Business Tax Strategies
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Maximise individual tax thresholds
Consider maximising your lower income tax thresholds in the current year as they cannot be carried forward to the next financial year. Consider the basic example below:
Example A Gross Net Example B Gross Net
Individual 1 $75,000 $58,658 Individual 1 $45,000 $39,333
Individual 2 $15,000 $15,000 Individual 2 $45,000 $39,333
Total $90,000 $73,658 Total $90,000 $78,666
The following tax thresholds apply to Australian residents excluding the 2% Medicare Levy:
$0-$18,200 00.00% $120,000 to $180,000 39.00%
$18,200 to $45,000 21.00%, Over $180,000 47.00%
$45,000 to $120,000 34.50%
Write off bad debts
In order to be treated as a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. The bad debt needs to be written off your debtors’ ledger by 30 June. If you do not maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
Bring forward repairs & maintenance
Consider bringing forward repairs and maintenance prior to 30 June to claim the deduction in the current financial year.
Consider making tax-deductible donations
Consider making tax deductible donations prior to 30 June to claim the deduction in the current financial year. Before donating, ensure the entity you are donating to is registered charity.
This can be confirmed by visiting https://abr.business.gov.au/ and entering the charity name or ABN into the search field. Scroll down the ‘Deductible gift recipient status’ to check whether the entity is endorsed. Example below:
Stock up on consumables
Consider replenishing consumable supplies such as stationery, printer cartridges and packaging materials prior to 30 June.
Consider prepaying expenses
SME businesses can prepay expenses up to 12 months in advance for an immediate tax deduction. This can include expenses such as rent, advertising, insurance, print and online subscriptions and interest.
Also consider realigning your annual business insurance premium renewal to coincide with the end of financial year. This gives you the option to prepay a full year of insurance prior to 30 June.
Pay June quarter employee super contributions now
Pay June quarter super contributions prior to 30 June to claim the tax deduction in the current financial year. The June quarter superannuation guarantee payment is due on 28 July, however, some employers choose to make the payment early to bring forward the tax deduction by 12 months.
Don’t forget yourself! Superannuation can be a great way to save tax and build your personal wealth.
Personal superannuation contributions need to be received by the fund before 30 June to be deductible.
Defer income
Where appropriate, defer issuing customer invoices to 1 July or later.
Bring forward employee bonuses
Any expected employee bonuses may be deductible in the 2019-20 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2020, even if the bonus is paid to the employee after 30 June 2020.
You would generally be definitely committed to the payment if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end. The accrued bonuses need to be paid within a reasonable time period after year-end.
Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses, i.e. consider selling assets and locking in the capital loss where applicable. These need to be genuine transactions to be effective for tax purposes.
Raise management fees between entities by 30 June
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management are raised, ensure they are commercially reasonable, and that documentation is in place to support these transactions. We recommend that management fees be physically paid rather than being processed via a journal entry.
If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered. This is an area under increased scrutiny and the ATO’s documentation expectations will be much greater.
Complete a stocktake
Businesses that buy and sell goods will generally need to complete a stocktake at the end of each financial year. The increase or decrease in the value of trading stock is taken into account when calculating the taxable income of your business.
If your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000. You will need to record how you determined the value of trading stock on hand. We generally do not recommend using this method.
If you do need to complete a stocktake, you may choose one of the three methods below to value your trading stock:
- Cost price: All costs connected with the stock need to be considered, including freight inwards and customs duty. Where an entity manufactures products, labour, materials, and a portion of fixed and variable factory overheads should also be included.
- Market selling value: Stock is valued at the current market value applicable to the normal course of business.
- Replacement value: The price of a substantially similar replacement item in a normal market on the last day of the income year.
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year, you can choose the most tax effective option each year.
The most obvious example is where the stock can be valued below its purchase price due to market conditions or where damage has occurred to the stock. This will give rise to a deduction even though the loss has not yet been incurred.
Review your asset register and scrap obsolete plant & equipment
Review your asset register and check for any obsolete items. If any plant and equipment has been scrapped or has become obsolete, these should be written off before 30 June.
If any items have been sold, ensure you have provided the relevant details to your accountant.
Note: Call or email our office to request a current copy of your asset register.
Take advantage of the $150,000 instant asset write-off
The instant asset write-off enables your business to claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed ready for use for a taxable purpose.
Consider bringing forward the purchase of business assets to take advantage of the write-off.
The COVID-19 stimulus measures temporarily increased the threshold for the instant asset write-off between 12 March 2020 and 30 June 2020 from $30,000 to $150,000, and expanded the range of businesses that can access the threshold to those with an aggregated turnover of less than $500 million.
For example, if your company’s turnover is under $500 million and you purchase an eligible asset for $140,000 (GST-exclusive) on 1 June 2020 (and install it ready for use by 30 June 2020), then a deduction of $140,000 can be claimed. If the company is subject to a tax rate of 27.5% then this should reduce the tax payable by the company for the 2020 income year by $38,500.
