Important Tax Planning Considerations

Whilst this Financial Year is almost over, there are still effective strategies you may be able to employ to make sure you pay the right amount of tax for the 2021-22 year and maximise any refund entitlements. While the best strategies are adopted as early as possible in a Financial Year and not at the end, it’s worth remembering proper tax planning is more than just sourcing bigger and better deductions. The best tips involve assessing your current circumstances and planning your associated income and deductions.

Not all of the following tips will suit your specific circumstances. Rather they are a list of possibilities that may get you thinking along the right track. Of course, check with us if you need further information.

SUPERANNUATION

Superannuation Contributions
The contribution rate is scheduled to increase by 0.5% per year until it reaches 12% from 1 July 2025. This may be subject to change.

The rate for superannuation contributions by employers on behalf of their employees under the SGC for the Year Ended 30 June 2022 is 10%.

The rates are scheduled to increase over the next few years. For the Year Ended 30 June 2023, the rate increases to 10.5%, meaning that contributions made in relation to salary and wages paid on or after 1 July 2022 will be subject to the higher 10.5% rate.

Employers must make SGC for their employees on a quarterly basis within 28 days after the end of each quarter (September, December, March and June).

Tax Planning Tip
Although the June 2022 quarter SGC does not have to be paid until 28 July 2022, tax deductions for the superannuation contributions will only be available in the 30 June 2022 tax year if the contribution is received by the Superannuation Fund by 30 June 2022. Please note if you use a clearing house they will have a cut-off date that will be earlier than 30 June to ensure the contributions hits your employees’ Superannuation Fund prior to 30 June.

Concessional Contributions
For the 2021-22 Financial Year, the tax-deductible superannuation contribution cap is $27,500 for all individuals regardless of their age.

• Note: Other contributions such as employer Superannuation Guarantee Contributions (SGC) and salary sacrifice contributions are considered part of your concessional contributions cap.

To use your unused cap amounts your total super balance at the end of 30 June of the previous Financial Year should be less than $500,000. You also need to exceed your general concessional contributions cap with your concessional contributions in the Financial Year.

The amount of unused cap amounts you can carry forward will depend on the amount you have contributed in previous years, starting from 2018–19. You can use caps based on your 5 previous Financial Years, including when you were not a member of a Superannuation Fund. Unused cap amounts are available for a maximum of 5 years and will expire after this.

Non-Concessional Contributions
From 1 July 2021, the non-concessional contributions cap has been increased to $110,000.

• The advantage of making the maximum tax-deductible superannuation contribution before 30 June 2022 is that superannuation contributions are taxed at between 15% and 30% (subject to your Income), compared to personal tax rates of between 32.5% and 45% (plus 2% Medicare levy) for an individual taxpayer earning over $45,000.
• If your total super balance is greater than or equal to the cap ($1.6m from 2017-18; $1.7m from 2021-22) at 30 June 2021, your non-concessional contributions cap is Nil ($0) for this Financial Year.

As part of the bring-forward arrangement, if you make contributions above the annual non-concessional contributions cap you may be eligible to automatically gain access to future year caps. This allows you to make extra non-concessional contributions without having to pay tax.

INDIVIDUAL TAX

There have been no changes to the individual income tax rates for 30 June 2022.

In addition, the Medicare levy is 2% of taxable income. Therefore, the top marginal tax rate for resident individuals will be 47% (including Medicare levy).

Low and Middle Income Tax Offset
The Low and Middle Income Tax Offset and the Low Income Tax Offset will continue to be available for the 2021-22 income year. Australian resident individuals with an income of up to $126,000 are entitled to the low and middle income offset. The low and middle income tax offset amount is between $675 and $1,500.

Work from Home Temporary Shortcut Method
The temporary shortcut method to calculate your deduction for working from home expenses has been extended for the 2021-22 income year. Using this method you can claim 80c per hour you work from home to cover expenses such as phone expenses, internet expenses, decline in value of equipment and furniture, electricity and gas for heating, cooling and lighting. You cannot claim any other expenses for working from home, even if you bought new equipment.

