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 2020-21 year and maximise any refund entitlements. This is still, if not more so, the case in the current COVID-19 environment.
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, but they should provide a list of possibilities that may get you thinking along the right track. Of course, check with us if you need further information.
2021 TAX HIGHLIGHTS:
Federal Budget Announcements
The 2021 Federal Budget was handed down on 11 May 2021. The Budget was predominantly a spending Budget to maintain the momentum of the recovery of the Australian economy following the pandemic.
The main revenue initiatives that impact immediately are:
Interaction of Tax Depreciation Incentives
In 2020 the government introduced measures to help businesses recover from the impacts of the coronavirus pandemic (COVID-19). Eligible business entities may want to know which tax depreciation incentive is right for them. This Interaction of Tax Depreciation Incentives Summary explains the depreciation incentives that are available and when businesses could consider using them.
Superannuation
The rate for superannuation contributions by employers on behalf of their employees under the SGC for the Year Ended 30 June 2021 is 9.5%.
The rates are scheduled to increase over the next few years. For the Year Ended 30 June 2022, the rate increases to 10%, meaning that contributions made in relation to salary and wages paid on or after 1 July 2021 will be subject to the higher 10% rate.
The contributions rate is scheduled to increase by 0.5% per year until it reaches 12% from 1 July 2025. This may be subject to change.
Employers must make superannuation guarantee contributions 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 2021 quarter SGC does not have to be paid until 28 July 2021, tax deductions for the superannuation contributions will only be available in the 30 June 2021 tax year if the contribution is received by the superannuation fund by 30 June 2021. A recent release from the Tax Office reminded all employers that deductions are not allowed when contributions are made via a clearing house until the payment has actually been paid by the clearing house to the trustee of the fund, and that this may take several days upon receipt by the clearing house.
INDIVIDUAL TAX RATES
There have been no changes to the individual income tax rates for 30 June 2021.
INDIVIDUAL TAX RATES | ||
Threshold | Rate | |
1st rate | $0 – $18,200 | 0% |
2nd rate | $18,201 – $45,000 | 19.0% |
3rd rate | $45,001 – $120,000 | 32.5% |
4th rate | $120,001 – $180,000 | 37.0% |
5th rate | $180,001 + | 45.0% |
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).
The Low and Middle Income Tax Offset and the Low Income Tax Offset will also be available
SMALL AND MEDIUM BUSINESSES
From 1 July 2020, the small business turnover threshold has increased from $10 million to $50 million.
This means from 1 July 2020, small and medium businesses can access the concessional prepayment rules and the immediate deduction for start-up costs. From 1 April 2021, the FBT exemptions for car parking benefits and for the provision of multiple work related electronic devices extends to entities with a $50 million turnover. From 1 July 2021, the balance of the small business entity (SBE) concessions extend to medium enterprises, including concessional GST and PAYG instalments, small business trading stock, 2 year amendment period and concessions for customs and excise reporting.
However, thresholds for the small business CGT concessions remains at $2 million turnover or $6 million net asset test and small business tax discount has a $5 million turnover threshold.
IMPORTANT YEAR-END PLANNING ISSUES
Base Rate Entity Company Tax Rate
The base rate entity company tax rate applies where companies satisfy the base rate entity passive income test and they have an aggregated turnover less than the following:
Year Ended 30 June | Turnover |
2018 | $25 million |
2019 | $50 million |
2020 | $50 million |
2021 | $50 million |
The base rate entity passive income test requires companies to derive no more than 80% passive income in a relevant year. Passive income includes items such as rent, interest, capital gains, and distributions from trusts and partnerships.
The base rate entity company tax rate for each of the relevant years is:
Year Ended 30 June | Rate |
2018 | 27.5% |
2019 | 27.5% |
2020 | 27.5% |
2021 | 26.0% |
2022 | 25.0% |
The base rate is also relevant in determining the maximum franking amount a company can apply to franked dividends it pays to its shareholders.
For companies that are not base rate entities, the standard 30% company tax rate applies.
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 2020 and 2021.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. The effects of this are illustrated below.
Trapped Franking credits
As can be seen from the above tables, the company tax rate for base rate entities has reduced for the 30 June 2021 year to 26% and it will further reduce for the 30 June 2022 year to 25%. Similarly, the franking rate will reduce in both 2021 and 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 30% and current year franking rate 27.5% then 2.5% franking credits trapped in company.
