As we approach 30 June, we thought it was timely to give our clients a refresher on some common EOFY tax planning tips, and also point out the key changes for the 2020 tax year that may impact you and/or your business.
If you have any questions at all regarding any of the below as you prepare for 30 June, please do not hesitate to contact your Account Manager at Keeping Company.
INCOME
Revenue Recognition – You may be able to defer revenue from the 2020 year to the 2021 year if income has been received in advance. You may also be able to bring forward sales into the 2020 year where work had been completed but not invoiced until the 2021 financial year.
Deferral of Revenue – You may be able to defer sales from the 2020 year to the 2021 year under certain circumstances, again where it can be demonstrated the work has not yet been completed in full in the 2020 year.
Construction Contracts – The ATO allows construction contract revenue to be recognized under various methods and may impact when the revenue is taxable. The application of the different methods must be consistently applied.
Interest and Dividends – Interest income is generally booked as revenue when received. If you have received a loan from a related company or trust you should consider whether a Division 7A dividend is likely to be paid.
Personal Services Income (PSI) or Personal Services Business (PSB) – If you provide personal services yourself through a company or trust it is possible that you have derived PSI or PSB and any profits may be required to be attributed to you personally or you may be limited to the type of tax deductions you can claim.
Tax Treatment of Government Grants – During the pandemic, bushfires and floods, grants and loans have been available to help business and individuals through the crisis. The way these grants and loans are taxed will vary.
If you carry on a business and the payment relates to your continuing business activities, then it is likely to be included in your assessable income for income tax purposes. This position is likely to be different where the payment was made to enable you to commence a new business or cease carrying on a business.
Grants will generally be assessable income unless a law has been passed to specifically exclude the grant or loan from tax. For example, the special disaster grant for the bushfires was made non‑assessable and non-exempt income. Also, amounts provided under the cash flow boost measure are non-assessable non-exempt income.
When it comes to GST treatment, the key issue is whether the grant is consideration for a supply. That is, was the business expected to deliver something for the grant? The following government payments are not consideration for a supply and therefore not subject to GST or included in your GST turnover:
- JobKeeper payment
- Cash flow boost payment
- The Early Childhood Education & Care Relief Package paid to approved child care providers
- Payment of grants to an entity where the entity has no binding obligations to do anything or does not provide goods and services in return for the monies
Living with JobKeeper – The JobKeeper $1,500 per fortnight per employee subsidy is paid in arrears to businesses that have experienced a downturn of 30% or more (50% for businesses with turnover of $1bn or more). A 15% threshold is used for ACNC-registered charities. The purpose of the scheme is to keep workers employed and ensure there is a viable workforce on the other side of the pandemic.
At present, JobKeeper is set to continue until 27 September 2020. And for businesses, JobKeeper’s decline in turnover is a once only test. If the eligibility criteria were met at the time of applying for JobKeeper, a business can continue claiming the subsidy assuming the other eligibility criteria for them and the individual employees are met.
However, we expect continuing eligibility to the subsidy will change over time as the regulators gain a clearer insight into the impact of the pandemic. Much of this data is likely to come from the actual and estimated GST turnover that forms part of the compulsory monthly JobKeeper reporting requirements in tandem with the volume of applications to Jobseeker. That is, are the right businesses receiving JobKeeper and is the subsidy keeping workers employed?
If your business did not initially qualify for JobKeeper, you can apply to start JobKeeper payments when you meet the eligibility criteria. Not every industry will experience the economic impact of the pandemic in the same way. Some will experience a greater decline in later months.
One of our most asked questions about the decline in turnover test is ‘what if I got it wrong?’ Eligibility is generally based on an estimate of the negative impact of the pandemic on an individual business’s turnover. Some will experience a greater decline than estimated while others will fall short of the required 30%, 50% or 15%. There is no clawback if you got it wrong as long as you can prove the basis for your eligibility going into the scheme. For those that, in hindsight, did not meet the decline in turnover test, you need to ensure you have your paperwork ready to prove your position if the ATO requests it. You will need to show how you calculated the decline in turnover test and how you came to your assessment of your expected decline, for example, a trend of cancelled orders or trade conditions at that time.
