With the end of the 2018 income tax year rapidly approaching, this article draws attention to year-end tax planning strategies and compliance matters that you need to consider to ensure good tax health. It focuses on the most important issues for small to medium businesses to consider.
One interesting procedural matter this year is that 30 June 2018 falls on a Saturday, meaning that ATO payments or lodgments due on that day or on Sunday 1 July can be made on Monday 2 July 2018 without incurring a general interest charge. However, where practically possible, all actions, payments or lodgments should be undertaken before Friday 29 June 2018.
This “date shuffling” conundrum should be kept in mind when reference is made to actions to be undertaken by 30 June 2018.
The following is general information. Contact us to find out more.
Deferring Derivation of Income
If your business recognises income on an accruals basis (when an invoice is raised) and your cash flow allows, you may consider delaying raising some invoices until after 30 June, meaning the assessable income will be derived after the 2018 income tax year.
For business income derived on a cash basis (interest, royalties, rent and dividends), you may consider deferring the receipt of certain payments until after 30 June 2018. For example, setting term deposits to mature after 30 June 2018 rather than before.
Bring Forward Tax-Deductible Expenses
To qualify for deductions in the 2018 income tax year, you may be able to bring forward upcoming expenses so that you incur them before 30 June 2018. Small businesses and individual non-business taxpayers may prepay certain expenses up to 12 months ahead. This should only be done subject to available cash flow and where the prepayment makes commercial sense.
Lower Company Tax Rates
The Commonwealth Government has announced its intention to reduce company tax rates in Australia. Companies carrying on a business with turnover of less than $25 million will pay a rate of 27.5% in 2018 – the rate of 30% only applies if turnover is $25 million or more, or the company is not carrying on a business.
By 2027, the tax rate is planned to reach a low of 25% for companies carrying on a business with turnover up to $50 million.
Deductions for Small Business Entities
Small business entities (companies, trusts, partnerships or sole traders with total turnover of less than $10 million) will qualify for a raft of tax concessions in the 2018 income tax year:
- the $20,000 instant asset write-off – an immediate deduction when buying and installing depreciating assets that cost less than $20,000.
- the simplified depreciation rules – accelerated depreciation rates of 15% or 30% for depreciable assets that cost $20,000 or more;
- the small business restructure rollover;
- an immediate deduction for start-up costs;
- an immediate deduction for certain prepaid expenses;
- the simplified trading stock rules – removing the need to do an end-of-year stocktake if stock value has changed by less than $5,000;
- the simplified PAYG rules – the ATO will calculate PAYG instalments;
- cash basis accounting for GST – the ATO will calculate the GST instalment payable and annual apportionment for input tax credits for acquisitions that are partly creditable;
- the FBT car parking exemption (from 1 April 2017); and
- the ability for employees to salary-sacrifice two identical portable electronic devices.
These concessions are very powerful for small businesses, and can lead to substantial tax savings.
Beware of Private Company Loans and Unpaid Trust Distributions
The shareholders of companies operating businesses sometimes treat their companies as their own piggybank by making drawings from the companies to either fund other business interests or their private lifestyle.
Such cash advances need to be documented with a complying loan agreement that requires minimum principal and interest repayments at the benchmark interest rate by 30 June; otherwise, they will give rise to a deemed dividend (Division 7A) and be taxed accordingly.
Care must also be taken when a private company makes a loan or payment or forgives a debt of a shareholder (or a 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 a loan by the company which may have Division 7A implications.
Review Trust Deeds and Make Trust Resolutions
Trustees must make valid distribution resolutions before 30 June (or an earlier date if specified in the trust deed) to distribute trust income to eligible beneficiaries. If trustees fail to make valid distribution resolutions before 30 June, the trustee can potentially be assessed on all of the trust’s net income at the top marginal tax rate (45%).
To ensure that valid trustee distribution resolutions are made, the terms of the trust deed must be complied with.
For example, if the trust deed defines trust net income as equal to taxable net income, but the trustee resolves to distribute only accounting income to beneficiaries, this resolution may not be an effective distribution of trust income (in part or whole) – and it may result in the trustee being assessed at the top marginal tax rate (45%).
Since the exact trust net income will not be known by 30 June, trust distribution resolutions should be made distributing different percentages to beneficiaries (adding up to 100%), or distributing specified dollar amounts to certain beneficiaries and the balance to a default beneficiary.
Review Bad Debts and Obsolete Plant and Machinery
Unpaid debts should be reviewed to determine the likelihood of not receiving payment of these debts and whether attempts to recover the debts will be successful. It is important to keep documentation as evidence where the debt is considered to be non-recoverable. If the debt is irrecoverable and 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.
It should be ensured that these bad debts have not been forgiven – forgiven debts do not qualify as bad debts.
This same methodology should be applied to plant and machinery. Review asset registers to identify obsolete plant and machinery, and be sure to scrap it (ie physically dispose of it). A deduction can be claimed for the written-down value of such assets.
Payments to Contractors in the Building and Construction Industry
Businesses in the building and construction industry must report the total payments they make to contractors on a taxable payments annual report by 28 August 2018.
Individuals Deducting Work-Related Expenses
People overclaiming deductions for work-related expenses like vehicles, travel, internet and mobile phones and self-education are on the ATO’s hit list this year. There are three main rules when it comes to work-related claims:
- You can only claim a deduction for money you have actually spent (and that your employer hasn’t reimbursed).
- The expense must be directly related to earning your work income.
- You must have a record to prove the expense.
Deductions are not allowed for private expenses (eg travel from home to work unless it's required to transport bulky equipment) or reimbursed expenses (eg for the cost of meals, accommodation and travel). And although you don’t need to include records like receipts with your tax return, the ATO can deny your claim – and penalties may apply – if you can’t produce the evidence when asked.
The ATO now uses real-time data to compare deductions across similar occupations and income brackets, so it can quickly identify higher-than-expected or unusual claims.
Superannuation Contributions and Changes
There have been a number of fundamental changes to the superannuation landscape for the 2018 income tax year, including changes to the caps for concessional (deductible) contributions (now $25,000 for all taxpayers) and non-concessional contributions and the introduction of the general transfer balance cap and total super balance threshold (each currently $1.6 million).
The above is general information, but we’ll take your particular circumstances into account to help you achieve good tax health if you wish. Clients should contact us to find out more. If you are not a client, please contact us to find out how we can help you.