As 30 June 2021 gets closer, we start nearing the end of the 2021 income tax year.
It is important to consider year-end tax planning strategies to ensure you are effectively managing your financial affairs, not only to understand your tax position but also help achieve your business and financial goals.
The following are some helpful tips to consider when planning for businesses and individuals:
The first step to an effective tax planning strategy is ensuring you understand your current cash position. This will allow you to understand not only your tax position for the year, but also cash available in your business allowing you to focus on growth opportunities or areas for improvement.
Tips to maximise cash flow from tax savings includes:
- Prepayments of certain tax-deductible expenditure (e.g. interest or income protection insurance);
- Review your depreciation schedule prior to 30 June 2021 and advise of any assets that have been disposed or destroyed. These assets may be eligible to be written off and deductible;
- Perform a stocktake as at 30 June 2021 and ensure that any obsolete stock is written off which may potentially result in a tax deduction;
- Review trade debtors prior to 30 June 2021 and write off any debts not recoverable; &
- Review inventory prior to 30 June 2021 and write off any obsolete stock.
If you are aware of your position, estimating your tax may allow you to vary instalments, so you can avoid overpaying tax during the year and being able to use that cash in other areas of the business.
It may also be worth planning and marking when tax payments are due, as late payment may result in penalties or interest charges impacting on cash flow.
Tax planning not only involves considering the 2021 income tax year, but also future years.
Contributing into superannuation allows you to plan for the future while accessing tax deductions for the current year, reducing your taxable income.
Individuals are able to obtain a tax deduction for concessional contributions up to the concessional cap of $25,000. It is important to take into account any other concessional contributions made during the year like compulsory or salary sacrifice contributions made by your employer as this count towards your concessional cap. This year the ATO Is allowing unused cap balances from the 2019 and 2020 financial years to be used for additional contributions into superannuation. There are penalties for exceeding this cap limit and being subject to excess contributions tax of 46.5%.
The government has passed legislation, reducing the corporate tax rate from 27.5% to 26% for entities considered a ‘base rate entity’ (aggregated turnover less than $50 million; and 80% or less of the entity assessable income is base rate entity passive income). From July 2021 the rate is being further reduced to 25%.
All other entities that do not meet these criteria may be taxed at 30%.
Also, if planning to pay a franked dividend in the 2021 income tax year, consideration must be given to the corporate tax rate (30% or 26%) that the dividend is franked at, as there is different set of criteria to apply in order to frank a dividend using the 30% rate.
If your business qualifies as a small business (aggregated turnover of less than $10 million) there are numerous concessions available that may result in a favourable tax outcome, such as:
- Simplified depreciation rules – If your business has previously applied these rules and used a small business pool, businesses are now able to deduct the balance of the small business pool at the end of the income year up until 30 June 2022.
- Immediate deduction for Prepayments – for expenses that are prepaid within 12 months or less; and the prepayment ends no later than 30 June 2021.
- Simplified trading stock rules
- Small business rollover – for changes to business structures tax-free if certain conditions are met;
- Small business tax offset for individuals up to $1,000 – a rebate of 8% of the tax payable on small business net income if turnover is under $ 5 million.
Recently, certain small business concessions have been expanded to include those with an aggregated turnover of $10 million or more but less than $50 million including:
- Immediate deduction from July 2020 for prepaid and specific start-up expenses ;
- FBT concessions from April 2021 that were previously only accessible by small businesses are now available to more businesses
When planning for the long-term there are Small Business CGT concessions which may allow you to defer or disregard capital gains from certain assets used in small businesses.
The government recently announced that they have extended the Instant Asset Write-off – assets until 30 June 2023. Businesses eligible for the instant asset write-off includes those with an aggregated annual turnover of less than $500 million. This allows eligible businesses to be able to depreciate in full assets (new or second hand) that are: purchased for less than $150,000; and installed, ready for use by 30 June 2021. Also note that the car limit applies of $59,136 for the immediate write off of motor vehicles for the year ended 30 June 2021.
Eligible companies with an aggregated turnover of less than $5 billion, may be able to carry back tax losses incurred during the 2020, 2021 and 2022 financial years to be used against profits previously taxed in 2019 or later years.
Companies can elect this tax relief strategy through disclosing in their 2020-21 or 2021-22 tax returns and receive a refundable tax offset in the year the loss was incurred. To carry back the losses, it must not be larger than earlier tax profit and not result in a deficit in the franking account. A company can also elect the amount of tax losses that are carried back.
SMSF related issues
The following are some SMSF matters to note in addition to taxation matters – particularly if you have taken advantage of some of the COVID-19 relief measures:
From 1 July 2020, if you were under the age of 67 you were able to make voluntary contributions without meeting a work test. This was previously restricted to people below age 65. In addition, if 2020-21 is the first year that you no longer satisfied the work test, you may still be able to make voluntary contributions under the work test exemption if you had a total superannuation balance (TSB) of less than $300,000 on 30 June 2020.
Therefore, it is important to review your contribution strategies before 30 June 2021, to make sure you maximise your contribution opportunities whilst ensuring you are below your contribution caps.
