With the end of the financial year approaching quickly, now is the time to plan the actions you need to take before 30 June to reduce your tax. It’s been an extraordinary end to the 2020 financial year with all the challenges due to COVID-19. The number one priority for most business owners and families right now is cash flow, so tax planning has never been more important.
Please note, the Federal Budget has been postponed until October 6, 2020 due to the effects of the coronavirus and the difficulty in formulating reliable economic and fiscal estimates.
Before the end of 2020 financial year, consideration may need to be given to following areas:
- Maximizing superannuation contributions without exceeding the relevant caps and paying employees quarterly/monthly super for June before the 22nd of June.
- COVID-19 Stimulus Packages from federal, state and local governments
- Instant Asset Write Off – The instant asset write-off is a tax deduction that reduces the tax liability of your business. You can immediately deduct the cost of a business asset if it costs less than the following amounts and turnover thresholds:
- $150,000 excluding GST from 12 March 2020 to 31 December2020 (with business aggregated annual turnover up to $500 million) – To be legislated
- $30,000 excluding GST up to 11 March 2020 (with business aggregated annual turnover up to $50 million)
This applies on a per asset basis to new or second-hand assets first used or installed ready for use in the above timeframe. Eligible businesses can immediately write-off multiple assets.
- Accelerated Depreciation– Businesses with a turnover up to $500 million can purchase eligible assets over $150,000 until 30 June 2021 and claim accelerated depreciation of an additional 50% of the asset cost in the first year of purchase. Existing depreciation rules apply to the balance of the asset cost. This is an extra tax deduction and not a cash back amount.
‘Eligible assets’ are new assets purchased after 12 March 2020 and first used or installed by 30 June 2021. It includes plant and equipment but does not apply to buildings, capital works or second-hand assets.
- Deferral of Income – If cash flow and business reality allow, consider deferring the derivation or receipt of income until the next financial year. This is especially relevant for companies with the change in tax rate. If on a cash basis, consider trying to defer the receipt of cash. If reporting income on an accruals basis, defer the derivation of income by holding back invoices if possible until after 30 June.
- Income Received in Advance – Consider whether income received is actually derived. Income received in advance may not be derived (and not taxable) until the services are provided. Conversely income such as interest, royalties, rent and dividends are usually derived upon receipt.
- Timing of Expenses – Expenses are only deductible when incurred, i.e. there must be a presently existing liability to pay the expense. Most prepayments now are not deductible until the period to which they relate (some exceptions apply), although small businesses and individuals may be able to deduct 12 months of prepayments in the year paid. Consequently, consider paying for additional materials, office supplies, donations, work subscriptions, etcetera by the 26th of June.
- Payments to Workers – A new rule for the 2020 year means that a business can only claim a deduction for payments to workers (employees, contractors, directors etc) where the business has complied with PAYG withholding and reporting obligations. If payments are paid but not correctly reported to the ATO, the business will be denied deductions, even if the individual correctly includes the amount in their income tax return.
This may mean some family businesses that may have paid wages or allowances to family members below the tax-free threshold will need to register as a withholder and provide a PAYG Summary, or process payments through Single Touch Payroll.
- Bad Debts – Review your debtors and if any are unlikely to be recovered, actually write them off as bad before 30 June. This will reduce your income tax and should generate a GST refund (for taxpayers registered for GST on a non-cash basis).
- Trading Stock – Prepare for a stock take on 30 June. Identify any obsolete or old stock and scrap it or write it down to its correct market value. Individual items of trading stock can be valued at cost, market value, or replacement value for tax purposes. The tax value may differ to the accounting value.
- Staff Bonuses – Bonuses are only deductible when they are actually incurred i.e. at 30 June the business must be committed to paying them and not subject to any discretion.
- ATO cautions early lodgers – This year as individual clients are expected to lodge early to get their hands on potential refunds as soon as possible, The ATO deputy commissioner Karen Foat has urged taxpayers to hold off from lodging until all their income details have been finalised. “We often see people too eager to get a tax refund making obvious mistakes, which can either delay processing the tax return or result in a bill later on,” Ms Foat said.