Making JobKeeper payments on time – To be eligible for JobKeeper payments, staff must be paid at least $1,500 during each JobKeeper fortnight. If you pay employees less frequently than fortnightly, the payment can be allocated between fortnights in a reasonable manner. For example, if you pay your employees on a monthly pay cycle, your employees must have received the monthly equivalent of $1,500 per fortnight.
For the first two JobKeeper fortnights (30 March-12 April, 13 April-26 April), employers had an extension until 8 May to make the JobKeeper payments to eligible employees. For the remaining JobKeeper fortnights, employees will need to receive at least $1,500 by the end of each JobKeeper fortnight or the monthly equivalent of $1,500 per fortnight. Depending on your pay cycle, this may require some adjustments each month.
EXPENSES
Deductibility – You should check whether any expenses incurred during the year may not be deductible such as personal, legal or expenses of a capital nature.
Superannuation guarantee amnesty – 7 September 2020 is the last day for employers to take advantage of the superannuation guarantee (SG) amnesty. The amnesty provides a one-off opportunity to disclose historical non-compliance with the superannuation guarantee rules and pay outstanding superannuation guarantee charge amounts.
To qualify for the amnesty, employers must disclose the outstanding SG to the Tax Commissioner. You either pay the full amount owing, or if the business cannot pay the full amount, enter into a payment plan with the ATO. If you agree to a payment plan and do not meet the payments, the amnesty will no longer apply.
Keep in mind that the amnesty only applies to “voluntary” disclosures. The ATO will continue its compliance activities during the amnesty period so if they discover the underpayment first, full penalties apply. The amnesty also does not apply to amounts that have already been identified as owing or where the employer is subject to an ATO audit.
Even if you do not believe that your business has an SG underpayment issue, it is worth undertaking a payroll audit to ensure that your payroll calculations are correct, and employees are being paid at a rate that is consistent with their entitlements under workplace laws and awards.
If your business has engaged any contractors during the period covered by the amnesty, then the arrangements will need to be reviewed as it is common for workers to be classified as employees under the SG provisions even if the parties have agreed that the worker should be treated as a contractor. You cannot contract out of SG obligations.
Depreciation of New Assets – Business with a turnover of up to $500 Million are entitled to an immediate deduction of all assets purchased and first used or installed and ready for use, up to the following thresholds:
- $30,000 from 1 July 2019 to 12 March 2020
- $150,000 from 12 March 2020 to 31 December 2020
Any assets over the above thresholds will be depreciated in a pool at 15% for the 1st year and 30% for each year after. A pool balance of less than the above thresholds at the specific dates can also be written off.
If the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20).
The business use percentage of the asset also needs to be taken into account in calculating the deduction.
Accelerated Depreciation Deductions – Businesses with a turnover of less than $500 million can access accelerated depreciation deductions for assets that don’t qualify for an immediate deduction for a limited period of time.
This incentive is only available in relation to:
- New depreciable assets
- Acquired on or after 12 March 2020 that are first used or installed ready for use for a taxable purpose by 30 June 2021.
It does not apply to second-hand assets or buildings and other capital works expenditure. The rules also won’t apply if the business entered into a contract to acquire the asset before 12 March 2020.
Businesses are able to deduct 50% of the cost of a new asset in the first year. They can then also claim a further deduction in that year by applying the normal depreciation rules to the balance of the cost of the asset.
Accelerated depreciation deductions apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.
For example, let’s assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2020-21 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation on the balance of the cost. If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e., 15% x $125,000). The total deduction in the 2020-21 tax return would be $143,750. Without the introduction of accelerated depreciation the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).
Bad Debts – If you write off doubtful debts before 30 June you will be entitled to a tax deduction. You should consider whether you have made all necessary attempts to collect before writing off as any subsequent collections will be considered taxable income.
Stocktake – You should perform a stock take to ensure the correct gross profit is being recorded and taxed. If you need to do a stocktake you are able to value your inventory at cost price, market selling price or replacement value.
If you are an SBE, if your inventory movements are under $5,000 each year you are not required to perform a stock take.
Employee Bonuses or Director Fees – If you are paying bonuses or Director Fees you should ensure that you are committed to paying them before 30 June and some documentation should be kept for the bonuses and a resolution for the Director Fees.
Prepayments – As an SBE, prepayments that have a period prepaid of 12 months or less are entitled to an immediate deduction.
