June 30 is nearly upon us once more. That means now is the time to act when it comes to optimising your tax position before the end of the 2017-18 financial year. To help, we recently asked Fred Scali, Director of Business Services & Tax here at Hill Rogers, to highlight some of the key areas for Australian small business owners to consider. How many of these are relevant for you?
- Maximise your depreciation deductions
If your business has an annual turnover of less than $10 million, you can still get an immediate tax deduction for nearly all individual assets purchased before 30 June 2018 that cost less than $20,000. This means if you need something, now’s the time to get it! Just remember the asset/s must be used for income-producing purposes and they must be ready for use by 30 June 2018. For businesses registered for GST, the $20,000 threshold is GST-exclusive. For other businesses the threshold is GST-inclusive.
Depreciating assets that are not immediately deductible (i.e. costing $20,000 or more) are automatically depreciated at a flat rate of 15% in the financial year of purchase. The adjustable value can then be depreciated at 30% in following years.
It’s also worth noting the Federal Treasury has proposed to extend the instant write-off measure until 30 June 2019, but it isn’t official just yet.
- Make sure the correct company tax rate is applied
Most companies with annual turnover of less than $25 million will pay tax at 27.5% in 2017-18. However, some companies will continue to pay tax at 30%, especially those earning most of their income from passive investments such as rental or interest income. It’s also worth remembering companies that do pay tax at 27.5% can only frank dividends up to that rate.
As tax laws currently stands, to qualify for the lower tax rate in 2017-18 you must have a turnover of less than $25 million and be “carrying on a business”. However, there is a proposal before Parliament for a new test that would mean companies below the $25 million threshold must earn no more than 80% of their turnover from passive income such as rent, interest and net capital gains. If adopted, this may lead to different tax outcomes for certain companies so it’s one to keep a close eye on.
- Make trust resolutions by 30 June
Do you have a discretionary trust? Trustees need to make and document resolutions by 30 June showing how trust income will be distributed to beneficiaries for the 2017-18 financial year. If this doesn’t happen, any default beneficiaries may become subject to tax (even where they do not receive any cash distribution). Alternatively, the trustee may be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.
Trustees can show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust’s accounts don’t need to be prepared by 30 June. Bearing in mind a corporate trustee may need time to convene a meeting of Directors to pass and record a resolution, time is of the essence here!
- Deductions for starting a business
Changes to the tax laws mean this is a little different to past years. Any professional expenses associated with starting a new business in 2017-18, such as legal and accounting fees, are deductible this financial year. This differs from the past where expenses were deductible over a five-year period.
- Consider whether your legal structure is right for your business
Could your business be structured more effectively? Small businesses are able to change their legal structure without incurring any income tax liability when active assets are transferred by one entity to another. This rollover applies to things like CGT assets, trading stock, revenue assets and depreciating assets that are used, or held ready for use, in the course of carrying on your business.
- Document the streaming of trust capital gains and franked dividends
Broadly speaking, trustees of discretionary trusts may be able to stream capital gains and franked dividends to different beneficiaries. However the trustee must document this resolution before 30 June, with the beneficiary receiving (or being entitled to receive) an amount equal to the net financial benefit of that gain or dividend.
- Review company loans
Company loans can have many income tax implications. It’s important to check yours before June 30. For example, unless an exemption applies the ATO could potentially treat any of the following as an unfranked deemed dividend for a taxpayer:
- Payment or a loan by a private company to a shareholder or an associate (such as a family member)
- Waiving of a shareholder’s or associate’s debt
- Use of a company asset by a shareholder or their associate
- Transfer of a company asset to a shareholder or their associate.
There are various things you can do to minimise the risk of a shareholder or an associate deriving a deemed dividend. The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term.
- Prevent deemed dividends in respect of unpaid trust distributions
Do you have unpaid distributions owed by a trust to a related private company beneficiary that arose after 30 June 2016? If so, the ATO may treat them as a loan by the company if the trustee and the company are controlled by the same family group. The associated trust may also be taken to have derived a deemed dividend for the amount of unpaid trust distributions in 2017-18. The good news is this can usually be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2017-18 income tax return needs to be lodged. A deemed dividend can also be avoided if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.
- Write-off bad debts
Businesses can only obtain income tax deductions for bad debts if they meet certain conditions. For example, a deduction is only available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in your accounts, no deduction is available. The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business. Certain additional requirements must be met where the creditor is either a company or trust.
- Paying employee bonuses
If you pay staff bonuses and you want to bring expenses into the 2017-18 year, ensure they are quantified and documented in a properly authorised resolution (e.g. Board minutes) prior to June 30. This will allow you to incur a deduction for employee bonuses even if they’re not actually paid or credited until 2018-19.
- Pay any outstanding superannuation entitlements
The Australian Government announced a 12-month amnesty from 24 May 2018 for employers to pay any outstanding Superannuation Guarantee (SG) contributions for periods prior to 1 April 2018. If you voluntarily disclose and pay any previously undeclared SG shortfalls during the amnesty (and before an SG audit) you will not be liable for administration penalties. You will also be able to claim a tax deduction for payments made during the 12-month period.
- Be wary of investment products promoted as ‘tax effective’
The end of the financial year often sees the promotion of investment products that claim to be tax effective. While the benefits may seem very seductive, the reality can be quite different and could expose you to a hefty tax bill, or even penalties. Our advice is always the same: be careful and seek expert tax advice before you commit.
- Specific tips for Primary Producers
Farm Management Deposits (FMDs)
One of the best tax-planning measures available to Primary Producers is the Farm Management Deposits scheme, or FMDs. They’re an effective business and cash flow planning tool. If you’re a Primary Producer you can deposit up to $800,000 in a FMD account and still have early access to your funds should you need them, such as during times of drought. You may also be able to offset the interest costs on your primary production business debt.
Tax averaging enables Primary Producers to even out their income and tax payable over a maximum of five years to allow for good and bad years. This ensures you don’t pay more tax over time than taxpayers on comparable but steady incomes. Primary Producers who opted out of income tax averaging for 2006-07, or an earlier financial year, can choose to restart income tax averaging in 2017-18.
Other Primary Producer-specific concessions
Also, don’t forget to consider the uncapped immediate write-off for capital expenditure on water facilities and fencing assets, the outright deduction for Landcare operations and the accelerated write-off for horticultural plants and grapevines.
Interested in discussing your pre-June 30 tax moves? Now’s the time to do it.
Please contact Fred Scali here