If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a direct short-term benefit to you. However, if this measure is likely to reduce the taxable income of the business for the year then it may be possible to vary upcoming PAYG instalments to improve cash flow.
- The instant asset write-off applies to both new and second-hand assets
- There is no limit to the number of times you can use the immediate deduction providing the cost of each individual asset is less than the relevant threshold
- If your business is registered for GST, the cost of the asset needs to be less than the limit after the GST credit has been subtracted from the purchase price
- If your business is not registered for GST, the cost of the asset needs to be less than the limit including GST
- For motor vehicle purchases, on-road costs such as stamp duty and registration must be added to the purchase price of the vehicle to determine whether the cost is less than the limit
- If the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20)
- Some assets are excluded from the instant asset write-off provision such as horticultural plants, capital works, software, and assets that are leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
The business use percentage of the asset also needs to be taken into account in calculating the deduction. For example, if a sole trader acquires a car for $40,000 but only expects to use it 80% in the business then the immediate deduction would be $32,000.
The increase to the instant asset write-off threshold in the stimulus package is the fourth increase or extension and businesses will need to be wary of what they are claiming and when:
Instant asset write-off thresholds
Small Business*
Medium Business**
Large Business***
1 July 2018 - 28 January 2019
$20,000
-
-
29 January 2019 - 2 April 2019
$25,000
-
-
2 April 2019 - 12 March 2020
$30,000
$30,000
-
12 March 2020 - 30 June 2020
$150,000
$150,000
$150,000
* aggregated turnover under $10 million ** aggregated turnover under $50 million ***aggregated turnover under $500 million
Note: At this stage it is expected that the instant asset write-off threshold will reduce back to $1,000 from
1 July 2020 for small business entities and that the instant asset write-off rules will no longer be available to medium and large businesses.
Write off small business pool balances
For businesses using the pooling depreciation method, the general pool may be able to be written off at 30 June 2020 providing the closing balance of the pool prior to depreciation being accounted for is less than $150,000. The calculation is as follows: Opening pool balance plus the value of any assets added to the pool during the year less the sale proceeds of any assets sold during the year.
Tax Tip: Consider selling assets prior to 30 June to reduce your pool balance to below $150,000.
Assets costing $150,000 or more
For small businesses (aggregated turnover under $10m), assets costing $150,000 or more can often be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. Depending on when the asset was acquired and first used in the business, the rate of deduction in the first year could be higher (see accelerated depreciation deductions heading below).
Accelerated depreciation deductions
Businesses with a turnover of less than $500 million can access accelerated depreciation deductions for assets that do not qualify for an immediate deduction, for a limited period of time.
This incentive is only available in relation to:
- New depreciable assets
- Assets acquired on or after 12 March 2020 that are first used or installed ready for use for a taxable purpose by 30 June 2021.
It does not apply to second-hand assets, buildings, and other capital works expenditure. The rules will also not apply if the business entered into a contract to acquire the asset before 12 March 2020.
Businesses are able to deduct 50% of the cost of a new asset in the first year. They can then also claim a further deduction in that year by applying the normal depreciation rules to the balance of the cost of the asset.
Accelerated depreciation deductions apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.
Example: A business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2020-21 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation on the balance of the cost. If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e. $125,000 x 15%). The total deduction in the 2020-21 tax return would be $143,750.
Without the introduction of accelerated depreciation, the business would have only claimed a deduction of $37,500 (i.e., 15% x $250,000).
Depreciation on investment properties
If you own a rental property, consider obtaining a Property Depreciation Report. This assists with claiming the maximum amount of depreciation and building write-off deductions. Please note that deductions for existing plant and equipment in investment properties purchased after 9 May 2017 are no longer available.
Companies
Consider bringing forward dividend payments to utilise franking credits
From 1 July 2020, the company tax rate for base rate entities will reduce to 26%. The reduction in the company tax rate will also change the maximum franking rate that applies to dividends paid by base rate entities. A base rate entity (BRE) is an entity with aggregated turnover less than $50m and no more than 80% of the company’s assessable income is base rate entity passive income.
Example: A BRE has a taxable income of $100,000 in the 2018-19 financial year and pays $27,500 (27.5%) in tax leaving retained earnings in the company of $72,500. In the 2019-20 financial year the company pays a dividend of $72,500 to the sole individual shareholder. The shareholder includes the gross dividend amount of $100,000 in their 2019-20 individual tax return and claims a tax credit of $27,500 for the tax already paid by the company.
If this dividend was paid after 1 July 2020 (the 2020-21 financial year), the tax credit available will reduce to $25,473 (72,500 / 0.74 x 0.26). Tax credits of $2,027 are trapped due to the company tax rate reducing from 27.5% to 26%. Note that the individual’s taxable income will also decrease by the value of the tax credit.
