With 30 June approaching, our End of Financial Year Tax Planning Guide draws your attention to year-end tax planning strategies and compliance issues you need to consider to ensure you are in the best possible tax health.
A number of new tax issues arise this year as we emerge from the worst of COVID-19 pandemic, yet still feel its ongoing economic and social impact.
Taking into account the most recent tax changes, this planner will focus on the most important issues to consider by businesses and individuals to best manage their tax exposure in respect of the 2022 income tax year. Where relevant, we also mention proposed or upcoming tax changes that may affect your tax position in 2022 or later years.
Tax planning is about taking control over the amount of money in your pocket. This manifests in managing risks, and capitalising on opportunities, to appropriately manage your tax exposure.
Whilst tax planning is all-year-round, there’s no doubt that coming up to 30 June heightens sensitivity to possible opportunities. This year continues to feature issues to contend with from various COVID-19 related matters, but perhaps with more of an eye to the future than we allowed ourselves last year.
1. Year-end tax planning – Business
1.1 Company tax and franking rates
There are two company tax rates:
A company is a Base Rate Entity (BRE) for an income year where is has group-wide business turnover below $50 million and no more than 80% of its income comprising passive income. BREs are subject to company tax at a rate of 25%. All other companies are subject to the 30% rate. A company can be a BRE one year, not a BRE in the next year, and so on. The applicable tax rate for the year changes accordingly.
Dividends can have tax credits attached by franking them at either the 30% rate (ie, dividend x 30/70) or 25% rate (dividend x 25/75). 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. This can cause over-taxation, or leave you with unusable franking credits.
We can assist with managing your franking outcomes.
1.2 ATO compliance activity on trust distributions
Longstanding anti-avoidance rules in section 100A of the tax act can apply where trust income is appointed on paper to a beneficiary on a lower tax rate, but someone else gets the benefit of the underlying funds. This has received limited attention over the years, but the ATO has embarked on a compliance program with renewed focus on administering these rules. Of particular focus is appointing trust income to adult children, and the exclusion from these anti-avoidance rules where arrangements are entered into in the course of ordinary family or commercial dealing (which is not defined as to what that means).
The ATO has issued a draft ruling (TR 2022/D1), setting out their views on these rules, as well as a draft Practical Compliance Guideline (PCG 2022/D1), which sets out essentially whose tax arrangements will be subject to review, and whose won’t.
Although still only in draft form, trustees ought to have regard to these pronouncements when making decisions on the appointment of trust income leading up to 30 June 2022 and beyond. We can provide guidance in relation to your particular circumstances, to ensure you are making fully informed decisions in this respect.
1.3 Allocation of professional firm profits
The ATO has finalised their approach for determining when they will likely review the tax arrangements of professionals, and possibly progress to an audit. The issue in the ATO’s sights is whether an equity holder in a professional firm is taxed on a sufficient amount of their profit share from their firm, or is too much allocated to related parties on a lower tax rate.
The ATO recently released Practical Compliance Guideline PCG 2021/4: Allocation of professional firm profits, which sets out the ATO’s approach to overseeing tax compliance amongst owners of professional firms in the fields of accounting, architecture, engineering, financial services, law, medicine, management consulting and others. It applies from the 2022-23 financial year.
The PCG sets out criteria for qualifying to rely on it, and contains a risk scoring system. On a year-by-year basis, the tax arrangements of equity holders in professional firms in the above fields will fall into one of the following risk zones:
From 1 July 2022, decisions on the allocation of professional firm profits ought to take into account the ATO’s compliance approach. Well in advance of 30 June next year, we will be talking to affected clients about what this development means, and how we can help you make these decisions.
1.4 Temporary full expensing of eligible depreciating assets
Businesses with a group-wide turnover below $5 billion can deduct the full cost of eligible depreciating assets acquired from 7.30pm AEDT on 6 October 2020 until 30 June 2023. Full expensing is also available for the cost of improvements to existing eligible assets.
Where a business’s group-wide turnover is less than $50 million, temporary full expensing applies to acquisitions of both new and second-hand assets. Where group-wide turnover is $50 million or more, it applies only to acquisitions of new depreciating assets. (But note, it applies to improvements to existing assets per above).
You can choose to opt out of full expensing on an asset-by-asset basis (also note at item 1.7 where you cannot opt out). The depreciation deductions for such assets will then be calculated under the normal effective-life rules. However, if it is subject to the instant asset write-off (refer to item 1.6), it must be fully deducted.
1.5 Loss carry-back – cash refund
Eligible companies can claim a cash-refund offset in their 2021/22 tax return for tax losses (revenue only, not capital losses) incurred in the 2019/20, 2020/21 and 2021/22 income years. The company must have group-wide turnover below $5 billion, and paid tax in any of the 2018/19 or later years. The losses can be “carried back” against those prior taxable years, but is claimed as a refundable offset on the 2022 tax return.