Motor Vehicle – If you are planning on claiming motor vehicle expenses you will need to ensure you have your log book completed for 12 weeks with the appropriate business/personal use percentages noted. If your log book is more than 5 years old or your pattern of travel has changed materially, you will need to update the logbook.
Super Payments – Make sure all super payments are made and received by the Super Fund before 30 June to ensure the contribution is tax deductible in the 2020 financial year.
COMPANIES
Company tax rate reduction – From 1 July 2020, the company tax rate will reduce from 27.5% to 26%.
Utilising franking credits – The reduction in the company tax rate will also change the maximum franking rate that applies to dividends paid by base rate entities (BRE). The way the rules normally work is that if the company was classified as a base rate entity and was taxed at the lower corporate tax rate in the previous year then a lower maximum franking rate will apply to dividends paid in the current year. For example, the maximum franking rate for a BRE that pays a franked dividend in the 2020 year is 27.5%. However, in 2021, the maximum franking rate will be 26%.
Some companies may have franking account balances that have accumulated over time and will reflect prior company tax rates. It is important to consider how these credits can be utilised in an efficient manner. One strategy could be to bring forward the payment of dividends to utilise the current 27.5% franking rate before the company tax rate reduces to 26% if the cashflow of the company allows for it.
Declare dividends to pay any outstanding shareholder loan accounts – If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2020. It may be necessary for the company to declare dividends before 30 June 2020 to make these loan repayments.
Single Touch Payroll [STP] – Where payments to employees have been reported to the ATO through single touch payroll, a finalisation declaration generally needs to be made by 14 July 2020 for employers with 20 or more employees and 31 July 2020 for those with 19 or fewer employees.
Payment summaries do not have to be provided to employees. Instead, employees will be able to access their Income Statement through myGov.
Maximise Deductible Super Contributions – The concessional cap for the 2020 year is $25,000 for persons of all ages. Remember that your 9.5% SGC also contributes towards this cap.
Division 7A Loans – You should review loans before year end to ensure you don’t accidentally trigger a debt forgiveness, deemed dividend etc and arrange a complying loan agreement with the entity.
Payment of Dividends – If you plan to pay a dividend or have paid a dividend you need to ensure the payment is allowable as well as documenting it via a Minute.
Directors at risk of personal liability for company’s GST liabilities – The Director penalty regime enables the ATO to recover amounts owed by a company for unpaid PAYG withholding amounts and superannuation guarantee liabilities from the Directors or former Directors.
From 1 April 2020, the existing Director penalty regime was expanded to include GST, luxury car tax and wine equalisation tax liabilities. The expansion of this regime means that company Directors, regardless of whether they are passively or actively involved, are at risk of being held personally liable for a large portion of a company’s estimated liabilities.
Directors are under a general obligation to ensure the company either satisfies its tax liabilities, or recognising the company may be insolvent, goes into administration or is wound up. Resigning as a Director after the event has no impact as the obligation attaches to the individual Directors equally. If the Commissioner issues a penalty notice, the Director becomes personally liable at that point. There is a grace period for new Directors, but they can become liable for obligations that arose before they became a Director.
Strict time frames are in place for the issuing of notices by the Commissioner and the required responses from the individual. If you receive a Director penalty notice, or if you are concerned that you are at risk of receiving a notice, please contact us immediately.
Changes to Super Guarantee calculation – From 1 January 2020, new rules came into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer.
Previously, some employers were paying SG on the salary less any salary sacrificed contributions of the employee. Now, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.
Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE plus any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.
The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.
Declare dividends to pay any outstanding shareholder loan accounts – If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2020. It may be necessary for the company to declare dividends before 30 June 2020 to make these loan repayments.
Raise management fees between entities by June 30 – Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.
TRUSTS
Trustee Resolutions – You should prepare a resolution or distribution plan before 30 June 2020 (or earlier) in accordance with your Trust Deed, accounting for all income types such as dividends, other income and capital gains. This will help to ensure income is not taxed unnecessarily at 47%.
Download a copy of the Sample Discretionary Trust Minute regarding the 2020 Distribution’s from the Resources section of our website. This template should be used as a guide only.
Meaning of Income – You should consider the definition of Income as per your Trust Deed to ensure your resolutions are effective in the distributions.