Where appropriate, consider paying dividends before 30 June to utilise the current 27.5% franking rate depending on the affect on cashflow and tax minimisation strategies being considered by the shareholders.
Pay dividends to holding company to lock in franking credits
Where all shares in a company are held by a holding company, consider paying a large dividend to the holding company prior to 30 June to avoid losing access to franking credits. See explanation above regarding how franking credits can be trapped.
Directors fees
Any expected director’s fees may be deductible in the 2019-20 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2020, even if the director’s fee is paid to the director after 30 June 2020.
You would generally be ‘definitely committed’ to the payment by year-end if the directors pass a properly authorised resolution. Any accrued directors’ fees need to be paid within a reasonable time period after year-end.
Declare dividends to pay out shareholder loan accounts
If your company has loaned funds to a shareholder or related party, has paid expenses on behalf of a shareholder, or has allowed a shareholder or other related party to use assets owned by the company, this could be treated by the ATO as a taxable dividend. Consider declaring dividends to clear any outstanding loan accounts by 30 June.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June. It may be necessary for the company to declare dividends before 30 June to be able to make these loan repayments.
Discretionary Trusts
Family trust anti-avoidance measure
From 1 July 2019, new anti-avoidance measures prevent family trusts engaging in ‘round robin’ circular trust distributions with other closely held trusts.
The rules impose penalty rates of tax in situations where trust income is distributed to one or more other trusts and ends up being distributed back to the first trust. Previously, trusts that had made a family trust election were excluded from these rules but that is no longer the case.
Timing of resolutions
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2020 at the latest (the trust deed may actually require this to be done earlier).
Decisions made by the trustees should be documented in writing, preferably before 30 June 2020.
If valid resolutions are not in place by 30 June, the risk is that the taxable income of the trust will be assessed in the hands of the trustee, in which case the highest marginal rate of tax would normally apply. If you require a trustee resolution template, please contact our office.
Income of minors
Minors (individuals under the age of 18) who receive ‘unearned’ income such as trust distributions are subject to penalty rates of tax on income that exceeds $416.
Up to $416 Tax free
$417 - $1,307 Nil plus 68% of the excess over $416
Over $1,307 47% of total income
Normal marginal tax rates apply to minors who receive income they earn such as employment income, as well as distributions from a deceased estate or a testamentary trust.
Streaming of franked dividends and capital gains
Trustees are only able to stream franked dividends (and the franking credits that are attached to those dividends) to a particular beneficiary for tax purposes if the beneficiary’s entitlement to the franked dividends is recorded in writing by 30 June 2020.
For streaming of capital gains to be effective for tax purposes, the beneficiary’s entitlement must be recorded in writing by 30 June if the capital gains form part of trust income for the year, or 31 August if the capital gains do not form part of trust income.
Tax exempt entities
If a trustee resolves to distribute income to a tax-exempt entity, the trustee will be assessed on that income at the top marginal tax rate unless:
- The trustee actually pays the entire distribution within 2 months of the end of the income year; or
- The trustee notifies the entity in writing of its entitlement within 2 months of the end of the income year.
Also, anti-avoidance rules tax the trustee on a portion of the income distributed to a tax-exempt entity where there is a mismatch between the net financial benefit to be received by the entity and the tax treatment of the distribution.
TFN reporting
Has your trust lodged TFN reports for all beneficiaries?
Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax return each year. The Australian Taxation Office (ATO) is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.
Where TFN provided
Where beneficiaries have quoted their TFN to the trustee, trustees are required to lodge a TFN report for each beneficiary. The TFN report must be lodged by the end of the month following the end of the quarter in which a beneficiary quoted their TFN. For example, if the trustee receives a beneficiary’s TFN in April, they must lodge a TFN report by the end of July.
Where TFN not provided
Where a TFN has not been provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% and pay this to the ATO. The trustee must also lodge an annual report of all amounts withheld.
Failure to comply with the TFN reporting and withholding requirements may incur penalties.
Partnerships
Access to the small business CGT concessions
A loophole that enabled partners in large partnerships to access the small business Capital Gains Tax (CGT) concessions has been closed.
The retrospective legislation applies to CGT events that occurred from 7.30pm on 8 May 2018. Now, partners who alienate their income by creating, assigning or otherwise dealing in rights to the future
income of a partnership (often referred to as Everett assignments) no longer have access to the
small business CGT concessions in relation to these rights.
