EXTRA EDITION – YEAR END TAX PLANNING TIPS
Clarifying the Process of Year End Tax Planning
YEAR END TAX PLANNING TIPS 2020-21
While many of us have struggled due to COVID-19, tax minimisation is still very important.
Overview
The fringe benefits tax (FBT) year ended on 31.3.2021. If you operate through a company or trust, carefully consider whether all FBT matters have been attended to and whether 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.
Also carefully consider the effect COVID-19 has had on the calculation of the taxable fringe benefits, in particular motor vehicle and car parking fringe benefits. Carefully consider what has transpired over the year and do not pay any more FBT than you need to.
SMALL BUSINESSES
Check Eligibility for Small Business Tax Regime
Small businesses (sole traders, partnerships, companies, and/or trusts with a turnover of less than $10 million) may be eligible for a range of tax benefits including immediate write-off of assets costing less than $150,000 a 26 per cent company tax rate, simplified depreciation, capital gains tax concessions (turnover less than $2 million) and accounting on a cash basis.
Also, see the instant asset write-off below.
Review Salary Sacrifice Arrangements
Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either 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 superannuation 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 2020-2021 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 from one entity to another. This rollover applies to active 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.
It may be necessary to make a family trust election for this to be effective.
Private Company Loans
Income Tax law can potentially treat a payment or 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 2020-2021 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 sole benefit of the private company, and other conditions are satisfied. These rules are complex and professional advice should be sought.
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 debt in the accounts no deduction will be available. The debt must also be unrecoverable 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.
INDIVIDUALS
In general, individual income is derived and deductions are incurred on a receipt’s basis. The following suggestions may reduce your current tax year 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 portfolio loans
- Membership and subscriptions
- Investment property expenses
- Corporate Body levies
- Insurance
- Repairs and maintenance
- Rates
Before 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 the following components:
- Motor vehicle expense
- Additional superannuation contributions
- School fees
The top marginal tax rate applied 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
Kindly note, there is no tax deduction for the non-concessional contribution.
2021 Contributions Caps:
- 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 2021 year for your spouse where your 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-Contributions
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 3.33 cents for each $1 of income over $39,837 p.a. up to $54,837 p.a. As there are also other qualifying criteria, you should contact your accountant if you wish to access this benefit in 2021.
Eligibility for Super Concessional Contributions
The 2020-2021 financial year is the second 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 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 is 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 2021, 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 threshold for the imposition of the MLS (If not covered by private hospital insurance) are broadly as follows:
- Singles (do dependants) – $90,000 pa; and
- Families – $180,000 pa (plus $,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 2021 income year. The rate of the rebate will be between 1% and 1.5% depending on the extent to which income exceeds the relevant threshold.
In addition, PHIR is also means-tested in the 2021 income year under a “tiered” system. The rate of the 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 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 are expected to register.
ATO Data Matching
The ATO’s extensive data matching capabilities are based on the information it receives from various sources including banks, share registers, 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 usually 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.
In 2021 an area of ATO focus is contractors not declaring income detectable under the Taxable Payments Reporting System (TPRS).
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 surveyor 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 that can be used to claim a deduction for motor vehicle expenses.
There are:
- 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 2021, the single rate of deduction determined by the Commissioner is 72 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 by the ATO continues on travel allowance expenses being claimed by individual taxpayers.
If you intend to use the exception for retaining substantiation of 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 DEDUCTIONS
Defer Income
- 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?
Bad Debts
Write off bad debts in the books of accounts prior to 30 June 2021.
Bonuses
Ensure all bonuses are determined and properly documented before year end.
Depreciation
- 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 of up to $150,000 for each individual asset acquired after 12.3.2020 until 30.6.2021.
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).
From 7.30 pm AEDT on 6.10.2020 until 30.6.2022, temporary full expensing allows a deduction for:
- The business portion of the cost of new eligible depreciation assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test.
- The business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50 million.
- The balance of a small business pool at end of each income year in this period for businesses with an aggregated turnover under $10 million.
Temporary full expensing is not subject to the $150k limit.
Trading Stocks
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 the 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 a turnover of less than $10 million) should consider prepaying expenses prior to 30 June 2021. 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 2021 for services to be rendered within a 12-month period.