With 30 June approaching, this article draws your attention to year-end tax planning strategies and compliance issues you need to consider ensuring you are in good tax health.
Considering the most recent tax changes, this Planner will focus on the most important issues to consider by small to medium businesses and individuals to best manage their tax exposure in respect of the 2019 income tax year.
Mention will also be made of proposed tax changes that may affect your tax position in 2019 or later years.
Tax planning is generally about managing risks, and capitalising on opportunities, to appropriately manage your tax exposure. This document is mainly about opportunities, of which there are many. Whether it is managing the timing of when assessable income arises or when deductions will be incurred, or taking advantage of a specific concession, the key is awareness.
Tax planning is all-year-round, but there’s no doubt that coming up to 30 June heightens sensitivity to possible opportunities.
1. Year-end tax planning – Business
Year-end tax planning: Business / Individuals
1.1 Lowering of company tax and franking rates
As illustrated in the table below, company tax rates are falling in Australia.
Companies with group-wide business turnover below $50 million and no more than 80% of their income comprising passive income will be subject to company tax at a rate of 27.5% in 2019. All other companies are subject to the 30% rate.
Dividends can have tax credits attached by franking them at either the 30% rate (ie, dividend x 30/70) or 27.5% rate (dividend x 27.5/72.5). The rate at which a dividend is franked and the company’s income tax rate for the year are determined independently of each other. Accordingly, a company might pay tax at one rate for a year, yet frank a dividend paid in that same year at the other rate.
The franking rate (ie, 30% or 27.5%) for a dividend paid in any particular year is based on a hypothetical scenario. You take the company’s income from last year, assume for a moment that that is the current year’s income, and based on that, determine the hypothetical tax rate (30% or 27.5%) that would apply for the current year as per the rules set out above. That hypothetical tax rate is the franking rate for a dividend paid that year.
Because company profits may be taxed at different rates from the rate at which dividends are franked, the disparate tax treatment can lead to either:
- Over-franking of dividends (i.e. if company profits are taxed at 27.5% but franking is done at a rate of 30%) – in which case certain actions need to be undertaken to avoid the imposition of franking deficit tax; or
- Under-franking of dividends (i.e. if company profits are taxed at 30% but franking is done at only 27.5%) – in which case franking credits may become trapped and may not be usable.
1.2 Deductions available for small business entities
Businesses that are small business entities (group-wide turnover below $10 million) may qualify for the following tax concessions in the 2019 income tax year:
- Immediate deduction for depreciating assets costing less than $20,000, $25,000 or $30,000;
- Simplified depreciation rules for all other depreciating assets;
- Small business restructure rollover;
- Immediate deduction for start-up costs;
- Immediate deduction for certain prepaid expenses;
- Simplified trading stock rules;
- Simplified PAYG tax instalment rules;
- Cash basis accounting for GST, ATO-calculated GST instalments; and
- FBT car parking exemption, ability for employees to salary-sacrifice 2 identical portable electronic devices (eg laptops).
1.2.1 Deductions available for small business entities
Small business entities (less than $10m group-wide turnover) will have the benefit of the instant asset write-off for most new or second-hand depreciating assets.
The threshold was amended twice during the year, and thus there are three bands of time. The cost of a depreciating asset is fully deductible if acquired for a cost below the relevant threshold during these time periods:
For small business entities, the instant deduction is available only where they have opted into the above-mentioned simplified depreciation rules.
That means depreciating assets costing $20,000/$25,000/$30,000 or more during the relevant time periods are pooled in a general small business pool, treated as a single depreciating asset and depreciated at:
- 15% for such assets acquired during the income tax year; and
- 30% for the 1 July opening written down balance of the assets in the pool.
From 3 April 2019, the concession was extended beyond small business entities to those with group-wide turnover below $50 million.
The instant deduction threshold will revert to the original $1,000 for small business entities from 1 July 2020. For business with turnover of $10-$50 million, the depreciation pooling treatment for depreciating assets costing less than $1,000 will also return.
1.2.2 Immediate deductibility of start-up costs
If you started a small business this year, you would be entitled to an immediate deduction of all start-up costs (e.g. lawyer’s and accountant’s fees, costs of company constitutions or trust deeds) incurred in the 2019 income tax year.
1.3 Immediate deductibility of start-up costs
Small business entities (i.e. below $10 million turnover) can change their business structure from one form to another (eg company to a trust etc.) without capital gains tax or income tax consequences.
The most appropriate structure for a small business may change over time, and this rollover can help a business transfer to a more appropriate business structure to suit the needs of the business.
1.4 General Business Issues
1.4.1 Manage your private company loans
Integrity rules exist to combat accessing funds in a company that have been taxed at the company tax rate, in a tax-preferred manner, such as by way of a loan, instead of by extracting a dividend. The rules exist due to the wide gap between the company tax rate of 30%/27.5% and the top personal tax rate of 47%.
Care must be taken when a private company makes a loan, payment or forgives a debt of a shareholder (or the shareholder’s associate) or if a trust declares a distribution to a private company without the cash payment to the company; such unpaid present entitlements (UPEs) made after 16 December 2009 by a trust to a company may be treated as either a loan by the company to the trust or remain a UPE (if put on sub-trust).