SMALL AND MEDIUM BUSINESSES

Tax Rate
For the 2021/22 year, the reduced Corporate Tax rate has been reduced to 25%, down from 26%. Eligibility for the reduced Corporate Tax rate remains unchanged and applies to base rate entity companies with an aggregated turnover of less than $50m.

Tax Planning Tip
Companies need to monitor their income tax rates as these may change from year to year. In particular, where rates are changing across years, companies may seek to time the derivation of income and/or the incurring of deductible expenses to take advantage of the changing rates (subject to prepayment rules and general anti avoidance rules).

Companies need to pay particular attention to the impacts of the business shutdown due to the pandemic. The changes in turnover may cause the company to move between thresholds in 2021 and 2022.This may result in a change of company tax rate, and more importantly, a change in the franking rate. It is the change in franking rate that companies should monitor carefully.

Trapped Franking credits
The Company tax rate for base rate entities has reduced for the 30 June 2022 year to 25%. Similarly, the franking rate has also reduced in 2022.

If the Company pays a franked dividend based on profits of a previous year where the Company’s tax rate was higher than the franking rate for the current year, there may be trapped franking credits e.g. previous year rate 26% and current year franking rate 25% then 1% franking credits trapped in the Company.

Tax Planning Tip
Companies need to consider which franking rate they are subject to in the 30 June 2022 year, and which rate they will be subject to next year. Where the company may move from a higher franking rate to a lower franking rate in the following year, there may be advantages in paying franked dividends prior to 30 June 2022 (subject to the position of the shareholders).

Small Business Income Tax Offset
The small business income tax offset for the 2021/22 year has been increased to 16%, up from 13%. The tax offset is a 16% discount of the income tax payable on the business income received from a small business entity (other than a company) with an aggregated turnover of less than $5m, up to a maximum of $1,000 a year.

Expanded Access to Small Business Concessions
More businesses may now be eligible for most small business tax concessions.

From 1 July 2021, businesses that are not small businesses where their turnover is $10m or more but less than $50m can also access these small business concessions:

• Simplified trading stock rules
• PAYG Instalments concession
• A 2 year amendment period
• Excise concession

Temporary Full Expensing of Assets – Extension to 30 June 2023
The temporary full expensing of depreciating assets measure has been extended by 12 months until 30 June 2023. From 6 October 2020 until 30 June 2023 the temporary full expensing allows:

• Eligible business entities with an aggregated turnover less than $5b or corporate tax entities that satisfy the alternative test can immediately expense the cost of eligible new depreciating assets
• Eligible businesses with an aggregated turnover under $50m can immediately expense the portion of the cost of eligible second-hand assets
• Businesses with an aggregated turnover under $10m can immediately expense the balance of a small business pool at the end of each income year in the period

Temporary Loss Carry-Back – Extension to 30 June 2023
The temporary loss carry-back measure has been extended by 12 months until 30 June 2023

• Eligible corporate tax entities with a ‘aggregated turnover’ of up to $5b can elect to ‘carry back’ a tax loss incurred in the 2019-20 to 2022-23 income years and offset it against the income of the 2018-19 or later years to generate a refundable tax offset
• The loss carry-back provision only applies to taxable losses, not capital losses and is limited to the corporate entity’s income tax liabilities in the relevant income year and the company’s franking account balance at the end of the current year

Higher Top-up Tax
Shareholders in companies that pay 25.0% franked dividends will have to pay higher top-up tax because the franking offset they receive will be lower than if the dividend was franked at 30%. Generally, this means the company tax cut is clawed back by the government when dividends are paid to resident shareholders.

Small business restructure rollover relief
From 1 July 2016 small businesses (<$10m turnover threshold) can use the small business restructure relief, which allows eligible taxpayers to transfer assets between related entities, including companies, Trusts and individuals, without any income tax or CGT consequences. While this rollover can be very beneficial to a small business, care needs to be taken as the eligibility rules can be complex in some cases.

Director Penalties
Company directors should review their companies’ reporting mechanisms to ensure they are adequately informed of their companies’ financial position. The director penalty provisions may leave directors personally liable where their company fails to make PAYG Withholding and SGC payments by the respective due dates.