Where partners are impacted by the legislative change, the ATO will not be applying penalties or shortfall interest to amounts that have not been reported (or where reduced amounts have been reported) on the basis that the small business concessions could apply. However, if you are impacted, you are required to amend your return to take into account the correct position (i.e., no access to the small business concessions) as soon as practicable.
view
Date
Changes and actions
Pre 30 June 2020
- Ensure that contributions are made and received by 30 June. If contributions are by EFT, ensure that the contribution is recognised in the bank account as at 30 June
- Where applicable, ensure minimum pension payments have been withdrawn from the fund’s bank account by 30 June
- Review your fund’s investment strategy including the appropriateness of any existing insurance held by the SMSF or the need for insurance coverage for fund members
- Rectify any outstanding compliance issues noted by your auditor
- Paperwork is in place for any in-specie contributions made to the fund
- 30 June 2020
- Last day to apply for 2019-20 early access to superannuation under COVID-19 measures
- From 1 July 2020
- Expected reforms for 66 and 67 year olds to allow voluntary contributions without satisfying the work test
- 24 September
- Last day to apply for 2020-21 early access to superannuation under COVID-19 measures
- 6 October 2020
- 2020-21 Federal Budget released
- 30 June 2021
- Minimum pension amounts for super income streams return to default rates
Early access to superannuation
See further information in the ‘Individuals’ section below.
Carry forward unused concessional contributions
See further information in the ‘Individuals’ section below.
Minimum pension amounts for super income streams
The minimum drawdown requirements for account-based pensions and similar products have been reduced by 50% in 2019-20 and 2020-21. If you have already drawn down more than the required minimum, any deposits into your fund will be treated as a contribution under normal contribution rules.
Age
Default minimum
drawdown rates
2019-20 and 2020-21
reduced rates
Under 65
4%
2%
65-74
5%
2.5%
75-79
6%
3%
80-84
7%
3.5%
85-89
9%
4.5%
90-94
11%
5.5%
95 or more
14%
7%
SMSF compliance status removed if annual returns late
If your SMSFs annual return is more than two weeks overdue and you have not requested a deferral,
the ATO will move your fund’s status on Super Fund Lookup from ‘Complying’ to 'Regulation details removed'.
Broadly, the change may result in the fund not receiving rollovers from APRA regulated funds and contributions from employers. Having a status of 'Regulation details removed' means APRA funds won't rollover any member benefits to the SMSF and employers won't make any super guarantee (SG) contribution payments for members of the SMSF.
This could particularly impact on those consolidating their superannuation accounts or receiving mandated employer contributions from independent employers (note that employees are required to advise their employer if the fund is no longer complying). There is also a risk that related employers could face issues as a result of making contributions to a fund that is not confirmed to be complying, such as losing the deductibility of contributions and incurring super guarantee charge obligations.
Warning on non-arms length income expenditure
From 1 July 2018, the definition of non-arm’s length income (NALI) expanded to manage a loophole that allowed superannuation savings to be artificially inflated by non-arms length expenses that were provided free or at below market rates. For example, where services were provided to the fund by a company related to a fund member at reduced rates. In this way, funds could increase their superannuation savings while circumventing the contribution caps.
Where this situation arises, the rules tax this non-arms length income at the top marginal tax rate.
The question of whether the non-arm’s length income rules apply depends on the capacity in which the trustee undertakes those activities. Essentially, if you or a related entity are providing services to your superannuation fund in a capacity other than as trustee, and you (or the related entity) currently provide that service to the public, an arms length fee should be charged for this service. Failure to do so could result in non-arms length income applying to the applicable asset the expense relates to.
There has been a lot of confusion over the new rules and the ATO has stated that they will not commit compliance resources to this issue until 1 July 2020. This gives trustees a limited opportunity to ensure that any non-arms length services provided are at market rates. If you are uncertain, please contact us and we can work with you to ensure your fund is not at risk.
Contributions must be received by 30 June
To claim a tax deduction for super contributions (as an employer or as an individual), the payment needs to be received by the fund no later than 30 June. Merely incurring a liability is not enough.
If you are making a personal superannuation contribution that you want to claim as a tax deduction, you need to write to your fund in their approved form and advise them of the amount you intend to claim as a deduction. The superannuation fund then needs to acknowledge your notice of intent and agree to the amount you intend to claim as a deduction. This will normally be in the form of a notice or certificate from the fund to confirm the tax deductibility of the contribution.
Valuing SMSF assets
SMSFs are required to value their assets at market value. Depending on the situation, a market valuation may be undertaken by a:
· Registered valuer
· Professional valuation service provider
· Member of a recognised professional valuation body, or
· A person without formal valuation qualifications but who has specific experience or knowledge in a particular area.
For real property, the valuation may be undertaken by anyone as long it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent is acceptable.
However, where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex, you should consider the use of a qualified independent valuer.
In general, real estate does not necessarily need a formal valuation each year by a licenced valuer unless there is a significant event that occurs during the year which may affect the previous valuation. A significant event could be one that directly involves the property itself, the fund on a general level such as one of the fund’s members going into pension mode, or if the asset represents a significant portion of the fund’s value.
Review the fund’s investment strategy
Trustees are required to ‘regularly review’ the fund’s investment strategy. We recommend that trustees review the strategy and document the review at least annually or when the circumstances of the fund change.