Trust to Company Distributions – If these exist you need to consider Division 7A and whether all payments have actually been made to avoid any Unpaid Present Entitlements (UPE).
Family Trust Elections – You should review FTE requirements to ensure that franking credits can flow through and protect bad debts and carry forward losses.
Trust Deed – Consider reviewing your Deed to ensure it is appropriate for the proposed distributions.
CAPITAL GAINS
Timing of CGT Events – You should consider the timing of a capital gains tax event in respect to which financial year the event falls into noting that contract dates and not settlement dates are generally when the event occurs.
Small Business CGT – Consider your ability to reduce any capital gains by applying available CGT concessions.
CGT Discount – Where assets are held for more than 1 year they may be entitled to a 50% discount on any CGT payable.
INDIVIDUALS
Work Related Deductions – In order to claim a deduction, you need to have incurred the expenditure yourself and not been reimbursed by your employer or business. The expense must be directly related to earning your income and you must keep copies of tax invoices or receipts to substantiate the claims.
The ATO is also paying close attention to taxpayers claiming the $300 work related deduction and $150 work related clothing deductions [under which no substantiation is required] without proper explanation or diary evidence. Claims without sufficient evidence may be denied.
Working from Home – From 1 March 2020 until at least 30 June 2020, special arrangements are in place to make it easier for individuals to claim expenses they have incurred while working from home during the COVID-19 pandemic.
If you have incurred work-related expenses and you have not been reimbursed by your employer, you can claim these expenses at a rate of 80 cents for each hour you work. To use this method, you will need a record of the hours you have worked, such as a diary or timesheet.
The claim covers all of your additional running expenses such as:
- Electricity and gas
- Decline in value and repair of capital items such as office furniture
- Cleaning expenses
- Phone and internet expenses
- Stationery
- Decline in value of computers and devices
For example, if you worked from home for 7 hours a day on the weekdays between 1 March and 30 June 2020, that’s 84 working days (in NSW) or 588 hours. Using the 80 cents COVID-hourly rate, you could claim $470.40. The rate covers all of your expenses and you cannot claim individual items separately, such as office furniture or a computer.
The COVID-hourly rate can be claimed per individual (it is not limited by household). That is, if you have multiple people working from home in your household, each person can claim the 80 cents per hour rate for the hours they have worked from home.
Using the COVID-hourly rate is optional and aimed at people who do not normally work from home. For some, their expenses will be higher, such as those with a dedicated home office, or for those that normally operate their business from home. In these circumstances the normal rules will apply.
The ATO appears to be taking the view that occupancy costs such as mortgage interest payments and rent cannot generally be claimed by those who are temporarily working from home as a result of COVID-19.
Home based businesses – In general, if your business is a home-based business, you should be able to claim both occupancy and running expenses. However, if you operate through a company or trust, the ATO’s preference is that there should be a rental agreement in place between the entity and the property owner.
If there is a genuine rental contract, then the property owner should recognise the rental income and should then seek to claim a reasonable portion of their expenses against the rental income. The business entity should generally be able to claim a deduction for the rent that is being paid to the owner of the property.
Without a genuine rental contract, it is difficult for the business to claim a deduction for any of the expenses relating to the portion of the property that it uses in the business.
The ATO will be looking for a separate, identifiable area of the home used for business. You need to consider any Capital Gains Tax implications of claiming a business use of operating your business from home.
Rental Property – You can no longer claim the costs of travelling to and inspecting your property as well as depreciation for 2nd hand plant and equipment. The ATO plans to carry out over 4,000 audits this year with the focus on over claimed interest, capital works claimed as repairs, incorrect apportionment of holiday home usage as well as omitted income from accommodation sharing such as Airbnb.
Income from Sharing Economy – The ATO has data matching technology for income earned from Uber, Airbnb, Airtasker etc and will be closely looking at omitted income from these sources.
You may also be able to claim a deduction for the proportion of expenses used to earn the income, such as car, property and tools. All Uber drivers should be registered for GST.
Cents per kms change for work-related car expenses – The rate at which work-related car expenses can be claimed using the cents per kilometre method will increase from 1 July 2020 from 68 cents to 72 cents per kilometre.
Using this method a maximum of 5,000 business kilometres can be claimed per year per car.