Moreover, the director penalties provisions have been extended to cover outstanding payments for GST, wine equalisation tax and luxury car tax.

Defences against director liabilities include situations where the director has been ill, has taken all reasonable steps to ensure the outstanding liabilities have been paid, or in limited circumstances the director has been appointed to the company in the last 30 days. However, good evidence will be required for these defences.

Loans from Private Companies – Division 7A
Private company directors are reminded to ensure they comply with Division 7A where they provide loans or other financial assistance to shareholders and associates or allow them to use company property.

Loans made by private companies to their shareholders or associates will be treated as deemed dividends under Division 7A unless the loan is repaid by the earlier of the date of lodgement or due date for lodgement for company’s tax return for the year, or the loan is converted to a formal loan with the following features:

• Is under a Division 7A complying  written agreement and on commercial terms by the earlier of the company’s lodgement day or due date;
• Has a minimum benchmark interest rate; and
• Has a term of no more than seven years, or 25 years for registered mortgages over real estate

Other Important Division 7A issues:

• Ensure minimum loan repayment amounts are paid in years after the loan is made; any shortfall will be a deemed dividend in that year
• A Division 7A deemed dividend is generally unfranked
• Payments and debt forgiveness to a shareholder or associate can also be a deemed dividend
• The private use of company owned assets for less than market value consideration can be a deemed dividend under Division 7A
• These rules apply to shareholders and associates, which includes relatives of shareholders and Trusts, companies and partnerships of the shareholders or their associates
• There is a Commissioner’s discretion for non-complying loans not to be treated as a deemed dividend or to be treated as a franked dividend if it resulted from an honest mistake or inadvertent omission
• Loans for income producing purposes can be caught as a deemed dividend under Division 7A – there is no otherwise deductible rule
• Make sure all Division 7A loans made in the 30 June 2021 tax year were either repaid or put under a complying Division 7A loan agreement by the earlier of the lodgement date or due date of the company’s 2021 tax return
• If the company has an unpaid present entitlement from a Trust, it may be a deemed dividend to the Trust and/or the shareholder or their associate in some circumstances (see comments under ‘Trusts’ below)

Tax Planning Tip
To ensure all future Division 7A loans are covered by a qualifying loan agreement, consider entering into a Division 7A complying facility loan agreement that will be able to cover all future loans to shareholders or their associates. If such a facility loan agreement is already in place, review it regularly to ensure it complies with current law and covers all relevant shareholders and associates.

TRUSTS

Unpaid Trust Distributions
Distributions made by Trusts to associated private companies that remain unpaid at the end of the following year may be deemed to be a loan to the Trust and become subject to Division 7A.

For the 2022 tax year, unpaid distributions to a private company that arose in the 2021 tax year may be a deemed dividend to the Trust for the 2022 tax year unless the Trustee:

• Has put the amount in a sub-Trust for exclusive benefit of the private company by the earlier of the lodgement date or due date for lodgement of the Trust’s 2021 tax return (usually 15 May 2022);
• Converts the amount to a Division 7A complying  loan by the earlier of the lodgement date or the due date for lodgement for the 2022 company tax return; or
• Pays the amount to the company by the earlier of the lodgement date or due date for lodgement for the company’s 2022 tax return.

For unpaid distributions that have been placed into a sub-Trust, the annual return on the sub-Trust investment must be paid to the private company by 30 June 2022.

Loans from Trusts
Where there are unpaid distributions to a private company (including those under sub-Trust) that have not been converted into a Division 7A loan, and the Trustee has made loans or payments to shareholders of the private company (or their associates), these loans or payments may also be subject to Division 7A.

• A loan from a Trust will be a deemed a dividend where:

• 1. The Trust has made a distribution to a company;
  2. The Trustee has not paid the distribution to the company that is presently entitled to the distribution; and
  3. The Trust makes a loan to company’s shareholder or associate;
• The loan is deemed to have been made by the company to the company’s shareholder or associate and will be subject to the Division 7A rules as discussed above;
• Loans will not be deemed dividends if they are repaid or put on a commercial footing before the lodgement day for the Trust tax return.