Review insurance inside your SMSF
SMSF trustees need to consider the need for insurance cover for the fund members when formulating and reviewing the fund’s investment strategy.
Cambridge Advisory Pty Ltd is Corporate Limited Authorised Representative No 1278397 and
Andre Kingon is Limited Authorised Representative No 1252197 of Merit Wealth Pty Ltd
Australian Financial Services License 409361, ABN 89 125 557 002. Access our FSG here.
Individuals
Working from home? What you can claim
From 1 March 2020 until at least 30 June 2020, special arrangements are in place to make it easier for individuals to claim expenses they have incurred while working from home during the COVID-19 pandemic.
If you have incurred work-related expenses and you have not been reimbursed by your employer, you can claim these expenses at a rate of 80 cents for each hour you work. To use this method, you will need a record of the hours you have worked, such as a diary or timesheet.
The claim covers all of your additional running expenses such as:
· Electricity and gas
· Decline in value and repair of capital items such as office furniture
· Cleaning expenses
· Phone and internet expenses
· Stationery
· Decline in value of computers and devices
The COVID-hourly rate can be claimed per individual (it is not limited by household). That is, if you have multiple people working from home in your household, each person can claim the 80 cents per hour rate for the hours they have worked from home.
Using the COVID-hourly rate is optional and aimed at people who do not normally work from home. For some, their expenses will be higher, such as those with a dedicated home office, or for those that normally operate their business from home. In these circumstances the normal rules will apply.
Cents per kms change for work-related car expenses
The rate at which work-related car expenses can be claimed using the cents per kilometre method will increase from 1 July 2020 from 68 cents to 72 cents per kilometre.
Using this method, a maximum of 5,000 business kilometres can be claimed per year per car.
Early access to superannuation
Individuals in financial distress as a result of the coronavirus pandemic are able to self-certify and apply for early release of up to $10,000 of their superannuation in 2019-20, and again in 2020-21 (up until 24 September 2020).
To be eligible for early release, you should ensure you meet the eligibility criteria:
· You are unemployed, or
· You are eligible for jobseeker, parenting payment or special benefit or farm household allowance, or
· On or after 1 January 2020, you were made redundant, or
· Your working hours were reduced by 20% or more, or
· For sole traders, your income reduced by 20% or more.
The early release of superannuation measure is available to Australian citizens, permanent residents, and New Zealand citizens with Australian held super. Eligible temporary visa holders can also apply for a single release of up to $10,000 before 1 July 2020.
We have received a number of questions from clients asking if they can access $10,000 of their superannuation in 2019-20 and 2020-21 and then recontribute the amount before the end of the financial year to claim a tax deduction.
If you have withdrawn more than you need, you can recontribute this amount under normal contribution rules. However, if you are withdrawing superannuation with the intent to recontribute the amounts to maximise your tax deductions, we advise against this as it will attract the ATO’s attention. If you have accessed your superannuation early and recontribute some or all of the amount, ensure that you have the documentation in place to prove that you met the eligibility criteria for early release and were in financial distress. Harsh penalties apply to those who make false declarations.
Consider making personal super contributions
If you make a personal super contribution before 30 June, you may be able to claim the contribution as a tax deduction and reduce your assessable income.
The concessional super contribution cap or limit for 2019-20 is $25,000. This amount includes any superannuation paid by your employer on your behalf, as well as any amounts you have contributed to super under a salary sacrifice arrangement. Penalties apply if you exceed the cap.
The contribution will generally be taxed in the fund at the concessional rate of 15%, instead of your marginal tax rate which could be up to 47%. Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super.
To be eligible to claim the super contribution as a tax deduction, you need to submit a valid ‘Notice of Intent’ form. You will also need to receive an acknowledgement from the super fund before you complete your tax return, start a pension or withdraw or rollover money from the fund to which you made your personal contribution.
Keep in mind that you are unable to access your super until you meet certain conditions.
Carry forward unused concessional contributions
If you have unused concessional contributions, that is, you did not contribute the full $25,000 in 2018-19 or 2019-20, then you can carry forward these amounts for five years on a rolling basis if your total superannuation balance is below $500,000 on 30 June (of the year you intend to access the unused amount).
The ability to carry forward concessional contributions applies from 1 July 2018, with the 2019-20 financial year the first year an individual can access their unused carry forward concessional amounts.
Concessional contributions include employer contributions (super guarantee and salary sacrifice) and personal contributions that you have claimed a tax deduction for.
For example, if your total concessional contributions in the 2019-20 financial year were $10,000 and you meet the eligibility criteria, then you can carry forward the unused $15,000. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution might assist in reducing your tax liability in the year of sale.
Remember:
· Your total superannuation balance must be below $500,000 on 30 June of the prior year before you utilise any carried forward amount (within the 5-year term); and
· In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super where income and concessional contributions exceeds the threshold ($250,000 in 2019-20). Your income could be higher than usual in the year when you sell an asset for a capital gain.