The amount of the offset generated by carrying back losses is limited to the amount of tax paid in the applicable prior years and the company’s franking account balance at 30 June 2022.
This is intended to operate in conjunction with Full Expensing of Depreciating Assets, which itself might be the cause for a company incurring a tax loss.
1.6 Instant asset write-off
For eligible depreciating assets which cost less than $150,000 (ex-GST), the instant asset write-off rule provides a full deduction. For businesses with group-wide turnover below $50 million, in practice, this is relevant only for acquisitions up to 6 October 2020. The reason is that, although the write-off rules still apply after that date, they are effectively overridden by the temporary full expensing deduction set out above.
1.7 Small business simplified depreciation
Businesses with group-wide turnover below $10 million can choose to apply a simplified depreciation system – and virtually all do. The costs of depreciating assets are pooled together and a simplified depreciation deduction is calculated for the year.
The above rules for temporary full expensing are replicated in these simplified pooled depreciation rules. However, for those businesses who have chosen to apply this simplified pooling depreciation system, there is one key difference: You cannot opt out of full expensing. Further, you will get a deduction for the closing written-down balance of the depreciating asset pool, at 30 June 2022. Again, you cannot opt out of this deduction.
As noted, virtually all businesses with group-wide turnover below $10 million choose to apply this simplified pooling depreciation. These deductions forced upon such businesses could actually produce a sub-optimal tax outcome.
This makes tax planning ahead of 30 June 2022 all the more important.
1.8 Concessions 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 2022, income tax year:
- Immediate deduction for depreciating assets (refer to items 1.4 and 1.6);
- Simplified depreciation rules for all other; depreciating assets (refer to item 1.7);
- 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 exemption for car parking, providing multiple portable electronic devices (eg laptops, mobile phones).
1.9 Government COVID-19 support payments
The federal, state and territory governments continued to provide a number of support measures to businesses during the 2021/22 income year. These are normally assessable income and thus subject to income tax. However, the Treasurer has the power to declare specific business support payments as exempt from income tax. This is done by way of legislative instrument.
In short, if a business government support payment has not been declared as exempt, it is assessable.
1.10 Superannuation Guarantee increase
From 1 July 2022, the Superannuation Guarantee (SG) rate for compulsory superannuation contributions by employers will increase from the current 10% to 10.5%. The rate is applied to an employee’s Ordinary Times Earnings.
SG was always intended to be an income sacrifice by employees. Depending on applicable awards or employment contractual arrangements, the salary component of an employee’s remuneration might need to change from 1 July due to the increase in the rate.
1.11 Abolition of SG $450 threshold
Ever since compulsory superannuation was introduced, where an employee earns less than $450 in a month from an employer, the employer has no requirement to pay the SG amount. The $450 income threshold has been removed, with effect from 1 July 2022. From that date, employers will be required to contribute the 10.5% SG amount for all employees, no matter how little the employee earns from the employer in any particular month.
Compulsory superannuation was always intended to be an income sacrifice by employees, and not an additional remuneration cost for employers. Accordingly, this will impact any awards or negotiated remuneration arrangements for affected employees in which the threshold exemption is embedded. This would predominantly be relevant for younger and casual employees.
Employers must ensure that their payroll tax systems are up to date ahead of this 1 July, to ensure that SG obligations are correctly calculated.
1.12 General Business Issues
Manage your private company loans
Integrity rules exist to combat accessing company funds in a tax-preferred manner that have been taxed at the company rate, instead of by extracting as a dividend. The rules exist due to the wide gap between the company tax rate of 30%/25% and the top personal tax rate of 47%.
Care must be taken when a private company makes a loan or payment to a shareholder (or the shareholder’s associate), or forgives a debt owed by a shareholder (or associate). Also, where a trust appoints trust income to a private company beneficiary without the cash payment to the company; such unpaid present entitlements (UPEs) made from 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).
This is a very complicated area of tax law, but is relevant for many businesses, so please speak to your Nexia advisor regarding any form of advance or credit from trusts or companies to associated parties.
Review your trust deeds and make trust resolutions by 30 June
Trustees must generally make valid resolutions before 30 June (or an earlier date if specified in the trust deed) to appoint trust income to 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 trustee appoints trust income to them for the first time – failure to do so will result in the trustee being liable to withhold tax at 47% from the trust income appointed to the beneficiary
To ensure that valid trustee income appointment resolutions are made, the terms of the Trust Deed must be complied with.
In relation to the choice of beneficiaries to whom trust income is appointed, refer to item 1.2.
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 considered to be 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. (But see items 1.4, 1.6 and 1.7 whereby depreciating assets might already have been fully deducted in any case.)
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 2022 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.
Or, value stock at the higher of the above three options
If your business has suffered a reduced level of profit this year, or even a loss, consider this alternative. You can choose amongst the three valuation options for year-end stock on hand on an item-by-item basis. You can possibly achieve a better tax outcome by increasing 2022’s taxable income to a more optimal level, or eliminate a tax loss, thereby avoiding the need to address complex integrity rules for carrying forward tax losses. The law expressly allows you to make these choices, and whilst they produce only a timing difference for your business’s taxable income, the right combination of choices can achieve a permanent tax saving.
