Countdown to EOFY — your tax planning checklist
With the end of the financial year approaching, now is an opportune time to review your business affairs as part of your year-end tax planning. Kevin Duda, Director of CCIWA Member Grant Thornton, explains what you should consider ahead of June 30.
Changes in corporate tax rate
For the year ending June 30, 2022, companies with an aggregated turnover of less than $50 million – that derive no more than 80 per cent of their income from passive sources – qualify for the base rate entity corporate tax rate of 25 per cent (down from 26 per cent for the year ended June 30, 2021). Companies that do not meet this criteria will have the higher corporate tax rate of 30 per cent.
Companies with a turnover in the vicinity of $50m should closely monitor their turnover in the lead up to the end of June, as additional sales could push them over the $50m threshold and result in a higher tax rate. Likewise, companies that previously had an aggregated turnover of more than $50m last year may have experienced a reduction in turnover and qualify for the lower tax rate this year.
The change in corporate tax rate also impacts a company’s maximum franking rate. When determining a company’s franking rate, it is assumed its income will be the same as the last financial year.
Base rate companies
Base rate companies with a turnover of less than $50m in the prior financial year are able to pay dividends up to a maximum franking rate of 25 per cent for the year ended June 30, 2022 – (down from 26 per cent for the prior year). Companies with a turnover of more than $50m in the prior financial year are able to pay dividends up to a maximum franking rate of 30 per cent for the year ended June 30, 2022. A lower franking rate means additional top-up tax paid by the shareholders.
If a company’s turnover was greater than $50m in the prior year and has decreased below $50m in the current year, consideration should be given to whether there is an advantage to declaring dividends with a ranking rate of 30 per cent prior to June 30 rather than waiting until next year when the franking rate will decrease to 25 per cent.
Temporary full expensing of eligible assets
Businesses with an aggregated turnover under $5 billion are able to claim an immediate deduction for the business portion of eligible new depreciating assets. The eligible new asset must be first used or installed ready for use between October 6, 2020 and June 30, 2023, with the deduction able to be claimed in the financial year the asset was first used or installed ready for use.
For businesses with a turnover of between $50m and $5b, the asset must be a newly acquired asset. For businesses with an aggregated turnover of less than $50m, the immediate deduction also applies to second-hand assets.
However, the immediate deduction does not apply to buildings and capital works or assets that are located outside of Australia.
- Bad debts — review your trade debtors and consider whether all are recoverable. Consider writing off any non-recoverable amounts as a bad debt to claim the tax deduction this financial year.
- Superannuation contributions — contributions are not deductible until paid and received by the complying superannuation fund. Look to pay contributions prior to June 30 to enable a tax deduction in the current financial year.
- Repairs — Prior to June 30 may be an opportune time to have any plant and equipment in need of service or repairs attended to and capture the tax deductions this side of June 30.
- Consumables — stock up on non-perishable consumables, such as stationery, printing and office supplies before June 30 and claim a deduction in the current year.
- Accrued expenditure — identify and accrue any expenses that have been incurred but not paid as at June 30. This could include interest on business loans, commissions owing to sale personnel, salaries, wages and bonuses or utility accounts.
- Trading stock — complete a stock take at June 30. Write off any obsolete of damaged stock and where the market selling value is less than the cost of the stock, look to write down the stock to the lower value.
- Prepayments — business with a aggregated turnover less than $50m are able to claim a deduction in the year an expense is paid provided the prepayment period does not exceed 12 months.
Income received in advance/work in progress
Where income has been received in advance of services being provided, that income may not yet be derived and subsequently not be taxable until the services are delivered.
Any income received in advance as at June 30 should be identified and either allocated to a liability account in the financial statements or adjusted for in the tax return.
Similarly, identify any work in progress that has been recognised as income through your accounting system as at June 30 but not yet invoiced. The work in progress is likely to not be assessable income until the following financial year once the invoice has been raised.
Review and vary PAYG instalment
Many businesses progressively pay PAYG instalments throughout the year towards their estimated tax liability for the current year.
Regardless of whether you are using the Instalment Rate method or accepting the ATO determined Instalment, the amount payable is generally based on the ATO’s assumption that the profit of the business will be an improvement on the last financial year.
Where businesses experience a decrease in profit relative to the prior year, this can result in additional PAYG instalments being paid throughout the year.
Whilst any overpayment of income tax will be reconciled upon lodgement of the tax return, the payment of additional tax can put pressure on the working capital requirements of the business. June is an opportune time to review your expected tax liability and vary the June instalment to reduce the instalment payable or claim back any excess instalments paid during the year.
Capital gains tax
Shares and real estate held for capital gain are deemed to be disposed of on contract date for tax purposes, rather than when settlement occurs. For any upcoming disposals, consider whether the contract should be entered into this side of June 30, or after June 30.
Where capital gains have been derived during the year and unrealised capital losses exist, you may consider disposing of those assets to crystalise the loss and offset the capital loss against the capital gain.
Loan/payments from companies
Loans and payments made by private companies to shareholders and their associates may be treated as assessable income to the shareholder under the provisions of Division 7A.
Where loans and payments have been made during the current financial year, consider if these amounts can be repaid to the company prior to June 30. If not, consider whether a loan agreement should be put in place between the company and shareholder to repay the loan over a maximum term of seven years.
For loans that arose in a prior year and are subject to a complying loan agreement, ensure the minimum loan repayment is made prior to June 30.
Trust distribution resolutions
Trust Deeds of most discretionary trusts require the trustee to make a determination on or prior to June 30 each year to determine how the net income of the trust is to be distributed.
In February this year the ATO released Draft Tax Ruling TR 2022/ D1 and Practical Compliance Guideline 2022/D1 identifying a focus on arrangements where adult children receive a present entitlement to trust income whilst at least part of the economic benefit ends up with another person, typically their parents or guardians.
In consultation with your advisor, you should be carefully considering the requirements of the Trust Deed, recent ATO guidance, income of the trust for the year and to which beneficiaries — and in what proportions — the income will be distributed.
Ensure the determination is documented by way of a distribution resolution and signed and dated by the trustee in accordance with the requirements of the Trust Deed.