This is an excellent concession to help you top up your superannuation, especially where you are out of the workforce at some stage.
Common Work-Related Deductions
For a list of common work-related deductions please see the Tax Deduction Checklist on our
website: http://www.cambridgeaccountants.com.au/resources/tax_deduction_checklist
New Developments
2020-21 Federal Budget delayed until October
The release of the 2020-21 Federal Budget has been postponed from its traditional date in May until
6 October 2020. We expect there will be a number of reforms and measures to tighten spending and recover revenue, as well as a range of productivity measures.
Company tax rate reduction
From 1 July 2020, the company tax rate for base rate entities will reduce to 26%.
2018-19 and 2019-20
2020-21
2021-22
Base rate entities*
27.5%
26%
25%
Other corporate tax entities
30%
30%
30%
*aggregated turnover less than $50m and no more than 80% of the company’s assessable income is base rate entity passive income.
JobKeeper
The JobKeeper $1,500 per fortnight per employee subsidy is paid in arrears to certain businesses that have experienced a downturn in turnover. The purpose of the scheme is to keep workers employed and ensure there is a viable workforce on the other side of the pandemic.
At present, JobKeeper is set to continue until 27 September 2020. For businesses, the JobKeeper decline in turnover is a once only test. If the eligibility criteria were met at the time of applying for JobKeeper, a business can continue claiming the subsidy assuming the other eligibility criteria for the business and its individual employees are met.
We expect continuing eligibility to the subsidy will change over time as the regulators gain a clearer insight into the impact of the pandemic. Much of this data is likely to come from the actual and estimated GST turnover that forms part of the compulsory monthly JobKeeper reporting requirements, along with the volume of applications for Jobseeker. That is, are the right businesses receiving JobKeeper, and is the subsidy helping to keep workers employed?
If your business did not initially qualify for JobKeeper, you can apply to start JobKeeper payments when you meet the eligibility criteria. Not every industry will experience the economic impact of the pandemic in the same way. Some will experience a greater decline in later months.
One of our most asked questions about the decline in turnover test is ‘what if I got it wrong?’.
Eligibility is generally based on an estimate of the negative impact of the pandemic on an individual business’s turnover. Some will experience a greater decline than estimated while others will fall short of the required 30%, 50% or 15%. There is no clawback if you got it wrong as long as you can prove the basis for your eligibility going into the scheme. For those that, in hindsight, did not meet the decline in turnover test, you need to ensure you have your paperwork ready to prove your position if the ATO requests it. You will need to show how you calculated the decline in turnover test and how you came to your assessment of your expected decline, for example, a trend of cancelled orders or trade conditions at that time.
Making JobKeeper payments on time
To be eligible for JobKeeper payments, staff must be paid at least $1,500 during each JobKeeper fortnight. If you pay employees less frequently than fortnightly, the payment can be allocated between fortnights in a reasonable manner. For example, if you pay your employees on a monthly pay cycle, your employees must have received the monthly equivalent of $1,500 per fortnight.
For the first two JobKeeper fortnights (30 March-12 April, 13 April-26 April), employers had an extension until 8 May to make the JobKeeper payments to eligible employees. For the remaining JobKeeper fortnights, employees will need to receive at least $1,500 by the end of each JobKeeper fortnight or the monthly equivalent of $1,500 per fortnight. Depending on your pay cycle, this may require some adjustments each month.
Tax treatment of Government grants and relief
During the pandemic, bushfires and floods, grants and loans have been available to help business and individuals through the crisis. The way these grants and loans are taxed will vary.
If you carry on a business and the payment relates to your continuing business activities, then it is likely to be included in your assessable income for income tax purposes. This position is likely to be different where the payment was made to enable you to commence a new business or cease carrying on a business.
Grants will generally be assessable income unless a law has been passed to specifically exclude the grant or loan from tax. For example, the special disaster grant for the bushfires was made non‑assessable and non-exempt income. Also, amounts provided under the cash flow boost measure are non-assessable non-exempt income.
When it comes to GST treatment, the key issue is whether the grant is consideration for a supply. That is, was the business expected to deliver something for the grant? The following government payments are not consideration for a supply and therefore not subject to GST or included in your GST turnover:
· JobKeeper payment
· Cash flow boost payment
· The Early Childhood Education & Care Relief Package paid to approved child care providers
· Payment of grants to an entity where the entity has no binding obligations to do anything or does not provide goods and services in return for the monies.
Unreported ‘cash in hand’ payments to workers no longer tax deductible
The ATO have advised that any unreported ‘cash in hand’ payments made to workers from 1 July 2019 will not be tax deductible.
‘Cash in hand’ refers to cash payments to employees that do not comply with pay as you go (PAYG) withholding obligations. Payments made to contractors where the contractor does not provide an ABN and the business does not withhold any tax will also not be tax deductible from 1 July 2019.