1.4.2 Review your trust deeds and make trust resolutions by 30 June
Trustees must generally make valid distribution resolutions before 30 June (or an earlier date if specified in the trust deed) to appoint trust income to eligible beneficiaries. If trustees fail to make valid appointment resolutions before 30 June, the trustee can potentially be assessed on all the Trust’s taxable income at the top marginal tax rate (i.e. 47%).
Also note that beneficiaries must quote their TFNs to trustees before a trust makes a distribution to them for the first time – failure to do so will result in the trustee withholding tax at 47% from all future distributions to the beneficiary.
To ensure that valid trustee distribution resolutions are made, the terms of the Trust Deed must be complied with.
1.4.3 Review your bad debts and obsolete plant and machinery
Before 30 June, outstanding debtors should be reviewed to determine the likelihood of not receiving payment and whether attempts to recover the debts will be successful (keep documentation to evidence that the debt is non-recoverable). If the debt is irrecoverable and if income is reported on an accruals basis, the debt can be regarded as a bad debt for which a tax deduction may be claimed. This process must occur before 30 June.
This same methodology applies to scrapping obsolete plant and machinery. In such a case you should review your asset register, identify, scrap (i.e. physically dispose of) and claim a deduction for the written down value of such assets.
1.4.4 Value trading stock at the lower of cost, market selling value or replacement value
The valuation of trading stock at year-end may impact on the amount to be included in assessable income for the 2019 income tax year.
Because a lower closing value for trading stock may result in a lower taxable income, taxpayers have the choice of valuing trading stock on hand at 30 June as the lower of cost, market selling value or replacement value.
1.5 Single touch payroll (STP)
From 1 July 2018, employers with 20 or more employees were required to run their payroll and pay their employees through accounting and payroll software that is Single Touch Payroll (STP) ready. Employers with 19 or fewer employees have until 30 September 2019 to be STP compliant.
Please talk to us so that we can assist you to choose a payroll service provider that is STP enabled to ensure STP compliance.
1.6 Report your payments made to contractors in the building and construction industry
Businesses in the building and construction, cleaning and courier industries must report the total payments they make to contractors on a taxable payments annual report by 28 August 2019.
It is proposed to extend this reporting regime to security providers, road transport and computer design services (from 1 July 2019).
2. Year-end tax planning – Individuals
2.1 Manage your exposure to capital gains tax
If suitable, delay the exchange of contracts to sell an appreciating capital asset until after 30 June 2019. That way, the capital gain will only be assessable in the 2020 income tax year.
If you have already made a capital gain this year, you may wish to crystallise capital losses (e.g. by selling shares that have declined in value) to reduce the capital gain. However, when adopting this strategy, ensure that you are not engaging in “wash sales” (where you sell shares shortly before 30 June solely to realise the capital loss and then buy the shares back shortly after 30 June).
Also, a capital gain will be eligible for the 50% CGT general discount to the gross gain if the asset has been held for at least 12 months before sale.
2.2 Deduct work-related expenses
Taxpayers who are over-claiming work-related expenses (e.g. vehicle, travel, internet and mobile phone and self-education) are on the ATO’s hitlist.
Although a myriad of tax law considerations are involved when claiming work-related expenses, the main three rules are:
- Only claim a deduction for money spent (and not reimbursed);
- The work-related expense must directly relate to the earning of income; and
- An employee must have a record to prove the expense.
2.3 Make donations
Donations of $2 or more to a deductible gift recipient are tax deductible. Donations of property to such recipients may also be tax deductible. Donations to overseas charities may not be tax deductible.
2.4 Pay superannuation contributions before 30 June
Both employees and self-employed individuals can claim a tax deduction annually to a maximum of $25,000 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2019 and the individual has provided their superannuation fund with a notice of intention to claim document.
Payments to a superannuation fund should be made sufficiently in advance of 30 June to ensure there is time for the payment to be processed and credited to fund’s bank account by 30 June. If it is not credited to the fund’s bank account by 30 June, the deduction will be deferred to the next income year. 30 June falls on a Sunday this year, so the deadline is Friday, 28 June.
Here is a short summary of the most important superannuation rates and caps that apply for the 2019 income tax year:
Remember that employed people can make concessional (ie, deductible) contributions directly to their superannuation fund. They do not need to enter into a salary sacrifice arrangement with their employer.
2.6 First Home Super Saver Scheme
A first home buyer can salary sacrifice a maximum of $15,000 a year (take care not to breach the $25,000 concessional contributions cap) to save for a deposit to buy a first home. The maximum amount that can be saved in such a way is $30,000. Provided the buyer’s partner does not already own his or her first home, the couple can put in a maximum of $60,000 ($30,000 x 2) to buy a first home.
Money saved in this way can only be withdrawn from the superannuation fund with strict rules applying on how to use such withdrawn money (e.g. must buy a home within a certain time and the ATO must be notified of the withdrawal).
Withdrawn funds are subject to income tax at your marginal rate, less a 30% rebate.
Tax is complicated and is constantly changing. Quite possibly strategies used in the past have become outdated and may not work for you anymore.
When doing year-end tax planning, you should assess whether your current business structure (e.g. company, trust, partnership, sole trader) is still appropriate for your current situation.
We hope that this Tax Planner helps you to identify some extra ideas for tax time to assist you in operating your business more tax efficiently.