Announced 120% deduction for skills and training expenditure, technology investment
The Government announced in the 2022 Federal Budget a 120% deduction for eligible expenditure on training employees and adopting digital technology by businesses with group-wide turnover below $50 million. The measure was to take effect from 29 March 2022. However, this had not been legislated prior to the dissolution of Parliament, and the Opposition’s position on the policy is not known. Accordingly, it is not known whether the bonus 20% deduction will materialise. In any event, if ultimately enacted, the bonus 20% deduction for eligible expenditure incurred up to 30 June 2022 is claimed only in the 2022/23 income year.
1.13 Single Touch Payroll
All employers are now required to run their payroll and pay their employees through accounting and payroll software that is Single Touch Payroll (STP) ready.
STP reporting has been expanded, known as STP Phase 2. You will need to start reporting extra information to the ATO each time you run your payroll. Some digital service providers needed more time to update their products and have applied for deferrals, which cover their customers. This means that when you can start Phase 2 reporting depends on when your payroll product is ready. If you haven’t already started Phase 2 reporting, make sure you ask your provider when their product will be ready if you don’t already know.
As an employer, it’s important that you’re across the changes required, and you’re getting ready to start Phase 2 reporting. This includes:
- Checking if you need to make changes to payroll pay codes/categories so they align with Phase 2 requirements
- Reviewing allowances you pay and how they need to be reported in Phase 2
- Understanding changes to salary sacrifice reporting
- Understanding how to assign an income type to each payment.
Amounts paid to “closely held” payees (eg, directors, family members, beneficiaries) should now be reported through STP. There are concessional reporting options for closely held payees reporting, which include:
- Reporting actual payments on or before the date of payment (along with your arm’s length employees)
- Reporting actual payments quarterly
- Reporting a reasonable estimate quarterly.
If you are still having STP issues, please talk to us so that we can assist you with STP compliance.
1.14 Certain industries must report payments to contractors
Businesses in the building and construction, cleaning, courier, road freight, IT, and security, investigation or surveillance industries must lodge a taxable payments annual report (TPAR) by 28 August 2022. The report includes the total payments they make to contractors.
2. Year-end tax planning – Individuals
2.1 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 hit list.
Although a myriad of tax law considerations is involved when claiming work-related expenses, the three main rules are:
- Only claim a deduction for money actually spent (and not reimbursed);
- The work related expense must directly relate to the earning of income; and
- You must have a record to prove the expense.
Working from home – running expenses
In response to COVID-19, many people have been working from home for an extended period. For the 2021/22 year, a temporary, simplified method is allowed for calculating your allowable deduction arising from working from home.
You can claim a deduction of 80 cents for each hour you work from home due to COVID-19, as a representation of all additional deductible running expenses as a result of working from home. However, you must be working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls.
You do not have to have a separate or dedicated area of your home set aside for working, such as a private study.
There are two other alternative methods for calculating your deductible running expenses:
- 52 cents per hour to cover certain running costs, plus calculated work-related portion for others.
- Actual work-related portion, calculated for all running costs.
2.2 Manage your general exposure to capital gains tax
If suitable, delay the exchange of contracts to sell an appreciating capital asset until after 30 June 2022. That way, the capital gain will only be assessable in the 2023 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.
2.3 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.
Pay superannuation contributions before 30 June
Both employees and self-employed individuals can claim a tax deduction annually to a maximum of $27,500 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2022 and the individual has provided their superannuation fund with a notice of intention to claim.
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 the 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. Employees can also top-up their employer’s superannuation guarantee contributions to the $27,500 limit.
Superannuation rates and caps
Here is a short summary of the most important superannuation rates and caps that apply for the 2020/21 and 2021/22 income tax years:
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.
Catch-up contributions to superannuation
If your superannuation balance is below $500,000 as at the previous 30 June, you can contribute more to superannuation than the annual $27,500 deductible contribution cap where your contributions in prior years were below the concessional contribution cap. Employer contributions are counted for this purpose, and there are contribution and timing limits.
2.5 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 $27,500 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 across all years. 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.
From 1 July 2022, the maximum amount an individual can save this way will increase from $30,000 to $50,000. The maximum salary sacrifice amount each financial year will remain at $15,000.
Looking to the future
Tax is complicated and is constantly changing. Quite possibly strategies used in the past have become outdated and may not work for you anymore.
Add to this the ATO’s renewed focus on compliance and collection, including specific compliance programs targeting professional firms and trusts, past practices may require re-evaluating.
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 and effectively.
Please speak to your trusted Nexia Edwards Marshall NT Advisor if you would like to discuss any of the strategies mentioned or would like us to perform a financial and tax health check on your business.