Superannuation guarantee amnesty
Monday 7 September 2020 is the last day for employers to take advantage of the superannuation guarantee (SG) amnesty. The amnesty provides a one-off opportunity to disclose historical non-compliance with the superannuation guarantee rules and pay outstanding superannuation guarantee charge amounts.
To qualify for the amnesty, employers must disclose the outstanding SG to the Tax Commissioner.
You either pay the full amount owing, or if the business cannot pay the full amount, enter into a payment plan with the ATO. If you agree to a payment plan and do not meet the payments, the amnesty will no longer apply.
Keep in mind that the amnesty only applies to “voluntary” disclosures. The ATO will continue its compliance activities during the amnesty period so if they discover the underpayment first, full penalties apply. The amnesty also does not apply to amounts that have already been identified as owing or where the employer is subject to an ATO audit.
Note: Even if you do not believe that your business has an SG underpayment issue, it is worth undertaking a payroll audit to ensure that your payroll calculations are correct, and employees are being paid at a rate that is consistent with their entitlements under workplace laws and awards.
If your business has engaged any contractors during the period covered by the amnesty, then the arrangements will need to be reviewed as it is common for workers to be classified as employees under the SG provisions even if the parties have agreed that the worker should be treated as a contractor.
You cannot contract out of superannuation guarantee (SG) obligations.
Directors at risk of personal liability for company’s GST liabilities
The director penalty regime enables the ATO to recover amounts owed by a company for unpaid PAYG withholding amounts and superannuation guarantee liabilities from the directors or former directors.
From 1 April 2020, the existing director penalty regime was expanded to include GST, luxury car tax and wine equalisation tax liabilities. The expansion of this regime means that company directors, regardless of whether they are passively or actively involved, are at risk of being held personally liable for a large portion of a company’s estimated liabilities.
Directors are under a general obligation to ensure the company either satisfies its tax liabilities, or recognising the company may be insolvent, goes into administration or is wound up. Resigning as a director after the event has no impact as the obligation attaches to the individual directors equally. If the Commissioner issues a penalty notice, the director becomes personally liable at that point. There is a grace period for new directors, but they can become liable for obligations that arose before they became a director.
Strict timeframes are in place for the issuing of notices by the Commissioner and the required responses from the individual. If you receive a director penalty notice, or if you are concerned that you are at risk of receiving a notice, please contact us immediately.
Reporting payments to contractors
The taxable payments reporting system requires businesses in certain industries to report payments they
make to contractors (individual and total for the year) to the ATO. ‘Payment’ means any form of
consideration including non-cash benefits and constructive payments. Almost every year a new industry or sector is drawn into the taxable payments reporting net.
Taxable payments reporting is required for:
• Building and construction services
• Cleaning services
• Courier services
• Road freight services
• Information technology (IT) services
• Security, investigation, or surveillance services
• Mixed services (providing one or more of the services listed above)
The annual report is due by 28 August 2020. This will be the first report for those businesses providing road freight, information technology, security, investigation or surveillance services.
1 January 2020 changes to Super Guarantee calculation
From 1 January 2020, new rules came into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer.
Previously, some employers were paying SG on the salary less any salary sacrificed contributions of the employee. Employers must now contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and the employee can choose whether or not to include the salary sacrificed amounts in OTE.
Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE plus any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.
The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.
Company tax residency developments
In late 2018, the ATO changed its guidance on the tax residency rules for companies incorporated overseas.
In broad terms, a company can be treated as a resident of Australia for tax purposes if either:
· It is incorporated in Australia, or
· It carries on business in Australia and either its central management and control is in Australia or its voting power is controlled by Australian residents.
In general, the ATO’s new approach means that a company can be treated as a resident of Australia if:
· It carries on any business activities, anywhere; and
· Central management and control of the company is in Australia.
The new approach means that companies previously classified as non-residents might be treated as residents of Australia. If a company is classified as a tax resident of Australia then it would generally be taxed in Australia on its worldwide income, but this is subject to the foreign branch profits exemption. For example, if a company carries on a business (any business, which could include deriving passive income from investments) and has its central management and control in Australia, then it would generally be treated as a resident.
The ATO initially provided a transitional period for companies to assess their position and consider making necessary changes. While this transitional period was to end at 30 June 2019, the ATO has now extended this deadline to:
· 31 December 2020 - Early balancer taxpayer with a 31 December year-end
· 30 June 2021 - Taxpayer with a 30 June year-end
The deadline extension applies to companies that are, “taking active and timely steps to change their governance arrangements.”
Cents per kms change for work-related car expenses
The rate at which work-related car expenses can be claimed using the cents per kilometre method will increase from 1 July 2020 from 68 cents to 72 cents per kilometre.
Using this method, a maximum of 5,000 business kilometres can be claimed per year per car.