Trust Distributions and Resolutions
Most Trust deeds for discretionary Trusts require Trustees to make their distribution determination for the Year Ended 30 June on or before 30 June, or sometimes earlier. It is essential that Trustees make these determinations prior to 30 June or earlier date if required in the Trust deed (notwithstanding the requirements of the Trust streaming rules discussed below).

The Tax Office stated they expect there to be evidence of the Trustees making determinations in accordance with their Trust deeds by the date as stated in the Trust deed.

We suggest that written evidence of the 2021/22 Trustee determination of income of the Trust (preferably in the form of a Trustee resolution) be prepared by 30 June 2022 (or whatever earlier date is required by the Trust deed).

Trust Streaming
Under the Trust streaming provisions, Trustees are able to stream franked dividends and capital gains to specific beneficiaries, rather than distributing these amounts as part of the general distribution to beneficiaries.

To stream franked dividends and capital gains, the Trust deed must not prevent the Trustee from streaming these amounts to specific beneficiaries. The Trust accounts must also separately account for the streaming of the capital gains and franked dividends to the specific beneficiaries.

In addition, the beneficiaries who are to receive these amounts must be specifically entitled to them, and the Trustee must record the streamed distributions in the accounts or records of the Trust.

The Trustees’ distribution resolution in favour of the specifically entitled beneficiary would generally be sufficient for this purpose.

Tax Planning Tip
You and/or your accountant, should regularly review your Trust’s deed to ensure you understand how it interacts with the various tax requirements, some of which are mentioned above.

ONGOING YEAR-END ISSUES

Timing of Income Derivation

• Consider whether the amount is income or capital – Income and capital gains have different tax timing rules.
• What is the appropriate method of income recognition for each type of income: cash or accruals?
• Cash generally for income from personal services, rent, interest, dividends and other income from non- business investments;
  • Accruals generally for trading income or other business income that relies on circulating capital, or staff or equipment to produce income
  • Consider specific rules to determine when income derived
• Consider whether income can be deferred until after 30 June 2022
• Alternatively,  if you are in a tax loss consider whether you accelerate income receipt prior to 30 June to recoup losses that may not be available in future years

 Income Received in Advance

• Income received in advance may not be derived (and taxed) until the services are provided
• Income received in advance should be credited to an unearned income account
• This rule will generally not apply if payment is not refundable if services are not provided
• Income received in advance must be released to profit when services are provided, or if services are not provided, when it is determined the services will not be provided and no refund is claimed by customer

 Timing of Expenses

• Expenses are generally deductible if incurred by 30 June 2022. This requires a presently existing liability
• Provisions are generally not deductible
• Some accruals are not deductible
• There are specific rules that determine when some expenses are deductible (in particular, see prepayment rules below)
• Interest paid after business ceases may be deductible

Repairs
Incur repairs on or before 30 June 2022 to obtain the deduction in the 2022 income year, but they must not be:

• Initial repairs
• Substantial replacement of an asset
• Improving an asset

Gifts

• Donate to deductible charities before 30 June 2022.
• Ensure the payment is to an endorsed deductible gift recipient (DGR).
• Donations are not deductible if a benefit is received by the donor, unless the contribution was made at eligible fundraising event for a DGR and contribution is more than $150:
  • Deduction will be reduced by value of any benefits received at the event.
  • GST inclusive value of benefits received must not exceed lesser of 20% of contribution and $150.

 Bad Debts

• Review bad debts before 30 June 2022.
• Remember the rules for deducting bad debts
• Write-off bad debts before year end to get deduction in that year (provision for doubtful debts not deductible).
• Bad debts may not be deductible if there has been a change in ownership or control of a company or Trust (unless company passes the same business test)

Trading Stock

• Consider an appropriate valuation method – you can choose cost, market selling value or replacement price
• Identify any obsolete stock – special valuation rule
• Scrap unwanted stock by 30 June 2022
• If taxpayer is a small business entity, stock valuation is not required if the difference between opening and estimated closing value of trading stock for the year is $5,000 or less

