- General Year End Tax Planning Strategies
- For Businesses
- For Individuals
- Capital Gains Tax
General Year End Tax Planning Strategies for Businesses
For the 2019/20 year, the aggregated turnover threshold is $50m and the base rate entity tax rate is 27.5%.
For the 2020/21 year, the aggregated turnover threshold is $50m and the base rate entity tax rate is 26.0%.
The small business income tax offset remains the same, which is 8% discount of the income tax payable on the business income received from a small business entity (other than a company) with aggregated turnover of less than $5m, up to a maximum of $1,000 a year
Subject to cash flow requirements, consider deferring income until after 30 June, especially if you expect lower income for 2020/21 compared to 2019/20.
Most businesses are taxed on income when it is invoiced. Some small businesses may be taxed only when income is received. Income from construction contracts is generally taxed when progress payments are invoiced or received.
Ensure that you have complied with the requirements to claim deductions in 2019/20:
- Bad debts must be written off in your accounts before 30 June.
- Depreciation can be claimed for assets first used, or installed ready for use, before 30 June.
- Employer and/or personal superannuation contributions must be paid to and received by the superannuation fund before 30 June and must be within the contributions cap ($25,000 for all individuals regardless of age). Please refer to superannuation section below for further details.
- Small business (turnover less than $10 million), can claim expenses prepaid up to 12 months in advance. For larger businesses, this is generally limited to expenses below $1,000.
- Wages paid to your spouse or family members must be reasonable for the work performed and must be processed through the single touch payroll system except in limited circumstances.
Small businesses planning major purchases or replacement of capital equipment should contact us for advice. Careful timing of those transactions can result in substantial tax savings.
Scrap any obsolete item in the asset register before 30 June. Consider delaying sale of assets that will realise a profit on sale and bring forward if it will be a loss.
Review valuations of trading stock in the lead up to 30 June. Best practice is generally to value stock at the lower of cost or market selling value.
This may change if you expect a tax loss for 2019/20, or substantially higher income in 2020/21 compared to 2019/20.
Increase and extension of the instant asset write-off
From 12 March 2020, the instant asset write-off threshold was increased from $30,000 to $150,000, and access to the write-off was expanded to include businesses with aggregated annual turnover of less than $500 million until 30 June 2020.
On 9 June 2020, the government announced it will extend the $150,000 instant asset write-off until 31 December 2020.
The instant asset write-off is a tax deduction that reduces the tax liability of your business. It enables your business to claim an upfront deduction for depreciating assets in the year the asset was purchased and used (or installed ready to use). For example, if your business is a base rate entity (turnover under $50m) in a company structure you will get back 27.5% in your 2019-20 company return if the company acquires an asset that is used by 30 June 2020. If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a short-term benefit to you.
This is the fourth increase or extension to the instant asset write-off and businesses will need to be wary of what they are claiming and when:
|Instant asset write-off thresholds||Small Business*||Medium business**||Large business***|
|1 July 2018 – 28 January 2019||$20,000||–||–|
|29 January – 2 April||$25,000||–||–|
|2 April – 12 March 2020||$30,000||$30,000||–|
|12 March 2020 – 30 June 2021||$150,000||$150,000||$150,000|
** aggregated turnover under $50 million
***aggregated turnover under $500 million
Assets will need to be used or installed ready for use from when the changes were announced on 12 March 2020 until by 30 June 2020 to qualify for the higher threshold. Anything previously purchased does not qualify for the higher rate but may qualify for one of the other thresholds. Similarly, anything purchased but not installed ready for use by 30 June 2020 will not qualify in the current financial year.
The instant asset write-off only applies to certain depreciable assets such as a concrete tank for a builder, a tractor for a farming business, and a truck for a delivery business. You will also need ensure that there is a relationship between the asset purchased by the business and how the business generates income. You can’t for example just go and purchase multiple television sets if they have no relevance to your business.
There are some assets that don’t qualify such as horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.
Which businesses can access the instant asset write-off?
To access the instant asset write-off, your business needs to be a trading business (the entity buying the assets needs to carry on a business in its own right). It also needs to have an aggregated turnover under $500 million. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions. Another entity is connected with you if:
- You control or are controlled by that entity; or
- Both you and that entity are controlled by the same third entity.
Accelerated depreciation deductions
In addition to the increased instant asset write-off rules, accelerated depreciation deductions will apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.
Businesses with a turnover of less than $500 million will be able to deduct 50% of the cost of the asset in the year of purchase. They can also claim a further deduction in that year by applying the normal depreciation rules to the balance of the asset’s cost. This will presumably only be relevant if the business cannot already claim an immediate deduction for the full cost of the asset.
