020, eligibility has been expanded to cover businesses with an aggregated turnover of less than $500 million (up from $50 million).
Consider these may be obsolete stock to write off and note closing stock can be valued at year end at the lesser of cost, market value or replacement value.
Generally, an entity must perform a stock take to determine the physical quantity and value of each item at year end.
Prepayment of Expenses
In some circumstances, small businesses (with turnover of less than $10 million) should consider prepaying expenses prior to 30 June 2020. A tax deduction can be brought forward into this financial year for expenses like insurance premiums, subscriptions and memberships, travel, advertising, and interest. A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2020 for services to be rendered within a 12-month period.
Bankruptcy Law Changes to Provide Relief
The Australian Government has temporarily changed bankruptcy law to help protect people who are facing unmanageable debt resulting from the economic impacts of COVID-19.
If you are a sole trader, or operating a business as a partnership, you could face personal bankruptcy if you cannot pay your debts.
If you are in financial difficulty you can now apply for temporary debt protection; this prevents recovery action by unsecured creditors for six months. You can use the time to:
- seek free advice from a financial counsellor
- negotiate payment plans with creditors
- consider whether you require a formal insolvency option.
In addition, the temporary debt relief measures have increased the:
- minimum amount of debt that can trigger bankruptcy (from $5,000 to $20,000)
- time an individual has to respond to a Bankruptcy Notice (from 21 days to six months).
If you are concerned about your finances, help is available. You can access advice from this office or get free support through the National Debt Helpline by calling 1800 007 007.
STP Exemption for Closely Held Payees
The ATO has extended the Single Touch Payroll (STP) exemption for small employers (19 or fewer employees) to report their closely held payees from 1 July 2020 to 1 July 2021.
Closely held payees include family members, directors or shareholders of a company, and beneficiaries of a trust.
If your business has any other employees (also known as arm’s length employees) they must be reported now through STP.
You can choose to report your closely held payees sooner if it is easier. If you are already reporting through STP, you can report closely held payees each time you make a payment just as you would for your other employees.
Reporting through STP may support your JobKeeper payment application and help you meet your monthly reporting requirements for the subsidy. STP reporting enables employers to notify of their eligible employees, their eligibility starts and finish periods, and the amounts those employees have been paid, including any JobKeeper top-up.
Work-Related Car Expenses
The ATO has published some Q and A on COVID-19 and work-related car expenses.
I claim my car-related expenses using the logbook method. Will I need to keep a new logbook for an updated representative period of private and business usage during COVID-19?
Answer: No, you are not required to keep a new logbook for the period in which your travel has been affected by COVID-19 as long as you account for any variation in the use of the car when working out your business kilometres and your business use percentage at the end of the income year.
When working out your business kilometres at the end of the income year, you need to make a reasonable estimate based on any logbooks, odometer records or other records you have.
For the period in which your travel has been affected by COVID-19, you may keep a new logbook if you think it will provide a more accurate indication of your business use of the car. However, if your overall business usage has not changed and you are merely using the car less, the odometer readings will reflect this, and you will not need to keep another logbook.
Residential Rental Properties
In similar fashion, the ATO have answered the following questions relating to residential rental properties.
My tenants are not paying their full rent or have temporarily stopped paying rent because their income has been adversely affected by COVID-19. Can I still claim deductions on my rental property expenses?
Answer: Yes. If tenants are not meeting their payment obligations under the lease agreement due to COVID-19 and you continue to incur normal expenses on your property, then you will still be able to claim these expenses in your tax return.
I am considering reducing the rent for tenants whose income has been adversely affected by COVID-19 to enable them to stay in the property. The tenants are not in default of their rent. Will my deduction for rental property expenses be reduced because of this?
Answer: No. If you decide to reduce the rent to enable your tenants to remain in the property (thereby maximising your rental return in a changed rental market), your deduction for rental property expenses will not be reduced.
If I receive a back payment of rent or an amount of insurance for lost rent, is this amount assessable income?
Answer: Yes. These amounts should be declared as income in the tax year in which you receive the amounts.
If the bank defers loan repayments for a period of time as a result of COVID-19, can I continue to claim interest on the loan as a deduction?
Answer: Yes. If interest continues to accumulate on your loan, it will be an expense that you have incurred and is therefore deductible. Interest remains deductible on the loan even if the bank defers the repayments.
Can I access the new instant asset write-off for my property?
Answer: No. If you are a property investor, you cannot access the instant asset write-off deduction.
Short-Term Rental Properties
COVID-19 is adversely affecting demand, including cancellation of existing bookings, for a property that I currently rent out as short-term accommodation. I have previously had some private use of the property. Will I be able to continue to deduct expenses associated with this property in the same proportion as I was entitled to claim before COVID-19 for the period that demand is adversely affected?
Answer: The amount you can claim will depend on how the property had been used before COVID-19 and how you had planned to use it during the COVID-19 period. If the reason for the adverse effect on demand for your property is because of COVID-19 (or the bushfires before this), you can continue to deduct expenses associated with your property in the same proportion as you were entitled to deduct before COVID-19.
If you had started to use the property in a different way than before COVID-19, the proportion of expenses you can claim as a deduction may change. Examples of changed use include:
- increased private use of the property by you, your family, or your friends
- a decision to permanently stop renting out your property once the COVID-19 restrictions end.
I would like to stop paying for advertising on my short-term rental property during COVID-19 as I am not getting any queries for the property. Can I still claim deductions associated with holding the property?
Answer: It depends on a wider range of factors, not just one. Whether active and bona fide efforts are made to ensure a property is available for rent is only one factor to consider when determining the appropriate method to apportion deductions for a short-term rental property. You would need to consider how the property had been used before COVID-19 and how you plan to use it during the period now adversely affected by COVID-19.
During this time, we acknowledge it may be a reasonable commercial decision to temporarily reduce the level of paid advertising for your property, depending on the restrictions in your property’s locality. However, this factor alone does not necessarily determine the allowable proportion of your deductions.
I am using my holiday home privately for myself and my family so we can isolate during COVID-19. Can I continue to claim deductions for the property for this period, as I am unable to rent the property commercially?
Answer: No. If you are using the property yourself or providing it to friends or family, this will increase your private usage of the property and reduce the deductions you can claim.
Please note: Our Newsletters are not the place for the giving or receiving of financial advice concerning investment decisions or tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Any ideas and strategies should never be used without first assessing your own personal needs and financial situation, or without consulting or engaging with us as your professional advisors.