Non-concessional (after-tax) contributions are limited to $100,000 for the 2021 financial year and only available if your TSB was less than $1.6m on 30 June 2020.
If you were under 65 at any time during the 2020-21 financial year, you can potentially contribute up to three times the non-concessional cap (or $300 000) at once. The maximum bring forward non-concessional contribution amount you can make will depend on your TSB on 30 June 2020. Please note that draft legislation to allow older individuals to make up to three years of non-concessional superannuation contributions under the bring forward rules, has yet to be passed.
Concessional (before-tax) contributions are limited to $25,000 for the 2021 year. You may also be eligible, subject to your TSB, to make larger concessional contributions if you have any unused concessional contribution cap from the 2019 financial year onwards.
Where you have made personal contributions and intend to claim a tax deduction in 2020-21, it is important that you reconcile all employer contributions and salary sacrificed amounts to superannuation to make sure you do not breach the annual concessional contributions cap. It is also important to ensure that the relevant notice requirements are met so that you can claim a deduction.
These annual limits will increase on 1 July 2021 to $110,000 for non-concessional contributions and $27,500 for concessional contributions.
The Government also announced in the latest Federal Budget that the work test will be removed altogether to allow voluntary non concessional contributions and salary sacrificed contributions to be made up to the age of 75. If passed, these changes are expected to be available from 1 July 2022.
SMSF trustees are required to value the fund’s assets at their market value as at 30 June each year in the annual financial accounts. Although it can be a straightforward process to value assets when it comes to term deposits or listed shares and managed funds, it can be quite difficult to ascertain the value of real estate or private companies and units trusts. When valuing SMSF assets, you must comply with the ATO valuation guidelines for SMSFs. Contact us if you have any questions or require assistance.
For the 2020-21 financial year, getting the value of the fund’s assets correct is important in assessing the impact of COVID-19 on your superannuation benefits. It is even more important for SMSFs relying of the ATO’s in-house asset COVID-19 relief. These SMSFs will have till 30 June 2022 to ensure that in-house asset levels are reduced to less than the allowable 5% limit.
For those SMSFs that took advantage of the property relief measures the ATO implemented to reduce rent in 2020-21, any form of rental relief must end by 30 June 2021. From 1 July 2021, COVID-19 will not be a valid reason for any rental relief and SMSF trustees will need to ensure that all rent is at an arm’s length rate.
For those SMSFs with a limited recourse borrowing arrangement (LRBA), there are additional considerations. Where your SMSF was provided with COVID-19 loan repayment relief to assist in meeting loan repayment obligations, this relief should cease by 30 June 2021. From 1 July 2021, any LRBA should revert to the original terms of the loan to ensure that the arm’s length requirements continue to be met. Where the COVID-19 loan relief has resulted in a variation to the original term of the LRBA, provided that interest continues to accrue on the loan and you repay any deferred principal and interest repayments in accordance with the varied terms, the LRBA will be considered to be consistent with an arm’s length dealing.
To help manage the economic impact of COVID-19, the Government reduced the minimum drawdown requirements by half on account-based pensions and market-linked pensions for 2020-21. The Government recently announced the 50% reduced minimum pension drawdown requirements will be extended for 2021-22.
Whether or not you have taken advantage of this reduction, it is important that you reconcile all pension payments received to ensure you do not underpay the minimum pension payment required by 30 June 2021. Where this requirement is not met, SMSFs will be subject to 15% tax on pension investments instead of being tax free.
All pension withdrawals for 2020-21 must be paid in cash by 30 June 2021 and cannot be accrued or adjusted using a journal entry so it is important to attend to this as soon as possible. For example, if you are making pension payments via an electronic transfer, you need to ensure that online transfers show the money coming out of the fund’s bank account by no later than 30 June.
Ensuring that member’s benefits are shown at market value is important in calculating each member’s TSB and in determining whether a member will exceed their transfer balance cap (TBC).
The $1.6 million TBC applies to SMSF members who are receiving a pension and limits the amount of tax-free assets that can support a pension. To track the relevant events against your personal TBC, SMSFs are required to lodge with the ATO a transfer balance account report (TBAR). The TBAR is separate to an SMSF’s annual return and TBAR lodgment obligations, depend on members’ TSBs.
With the general TBC set to index to $1.7million on 1 July 2021 it is more important than ever to ensure that all your TBAR lodgments are up to date and that you seek help in correctly calculating your entitlement to any proportional indexation of the TBC.
The above are just some ideas to consider when undertaking taxation and superannuation planning. The Australian tax system is constantly evolving with many proposed changes in place.
Vincents’ Taxation Accountants & Business Solutions specialists have been helping SMEs (small to medium sized enterprises), corporates, organisations and individual clients gain insight and take control of their businesses and financial interests since 1989.
Our team of highly experienced accountants and business advisors is committed to helping you achieve profitability and operational simplicity.
We will help you understand your business and financial interests and make the right decisions about your direction – and you’ll ‘sleep at night’ knowing it’s all been done right.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.