For example, let’s assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2021 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation that would have arisen 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 2021 tax return would be $143,750. Without the introduction of this investment incentive the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).
This incentive will only be available in relation to new assets that are acquired after 12 March 2020 and are first used or installed ready for use by 30 June 2021. It will not apply to second-hand assets or buildings and other capital works expenditure.Page Break
Other Tax Planning Considerations
Contact us for advice if you have moved to or from Australia for an extended period. You may need to review your residency status for tax purposes. There are important tax consequences if you change residency.
Trustees of trusts should ensure that all necessary documentation is completed before 30 June, where you intend to stream capital gains or franked distributions to specific beneficiaries.
Be sceptical of year-end tax shelter schemes. You should not enter a scheme without advice regarding both its tax consequences and commercial viability.
General Year End Tax Planning Strategies for Individuals
|Income Thresholds||Rate||Tax Payable|
|$0 – $18,200||0%||Nil|
|$18,201 – $37,000||19%||19c for each $1 over $18,200|
|$37,001 – $90,000||32.5%||$3,572 plus 32.5% of amounts over $37,000|
|$90,001 – $180,000||37%||$20,797 plus 37% of amounts over $90,000|
|$180,000 and over||45%||$54,097 plus 45% of amounts over $180,000|
Personal Income, Deductions and Tax Offsets
Subject to cash flow requirements, set term deposits to mature after 1 July, rather than before 30 June.
Consider realising capital losses if you have already realised capital gains on other assets during 2019/20. Conversely, consider realising capital gains if you have un-recouped capital losses, or you expect substantially higher income in 2020/21 compared to 2019/20.
If you expect lower income in 2020/21, consider deferring income until after 1 July, when you will be in a lower tax bracket. If you are a primary producer and you expect a permanent reduction in income, consider withdrawing from the income averaging system.
Arrange for deductible donations to be grouped in the higher income year, if you expect substantially higher or lower income in 2020/21 compared to 2019/20. Make all donations in the name of the higher income earner.
Travel expenses relating to inspecting, maintaining or collecting rent for residential investment properties are not deductible, unless you are carrying on a business of property investing.
Deductions for depreciation will be limited to costs that the taxpayer actually incurred to purchase the plant and equipment in the current year, not to successive investors in the property.
The ATO is cracking down on rental property deductions and will be doubling audits.
Low Income Earners
The spouse contributions tax offset will be available for individuals contributing to the superannuation account of a spouse whose income is up to $37,000. This will fade out completely when the spouse’s income reaches $40,000.
Individuals with an adjusted taxable income up to $37,000 will receive a refund into their superannuation account of the tax paid on their concessional superannuation contributions, to a cap of $500 under the low income superannuation tax offset.
High Income Earners
High income earners become liable to pay Division 293 tax when their income for surcharge purposes reaches $250,000.
The concessional contributions cap for the 2019/20 is $25,000 for all up to 74 years old.
The non-concessional contributions cap is $100,000 for members aged between 65-74.
Members under 65 years of age will have the option of contributing up to $300,000 over a three-year period for members depending on their total superannuation balance.
Employer Superannuation Contributions
If you are intending to pay any outstanding superannuation contributions relating to employees prior to 30 June 2020 to claim a tax deduction in the current financial year, we strongly advise that you do so no later than Tuesday 23 June 2020!
Your superannuation obligations are only met and the tax deduction allowable when the payment is received by your employee’s superannuation fund, not when you process it.
If you are paying via a clearing house such as the Small Business Superannuation Clearing House, it takes time to first be received by the clearing house and then be forwarded and received by the employees nominated superannuation fund.
If your employee does not provide the choice of fund information before you are required to make a payment, you must make the payment to your default fund.
Personal Superannuation Contributions
Deductions for personal superannuation contributions are now allowed for all individuals under the age of 75 (including those aged 65 to 74 who meet the work test). If you would like to receive further information, please contact us to discuss.
If you do make personal superannuation contributions, it is critical that you complete an “Intention to Claim a Tax Deduction” declaration and forward it to your superannuation fund provider before you lodge your tax return. If you don’t the ATO may deny your superannuation contribution as a tax deduction.
Capital Gains Tax
Foreign Resident CGT Withholding
When a foreign resident (vendor) disposes a taxable Australian property with a market value of $750,000 or more, the purchaser is required to withhold 12.5% of the sale price, unless the vendor has a clearance certificate from the ATO.
Non-Resident CGT Main Residence Exemption
The main residence exemption is no longer available to foreign and temporary tax residents.
General Advice Disclaimer:
The information in this presentation is of a general nature only and is not intended to be, and is not a complete or definitive statement of the matters described in it. It has been prepared without taking into account your personal objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist advice