I was talking with someone recently who’s accountant doesn’t do any tax planning prior to the end of the year. My friend was saying how they were left ‘in the dark’ as to what their future liabilities are likely to be across their business and personal group and what, if anything, they could do to minimise their tax obligations via tax planning strategies. Their large tax obligations came as an unwelcome surprise, whereas future tax obligations, if properly planned for, should never be a surprise.
At S&S we start our tax planning process at the beginning of April each year for our June year end clients. We prepare detailed spreadsheet analyses on each of the entities in a tax group, assess what likely tax they will pay on extrapolated taxable income and what tax instalments they have already paid and then we prepare a series of scenarios to determine the optimal strategy which we discuss with you during a face-to-face meeting.
What are the key tax planning strategies prior to 30 June 2021 ?
1. Full Expensing of Depreciating Assets
The Government has made changes to the depreciation rules, allowing businesses with a turnover less than $5 billion to immediately write-off the full cost of eligible assets acquired from 7.30 pm 6 October 2020 and first used by 30 June 2022, with no threshold limit on the cost of the asset. Small and medium businesses, with turnover less than $50 million, are also able to immediately write-off second-hand assets.
Businesses with turnover less than $500m who use the simplified depreciation rules (Instant Asset Write-Off and Small Business Pooling) do not have the option to opt-out of full expensing rules on an asset-by-asset basis, they can only choose to opt-up of the rules entirely for all assets.
Under temporary full expensing, you can deduct the balance of the Small Business Pool at the end of the income years ending between 6 October 2020 and 30 June 2022.
2. Make the most of Small Business Tax Concessions which are available to businesses with turnover Under $10 million, expanding to $50 million turnover
If you have a grouped turnover of less than $10 million, you are considered a Small Business. Tax concessions available to Small Businesses include:
• Immediate deduction for prepaid expenditure when payment covers a period of less than 12 months
• Immediate deduction for certain costs incurred in relation to establishing a business.
• Simplified rules for trading stock (available for medium sized businesses from 1 July 2021)
• A Small Business tax offset for individuals up to a maximum of $1,000, calculated as 8% of the tax payable on any Small Business net income (turnover under $5 million).
• A rollover for tax-free changes to business structures
It is important to note that these concessions apply to revenue and expenses only.
The eligibility for Small Business CGT concessions is a separate test that is not to be confused with these new Small Business Entity Concessions. The CGT concessions are still restricted to entities with a turnover of $2M or the $6M net asset test. No concessions have been made from a capital gains tax viewpoint.
The Small Business Entity (SBE) turnover threshold will be increased from $10 million to $50 million. This gives businesses with aggregated turnover less than $50 million access to the below small business tax concessions.
These concessions will be delivered in phases:
1. From 1 July 2020, these businesses will be able to immediately deduct certain start-up and prepaid expenses
2. From 1 July 2021, these businesses will be entitled to use the simplified trading stock rules
3. Base Rate Entity – Increase in Turnover Threshold
If you’re operating a business through a company with a grouped turnover of less than $50 million, you may be considered a “Base Rate Entity” and subject to the reduced corporate tax rate of 26%. From 1 July 2021, this rate will reduce to 25%.
4. Company Loss Carry-Back
A temporary tax relief allows eligible companies, with an aggregated turnover of less than $5 billion, to carry back tax losses incurred in the 2020, 2021 or 2022 financial years, to be used against profits taxed in a previous year, 2019 or later.
These companies will receive a refundable tax offset in the year they made a loss, if they elect to use this mechanism when they lodge their 2020-21 or 2021-22 tax return. The losses carried back must not be more than earlier taxes profits and must not result in a franking account deficit.
Any tax losses that are not fully offset against previous taxed profits, or not elected to be used, will be carried forward as normal.
5. Prepay Interest on Loans
Taxpayers who have borrowed money for investments can check with their lenders to see if they can prepay interest to gain an early tax-deduction by paying 12 month’s of interest in advance as a one-off tax benefit. This is an option for investment loans on properties, margin loans on shares and business loans.
6. Interest Deductibility on Financing Business Expenses
Interest on the financing of business expenses is tax-deductible in most circumstances. If you are maintaining a line of credit or overdraft to finance your day to day business expenses, the interest will be tax-deductible except in the following cases:
• Payments from the account are for personal purposes
• Payments made for the payment of personal income tax (including PAYG instalments)
• Payments made for personal superannuation contributions
Consideration should be given to external finance if you are currently using your personal funds to finance your business activities and would prefer to use your personal funds elsewhere.
7. Superannuation Contributions
Maximise your superannuation deductions before 30 June 2021 by:
• Ensuring superannuation contributions for employees are paid and cleared by 30 June 2021,
• If your superannuation balance is less than $500,000 and you’ve made concessional contributions of less than the concessional contributions cap of $25,000, you may be able to make additional concessional contributions in subsequent financial years for any unused amounts. Unused cap amounts can be carried forward for up to five years,
• If you earn less than $54,837 p.a., you could be eligible for the government co-contribution. The government will contribute 50 cents for every dollar of after-tax contributions you make to your superannuation fund up to a maximum of $500. The full benefit is available for income earners under $39,837 and phases out where adjusted taxable income is between $39,837-$54,837.
• Note that from 1 July 2021, the concessional contributions cap rises to $27,500.
8. Bad Debts
Review your aged debtors and determine if any debts are bad debts (i.e. not recoverable). If they are, write them off before 30 June 2021 to receive a tax deduction this year. For a debt to be bad, there must be little or no likelihood of recovery, such as when the debtor is in receivership or cannot be traced. Records should be kept to show you have taken reasonable steps to recover the debt prior to writing off. If circumstances later change, you can recommence pursuing the debtor.
9. Stock Management
Review your stock and identify any obsolete or unusable stock. Write off these stock items prior to 30 June 2021.
10. Capital Gains Tax (CGT)
If you have derived any capital gains from the sale of your investments or business assets this year, consider whether you can offset them by crystallising any capital losses on the sale of other assets (where possible), or be able to use the CGT Small Business concessions. Please contact us to discuss prior to 30 June to minimise or eliminate any potential CGT.
If you would like to know more about our Tax Planning and other S&S services and how we can help you to be more proactive with your tax and compliance matters. Send an email to info@stewartsmithadvisory.com we would love to hear from you.