With Single Touch Payroll now live for all businesses, apart from closely held payees (July 2021), employers with 20 or more employees will have until 14 July 2020 to make a finalisation declaration, while employers with 19 or fewer employees will have until 31 July 2020.
Other information from banks, health funds and government agencies will also be available by the end of July. So if you are lodging before then, make sure the information provided is complete, accurate and up to date to avoid delays or a debt later on.
- 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)?
Work – related hotspots for 2020 “With more people working from home, working reduced hours or unfortunately not working at all, we expect to see claims for laundry expenses or travel expenses decline this year,” Ms Foat said.
“If you aren’t travelling for work, you can’t claim travel expenses. If you aren’t wearing your work uniform, you can’t claim laundry expenses.
- Working from home and other changes due to Covid-19 – We understand that due to COVID-19 your working arrangements may have changed. If you have been working from home, you may have expenses you can claim a deduction for at tax time.
While the new simplified expenses calculation is grabbing the headlines, this may not be the most tax efficient option for everyone. Whether it’s for yourself or your staff who are working from home, understand that there are three methods:
- A flat hourly rate The simplified method lets an individual claim a flat $0.80 for every hour worked at home from 1 March 2020 to 30 June 2020. Hours worked at home before this period are calculated using one of the methods below.
- An hourly rate plus bills Another option is to claim $0.52 per work hour and include a portion of household bills such as utilities, internet and cleaning. This may deliver a larger deduction.
- A pure percentage rate Individuals can add up everything spent working from home, work out what percentage was for work, and claim that.
All three require you to keep a log of the hours you’ve worked. The last two require adding any equipment purchases and ‘home office’ expenses like utility, phone, internet and cleaning costs. Please note, unlike at an official workplace, tea, coffee, biscuits, food and alcohol are not claimable.
- June 2020 PAYG Instalments – If you are a taxpayer on the PAYG Instalment system and you plan to use some of these tax planning tips to reduce your 2019 taxable income, you may be able to vary the June quarterly instalment (due 28 July) to a lower amount to assist with your cashflow. We suggest you contact us or your accountant to discuss this further.
Checklist of Other Year End Tax Issues
In addition to the tax planning opportunities, there are a number of obligations in relation to the end of the financial year that should be considered:
If you use a Motor Vehicle in producing your income you may need to:
- Record Motor Vehicle Odometer readings at 30 June 2020
- Prepare a log book for 12 continuous weeks if your existing one is more than 5 years old. Please note, if you commence the logbook prior to the 30th June 2020, the usage determined will still be appropriate for the whole of 2019/20. As such, it is not too late to start preparing one for the current financial year.
- If you have started an account-based pension: Ensure that you have withdrawn the annual minimum required.
- For Private Company – Div 7A Loans or Trust Unpaid present Entitlement – Business owners who have borrowed funds from their company in prior years must ensure that the appropriate principal and interest loan repayments are made by 30 June 2020. Current year loans must be either paid back in full or have a loan agreement entered into before the due date of lodgement of the company return. Failure to comply risks having it counted as an unfranked dividend in the individual’s tax return.
- Trustee Resolutions – ensure that the Trustee Resolutions on how the income from the trust is distributed to the beneficiaries are prepared and signed before June 30, 2020 for all Discretionary (“Family”) Trusts. If a valid resolution hasn’t been executed by this date, the default beneficiaries become entitled to the trust’s income and are then subject to tax. Income derived but not distributed by the trust will mean the trust will be assessed at the highest marginal rate on this income.
If you want to discuss further or have any questions please contact Nick or Richard on our office numbers at your earliest convenience.
Disclaimer: This article contains general information only and no responsibility can be accepted for errors, omissions or possible misleading statements. It is not designed to be a substitute for professional advice and does not take into account your individual circumstances. Therefore, no responsibility can be accepted for any action taken as a result of any information contained in this newsletter.