Non-Commercial Losses

• Losses from businesses carried on by individuals (or partnerships which have individuals as partners) are quarantined and deductible only against income from that business, or a related business unless the tests below are met.
• For individuals with adjusted taxable income less than $250,000, at least one of these tests must be met:
  • Assessable income from the business of $20,000 or more
  • Profit from the business in three out of the five previous years, including the current year
  • Real property of $500,000 or more, or other assets of $100,000 or more used in the business
  • The Commissioner exercises his discretion.
• For individuals with adjusted taxable income in excess of $250,000, they must rely on the Commissioner’s discretion (they will have losses quarantined unless they can satisfy the Commissioner the loss was the result of unusual circumstances beyond the control of the taxpayer or because of the nature of the business)

Home Office Expenses

• Home office expenses may be deductible where you carry on business or employment activities at home
• Portion of interest, rent and insurance are not deductible unless you are carrying on business from home and the area is separate and distinguished from private living areas
• If carrying on business from home, deductibility of interest, rent etc. may be determined by the space occupied by the home office, as well as extent the space is used for income producing purposes
• Converting the spare room is not sufficient to be classified as a home office
• Power, heating and depreciation can be claimed at a flat rate established by the Tax Office even if the room is not exclusively set aside for a home office
• If an office is provided by the employer, working from home as a convenient place to do part of the work may not be sufficient to claim home office expenses
• There have been a number of recent Tribunal cases looking at the deductibility of home office costs. This issue has been identified by the Tax Office as a risk area that may be subject to increased audit activity

Car Expenses for Individuals

• If claiming  actual expenses, check the logbook is current and that logbook details are correct. Please note a logbook must be completed every 3 years.
• Ensure year-end odometer readings are taken
• Ensure all relevant receipts have been kept

Personal deductions
Individuals who are seeking to claim deductions for employment related expenditure should be aware of an increase in audit activity by the Tax Office in relation to personal employment related deductions.

When you are claiming these deductions, you should ensure:

• You are actually entitled to claim the deduction (is the amount deductible?)
• You can substantiate the expenditure you are seeking to deduct (do you have the appropriate receipts, tax invoices, diaries etc.)
• Have you restricted your deduction to the business/ employment related portion of the deduction (have you excluded the private/non-deductible amounts and can you substantiate business/employment use)?

Prepayments

• If expenses are not subject to the prepayment rules, prepay deductible expenditure by 30 June 2022
• The prepayment rules spread a pro-rated deduction over more than one year, where the expenditure provides benefits after end of the current income year
• The prepayment rules do not apply to excluded expenditure, which includes:
  • Salary;
  • Amounts required to be paid by law or a court; and
  • Expenditure under $1,000.
• Small business entity taxpayers and non-business individuals are allowed prepayments in the year incurred if the benefit does not extend beyond 12 months

Taxable Payments Reporting System
Businesses in building and construction are required to record payments to contractors and report these payments to the Tax Office. From 1 July 2018, businesses engaged in the courier or cleaning industries were also required to make these reports. From 1 July 2019, the rules will extend to businesses engaged in IT, road (freight) transport, and security industries.

The annual report due to be lodged by 21 July 2022.

Superannuation
Some of the following super fund issues require advice from a qualified financial adviser:

• Employee superannuation guarantee quarterly contributions are required by 28 July 2022
• Ensure at least the minimum pension payments have been made for those in pension phase
• Before making any contributions prior to year-end, ensure you are aware of your contribution caps
• Make sure you take into account contributions already made and ensure contributions made for the year do not exceed the concessional and non-concessional contribution limits
• Ensure that contributions made near the end of the year are actually received by the fund by 30 June to ensure deductibility
• Review salary sacrifice arrangements, especially if you have more than one employer, to ensure you do not breach your concessional cap in total

Super Guarantee and Contractors
Employers need to ensure they make super contributions for all eligible employees, including certain independent contractors for Superannuation Guarantee Charge  (‘SGC’) purposes.

Under SGC, ‘employee’ includes individuals who are employees in the ordinary sense (PAYG) and independent contractors engaged under a contract primarily for the provision of labour.

Where you engage contractors, you should review the contracts to determine whether the individuals are treated as employees for SGC purposes.