Tax Planning Tip
Companies need to consider which franking rate they are subject to in the 30 June 2021 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 2021 (subject to the position of the shareholders).
Higher Top-up Tax
Shareholders in companies that pay 26.0% 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.
For example, a company has $100 profit and pays 30% tax, and pays the $70 balance as a franked dividend to the shareholder. If the shareholder’s marginal tax rate in 47%, they will pay tax on the $70 franked dividend of $17 (after franking offset) leaving the shareholder with $53 after tax.
However, if the company pays tax at 27.5% tax on the $100 income it can pay a $72.5 franked divided franked at 27.5%, in which case the shareholder pays $19.50 on the $72.50 franked dividend leaving the shareholder with the same $53 after tax.
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.
Loss Carry Back Rules
Legislation has been passed allowing companies with an aggregated turnover of less than $5 billion to make an election to carry back income tax losses in 30 June 2020, 30 June 2021 and 30 June 2022. The Government has proposed extending these rules to 30 June 2023, although at the time of publication, legislation has not been introduced.
Where an election is made to carry back a loss, the company receives a refundable income tax offset equivalent to the amount of the tax loss multiplied by the relevant income tax rate.
The election allows income tax losses from 30 June 2020 to 30 June 2022 to be carried back for a refund of income tax paid in the 30 June 2019 to 30 June 2022 income tax years.
The amount of the losses able to be carried back is capped at the lesser of:
Note however that by making the election and receiving a refund of income tax paid in an earlier year, the company will receive a debit in its franking account equivalent to the amount of the refund. This may restrict the company’s ability to pay franked dividends to its shareholders.
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, from 1 April 2020, the director penalties provisions have been extended to cover outstanding payments for GST, wine equalisation tax and luxury car tax.
Defenses 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 defenses.
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:
Other Important Division 7A issues:
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 2021 tax year, unpaid distributions to a private company that arose in the 2020 tax year may be a deemed dividend to the trust for the 2021 tax year unless the trustee:
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 2021.
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.
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 2020/21 trustee determination of income of the trust (preferably in the form of a trustee resolution) be prepared by 30 June 2021 (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.
Single Touch Payroll
From 1 July 2018, employers with more than 20 employees are required to provide real time reports to the Tax Office of salary and wage payments, SGC contributions, ordinary time earnings of employees and PAYG withholding amounts.
From 1 July 2019, this system has extended to all employers.
Single Touch Payroll reporting is expanding for Closely Held Payees and will be mandatory from 1 July 2021.
SUPERANNUATION
Super Guarantee Changes
The rate for superannuation contributions by employers on behalf of their employees under the SGC for the Year Ended 30 June 2021 is 9.5%.
The rates are scheduled to increase over the next few years. For the Year Ended 30 June 2022, the rate increases to 10%, meaning that contributions made in relation to salary and wages paid on or after 1 July 2021 will be subject to the higher 10% rate.
The contributions rate is scheduled to increase by 0.5% per year until it reaches 12% from 1 July 2025. This may be subject to change.
Employers must make superannuation guarantee contributions 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 2021 quarter SGC does not have to be paid until 28 July 2021, tax deductions for the superannuation contributions will only be available in the 30 June 2021 tax year if the contribution is received by the superannuation fund by 30 June 2021. A recent release from the Tax Office reminded all employers that deductions are not allowed when contributions are made via a clearing house until the payment has actually been paid by the clearing house to the trustee of the fund, and that this may take several days upon receipt by the clearing house.
ONGOING YEAR-END ISSUES
Timing of Income Derivation
Income Received in Advance
Timing of Expenses
Repairs
Incur repairs on or before 30 June 2021 to obtain the deduction in the 2021 income year, but they must not be:
Gifts
Bad Debts
Trading Stock
Non-Commercial Losses
Home Office Expenses
Car Expenses for Individuals
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:
Prepayments
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 2021.
Superannuation
Some of the following super fund issues require advice from a qualified financial adviser:
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
Payment Summaries – Salary Sacrifice
Losses
Debt Forgiveness
Sale of Investments – CGT Issues
CGT Small Business Concessions
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