Employee reporting
Single Touch Payroll
Where payments to employees have been reported to the ATO through single touch payroll, a finalisation declaration generally needs to be made by 14 July 2020 for employers with 20 or more employees and 31 July 2020 for those with 19 or fewer employees.
Payment summaries do not have to be provided to employees. Instead, employees will be able to access their Income Statement through myGov.
Reportable Fringe Benefits
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount. This is referred to as a `Reportable Fringe Benefit Amount’ (RFBA).
If you need assistance with setting up STP in your business or managing your STP obligations, please contact our office.
Single touch payroll extension for closely held employees
Many small businesses have closely held employees such as family members, directors or shareholders of a company, and beneficiaries of a trust. Small businesses with 19 or fewer employees were to start reporting these closely held employees through single touch payroll (STP) from 1 July 2020. In response to the COVID-19 pandemic however, the ATO has granted an extension until 1 July 2021.
Your business can start voluntarily reporting these closely held employees, and many may have already done so to access JobKeeper payments, but it is not a requirement until 1 July 2021.
All other employees should be reported through STP.
Proposed Division 7A reforms
Division 7A captures situations where shareholders access company profits in the form of loans, payments or forgiven debts. If certain steps are not taken, such as placing the ‘payment’ under a complying loan agreement, these amounts are treated as a deemed unfranked dividend and taxable at the taxpayer’s marginal tax rate.
Sweeping reforms to the operation of Division 7A were to take effect from 1 July 2020. However, these reforms have not been enacted. Given the extent of the proposed changes and the uncertainty created by COVID-19, we expect the timing of these reforms to be revised in the October federal budget.
R&D tax incentive overhaul
The impending overhaul of the R&D tax incentive system is not yet law. Originally intended to take effect from 1 July 2018, the sweeping reforms are now set to take effect from 1 July 2019, assuming the legislation passes Parliament.
Under these reforms, the way the R&D tax incentive applies will change to focus on ‘more intensive’ R&D activities, particularly in medical and clinical development. The changes attempt to refocus the incentive on activities that go well beyond what companies would normally do to improve.
Companies under $20m
For companies with an aggregated annual turnover less than $20 million:
· An annual $4 million cap will be introduced on cash refunds for R&D claimants. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
· Clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area; and
· The refundable R&D tax offset will be amended and will become a premium of 13.5 percentage points above the company’s tax rate for that year.
Companies over $20m
For companies with aggregated annual turnover of $20 million or more, an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.
The R&D expenditure threshold - the maximum amount of R&D expenditure eligible for concessional R&D tax offsets - will be increased from $100 million to $150 million per annum.
In addition, where an R&D entity benefits from a government recoupment (such as a grant or reimbursement) for expenditure that is also eligible for the R&D tax offset, a clawback applies to reverse the double benefit that arises. The clawback is in the form of an additional 10% tax on the recoupment.
The ATO has stated that once the legislation has passed, taxpayers will need to review their position for the 2019-20 year to ensure compliance with the new laws. We will keep you up to date of the progress of these reforms.
Deductions no longer available for vacant land
From 1 July 2019, new rules prevent some taxpayers from claiming a deduction for interest and other holding costs for property that they own. Previously, if you bought vacant land with the intent to build a rental property on it, you may have been able to claim tax deductions for expenses incurred in holding the land such as loan interest, council rates and other ongoing holding costs.
Mum & Dad developers (individuals, closely held trusts, SMSFs and unit trusts or partnerships where any interests are held by individuals, discretionary trusts or SMSFs) are the focus of these changes. Since the new laws apply retrospectively to losses or outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date, and with no grandfathering in place, the amendments not only impact those intending to develop vacant land but those who have acquired land to develop.
The rules seek to ensure that deductions cannot be claimed during periods where a residential dwelling is being constructed or substantially renovated until the work has been completed, an occupancy certificate is issued and the property is either rented out or genuinely available for rent.
Where holding costs cannot be claimed as a deduction, then they will generally be added to the cost base of the property for CGT purposes. This means that they can potentially reduce a capital gain made when you dispose of the property in the future. However, holding costs cannot be added to the cost base of a property unless it was acquired after 20 August 1991 and these costs cannot increase or create a capital loss on sale of a property.
Disclaimer
The information contained herein is provided on the understanding that it neither represents nor is intended to be advice or that the author is engaged in rendering legal or professional advice. Whilst every care has been taken in its preparation no person should act specifically on the basis of the material contained herein. If assistance is required, professional advice should be obtained.
This material should be used as a guide only and in conjunction with professional expertise and judgement. All responsibility for the use or application of any of these strategies and for the direct or indirect consequences of decisions based on this material rests with the user.
Cambridge Advisory Pty Ltd, its director and authors or any other person involved in the preparation and distribution of this information, expressly disclaim all and any contractual, tortious or other form of liability to any person in respect of this material and any consequences arising from its use by any person in reliance upon the whole or any part of the contents of this guide.
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