Director and Employee Entitlements

• Conduct shareholders’ meetings before 30 June 2022 to approve directors’ fees and bonuses to receive deductions for the 2021/2022 year
• Ensure arrangements for employee bonuses based on 2022 results are in place before 30 June 2022 to receive the deduction for the 2021/2022 year
• Ensure employee salary packages that include fringe benefits and/or additional employer super contributions are reviewed and in place before the sacrificed salary is earned by the employee

Payment Summaries – Salary Sacrifice

• Employers are required to report (on PAYG payment summaries) reportable super contributions
• These are contributions in excess of the amount required under the SGC (industrial award or law where the amount exceeds the SGC amount) where employee influenced the additional contribution (salary sacrifice)
• Contributions out of post-tax salary are not included

Losses

• Check to ensure companies and Trusts seeking to claim a deduction for current year or prior year losses satisfy the company loss and Trust loss rules by 30 June.

Debt Forgiveness

• Where a debt owed by the taxpayer is released prior to 30 June, ensure there are no adverse consequences from the application of the commercial debt forgiveness rules
• These rules operate where a debt is released and interest on the debt is deductible, or if the debt is interest free, interest would have been deductible if interest was charged
• The beneficiary of the release may forfeit tax losses, future deductible amounts and/or CGT cost bases
• In certain circumstances, there may be advantages in deferring the forgiveness until the following tax year. Where you are considering releasing debts, you should consider the optimal timing of the release

Sale of Investments – CGT Issues

• Where CGT assets will be realised for a gain, consider delaying making the contract for sale until after 30 June unless you have losses that may be lost because of the loss integrity measures
• Caution is required if you crystallise capital losses to offset against capital gains just before 30 June 2022 as this may result in the loss being denied if the taxpayer does not lose effective control of the loss assets, or they are replaced with substantially identical assets (wash sales)
• Timing of disposal under a contract for CGT purposes is generally the date of making the contract
• If assets are held for less than 12 months by individuals, Trusts or super funds that are eligible for the CGT discount, consider delaying sale until 12 months has passed
• Take care if using options to defer the date of sale of an asset to pass the 12-month rule for CGT discount or to delay CGT event until the next year, as certain options may not be effective for these purposes
• Recoup capital losses against indexed capital gains before discounted gains

CGT Small Business Concessions

• The concessions are:
  • 15-year exemption
  • active asset reduction
  • retirement exemption
  • small business rollover
• To qualify for the basic concessions, the taxpayer must either pass the $6 million net asset value test, or be a small business entity with an aggregate turnover of less than $2 million; and the assets must satisfy the active asset test used in the relevant business
• To qualify for the 15-year exemption, the taxpayer must also be retiring or permanently incapacitated and assets must have been held for at least 15 years
• To qualify for retirement exemption, if the taxpayer is less than 55, the exempt amount must be contributed to a super fund
• If the taxpayer is a Trust or company, special rules determine if the entity can access the concessions
• If the taxpayer sells shares in a company or interests in a Trust which conducts a business, there are rules to determine whether the sale qualifies for the concessions
• There are special rules where an asset owned by one entity is used in a business by a related entity
• Also, consider the small business Restructure rollover relief that applied from 1 July 2016
• Be aware of the amendments to the basic conditions where the asset being sold is a share in a company or an interest in a Trust. The amendments took effect from 1 July 2017

FINAL REMINDERS

No-one knows your affairs better than yourself, so you will recognise if any of these tax tips apply to your circumstances. But no-one is better informed as to what is appropriate, or indeed allowable, than your accountant (and don’t forget, any fee is an allowable deduction in the year it is paid).

Every individual taxpayer is required to lodge their return before October 31, but tax professionals are generally given more time to lodge, which can be a handy extension to a payment deadline if any arises.

Of course, if you’re sure you are going to get a refund there is no use delaying, so in these cases it is worth getting all of your information to this office as soon as you can after July 1 – especially if you’re keen to get your hands on the refund.

Should you have any questions or need any help ensuring you receive all available assistance, please reach out to our team and we will endeavour to do our best to assist.

Stay Safe.

The Team at Rose Partners