2020 Tax Planning Guide for Business
Here’s a guide to the strategies you can use to minimise your business tax.
IS YOUR BUSINESS A ‘SMALL BUSINESS’ ENTITY?
Small businesses can access a range of tax concessions from the ATO. To qualify as a ‘Small Business Entity’, the business must have an aggregated turnover (your annual turnover plus the annual turnover of any business connected / affiliated with you) of less than $10 million and be operating a business for all or part of the 2020 year.
REDUCTION IN COMPANY TAX RATES
The company tax rate in 2019/20 for businesses with less than $50 million turnover is 27.5%, if 80% or less of a company’s assessable income is ‘passive income’ (such as interest dividends, rent, royalties and net capital gains).
The corporate rate for businesses with aggregated turnover of under $50 million, next 20/21 financial year is 26% and 25% in the 21/22 year.
If you use a Trust structure, one strategy is to allocate profits to a ‘Bucket Company’ and cap your tax at 30% for the 2020 year. This rate for passive companies will remain at 30%, despite the business corporate rate dropping.
INSTANT DEDUCTION FOR ASSETS PURCHASES
The recent Federal Government COVID-19 assistance packages has expanded deductions for asset purchases, plus new accelerated depreciation laws.
If your business has a turnover under $500 million, business assets purchased up to the amount of $150,000 (exc. GST) will be immediately deductible.
To get this deduction, you should buy these assets and use them or have them ready for use before 30 June 2020.
MAXIMISE DEDUCTIBLE SUPER CONTRIBUTIONS
The concessional superannuation cap for 2020 is $25,000 for all individuals. Do not go over this limit or you will pay more tax!
Note that employer super guarantee contributions are included in these caps. Where a concessional contribution is made that exceeds these limits, the excess is included in your assessable income and taxed at your marginal rate, plus an excess concessional contributions charge.
For the contribution to be counted towards the employee’s 2020 contribution cap, it must be received by the fund by 30 June 2020. We recommend placing any contributions well before this date to ensure it is received in time.
TOOLS OF TRADE / FBT EXEMPT ITEMS
The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.
Items that can be packaged include handheld/portable tools of trade, computer software, notebook computers, personal electronic organisers, digital cameras, briefcases, protective clothing, and mobile phones.
If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.
To get these deductions, you should buy these items before 30 June 2020.
PAY EMPLOYEE SUPERANNUATION NOW
To claim a tax deduction in the 2020 financial year, you need to ensure that your employee superannuation payments are received by the super fund or the Small Business Superannuation Clearing House (SBSCH) by 30 June 2020.
You should avoid making last minute superannuation payments as processing delays may cause them to be received after year-end.
If possible, defer issuing further invoices and receiving cash/debtor payments until after 30 June 2020. This strategy pushes tax payable to future years.
BRING FORWARD EXPENSES
Purchase consumable items BEFORE 30 June 2020. These include marketing materials, consumables, stationery, printing, office and computer supplies. Spend the money now and get the deduction this year.
REPAIRS & MAINTENANCE
Make payments for repairs and maintenance (business, rental property, employment) BEFORE 30 June 2020.
DEFER INVESTMENT INCOME & CAPITAL GAINS
If possible, arrange for the receipt of Investment Income (e.g. interest on Term Deposits) and the Contract Date for the sale of Capital Gains assets, to occur AFTER 30 June 2020.
The Contract Date is generally the key date for working out when a sale occurred, not the Settlement Date!
MOTOR VEHICLE LOG BOOK
Ensure that you have kept an accurate and complete Motor Vehicle Log Book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2020. You should make a record of your odometer reading as at 30 June 2020 and keep all receipts/invoices for motor vehicle expenses.
An alternative (with no log book needed) is to simply claim up to 5,000 business kilometres (based on a reasonable estimate) using the cents per km method.
Let us know if you need a new log book and we can send a complimentary one out to you.
INVESTMENT PROPERTY DEPRECIATION
If you have an investment property purchased pre-9 May 2017, a property depreciation report (prepared by a Quantity Surveyor) will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself.
The cost of this report is generally recouped several times over by the tax savings in the first year of property ownership.
For residential properties purchased post 9 May 2017, there are limits on depreciation deductions. The new rules prevent investors from claiming depreciation deductions for ‘previously used’ assets (i.e., plant & equipment) contained within second-hand residential properties. That is, if you have purchased a residential investment property after this date, that has plant & equipment already installed and currently being used, you can no longer claim a depreciation deduction for this equipment. You still however can claim a capital works deduction for any structural improvements pre-existing at the time of purchase.
Further you are no longer able to claim any deductions for the cost of travel relating to your residential rental property. As with prior years, the travel expenditure cannot be included in the cost base for calculating your capital gain or capital loss when you sell the property.
PRIVATE COMPANY (‘DIV 7A’) LOANS
Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principal and interest repayments are made by 30 June 2020. Current year loans must be either paid back in full or have a loan agreement entered in before the due date of lodgement for the company return, or risk having it counted as an unfranked dividend in the return of the individual.
Note, Treasury are proposing some major changes to the Division 7A regime. These include changes to the interest rate; loan terms and types of loans affected. We will update those clients affected as the proposals develop.
YEAR-END STOCKTAKE / WORK IN PROGRESS
If applicable, you need to prepare a detailed Stock Take and/or Work in Progress listing as at 30 June 2020. Review your listing and write-off any obsolete or worthless stock items.
Talk to us about your different options for valuing Stock, and how they affect your tax payable.
WRITE-OFF BAD DEBTS
Review your Trade Debtors listing and write-off all bad debts BEFORE 30 June 2020. Prepare a management or director meeting document listing each bad debt, as evidence that these amounts were written off prior to year-end and enter these into your accounting system before 30 June 2020. We can assist if you need help.
SMALL BUSINESS CONCESSIONS – PREPAYMENTS
‘Small Business Concession’ taxpayers can make prepayments (up to 12 months) on expenses (e.g. loan interest, rent, subscriptions) BEFORE 30 June 2020 and obtain a full tax deduction in the 2020 financial year.
Trustees of trusts need to resolve in writing and sign BEFORE 30 June 2020 how the year’s income is to be distributed. This requirement ensures the intended beneficiary is presently entitled to the trust income and is taxed accordingly. We are currently working on drafting up the various trust resolutions for our clients. Please contact us if you have a family trust and we have not written to you to commence this process.
TALK TO YOUR WLF ADVISOR
We will be discussing these opportunities with many of our clients as part of year-end tax planning. If you would like further information or to book an appointment to discuss the impact on your personal situation, please contact us.
General advice disclaimer:
The information provided is of a general nature only, in preparing it we did not take into account your investment objectives, financial situation or particular needs.