2021 Tax Planning Guide for Business
Here’s a helpful guide to the strategies you can use to minimise your businesses tax leading up to the end of the financial year.
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 2021 year.
REDUCTION IN COMPANY TAX RATES
The 2021 company tax rate for businesses with less than $50 million turnover is 26%. This is on the proviso not more than 80% 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 2021/22 financial year drops to 25%, which is an attractive tax rate.
If you use a Trust structure, one strategy is to allocate profits to a “Bucket Company” and cap your tax at 30% for the 2021 year. This rate for passive companies will remain at 30%, despite the business corporate rate dropping.
TEMPORARY FULL EXPENSING FOR ASSET PURCHASES
Small businesses (under $10mil) who use a small business pool to depreciate assets, will be able to write off the entire balance of their pool this year.
Other businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets.
For businesses with an aggregated turnover of less than $50 million, (which is many of you) temporary full expensing also applies to the business portion of both new and eligible second-hand depreciating assets.
The Federal budget announced that these measures are to be extended by 12 months until 30 June 2023.
Note that for cars and some 4WDs the deduction is capped at $59,136 (GST exclusive), assuming it is 100% business use. If you are thinking about buying a larger vehicle such as a ute please talk to your advisor because you might be able to claim over the cap. Deductibility will depend on specific characteristics of the vehicle, such as its payload (over 1 tonne) and/or the number of passengers it’s designed to carry. Other assets such as tractors and industrial machinery are not affected by this limit.
To get a deduction for the immediate asset write off, you should buy these assets and use them or have them ready for use before 30 June 2021. This can become problematic for assets such as vehicles that are currently facing a longer delivery time, so start planning now to ensure the asset arrives on time!
MAXIMISE DEDUCTIBLE SUPER CONTRIBUTIONS
The concessional superannuation cap for 2021 is $25,000 for all individuals. Do not go over this limit or you will pay more tax! The exception to this rule is if you are eligible for the ‘carried forward contribution’ rules.
Note that employer super guarantee contributions are included in this cap. Where a concessional contribution is made that exceeds the limit, the excess is included in your assessable income and taxed at your marginal rate, plus an excess concessional contributions charge.
Note from 1 July 2021 the concessional contribution cap increases to $27,500.
For the contribution to be counted towards the employee’s 2021 contribution cap and to be tax deductible to the business, it generally must be received by the fund by 30 June 2021. 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 Fringe Benefits Tax (FBT) exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.
Items that can be provided without incurring FBT include handheld/portable tools of trade, computer software, notebook computers, personal electronic organisers, digital cameras, briefcases, protective clothing, and mobile phones.
These can all be salary packaged and 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 2021.
PAY EMPLOYEE SUPERANNUATION NOW
To claim a tax deduction in the 2021 financial year, you need to ensure that your employees superannuation payments are received by the super fund or the Small Business Superannuation Clearing House (SBSCH) by 30 June 2021.
You should avoid making last minute superannuation payments as processing delays may cause them to be received after year-end which may push them into the next financial year.
Is your business ready for the increase in Super Guarantee?
The superannuation guarantee percentage is set to increase by 0.50% over the next 6 years to 12% by the year 2026. The first increase in the rate to 10%, is effective 1 July 2021. Please ensure your accounting systems are up to date to reflect the new super rate.
REPAIRS & MAINTENANCE
Make payments for repairs and maintenance (business, rental property, employment) BEFORE 30 June 2021.
If possible and appropriate, defer issuing further invoices and receiving cash/debtor payments until after 30 June 2021. This strategy pushes tax payable to future years.
BRING FORWARD EXPENSES
Purchase consumable items BEFORE 30 June 2021. These include marketing materials, consumables, stationery, printing, office and computer supplies. Spend the money now and get the deduction this year.
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 2021.
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 2021. You should make a record of your odometer reading as at 30 June 2021 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 furniture, 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 2021. 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 has had in the pipeline for some time, a range of proposed 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 2021. 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 2021. Prepare a management meeting document listing each bad debt, as evidence that these amounts were written off prior to year-end and ideally enter these into your accounting system before 30 June 2021.
SMALL BUSINESS CONCESSIONS – PREPAYMENTS
Small Business taxpayers can make prepayments (up to 12 months) on expenses (e.g., loan interest, rent, subscriptions) BEFORE 30 June 2021 and obtain a full tax deduction in the 2021 financial year.
Trustees of trust’s need to resolve in writing and sign BEFORE 30 June 2021 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 business or 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.