Defer Income
» Where practical for Small Business Entities and depending on whether it returns on a cash or accruals basis, you may wish to consider deferring the issue of invoices and/or the receipt of cash until after 30 June 2019. Please note that the ATO will generally require you to pay tax on income that you have either received or become entitled to due to the completion of work. Given the reduced company tax rate of 27.5% for Small Business and Base Rate Entities, the deferral of income may be useful if you are able to defer the derivation of income.
» Base rate entities, being companies with turnovers less than $50 million for the 2019 financial year, have the maximum franking credit rate attached to franked dividends of 27.5%, the same as the rate of tax they pay on income.
Maximise Your Deductions
» Review inventory and assets schedules for obsolete items and items that may be scrapped. Pay professional fees or other employment or business related deductions before 30 June 2019.
» For companies and other business that are taxed on an accruals basis, it is not always essential that an invoice is received for an expense to be deductible. Prior to year end consider what additional specific accruals can be booked into the accounts and deducted for tax purposes on the basis that you are wholly committed to the expense at year end, it is capable of reasonable estimation (e.g. accrued utilities) and the accrual relates to work or services provided before year end.
» Entities with an aggregated turnover of less than $50 million can purchase assets up to the value of $30,000 and claim an instant tax deduction for them, applicable for assets acquired from 2 April 2019 to 30 June 2020.
Private Company (“Division 7A”) Loans
» Business owners who have borrowed funds from their company in previous income years and put the loan under a complying loan agreement must ensure that the appropriate minimum payments of principal and interest repayments (ATO Benchmark interest rate for 2018-19 — 5.2%) are paid by 30 June 2019. Note, if business owners borrowed funds from the company during 2019, then they must ensure that it is either repaid in full or put under a complying loan agreement by the relevant date (that is, generally the due date for the lodgement of the relevant company’s tax return for 2019).
» Treasury has released long-awaited consultation paper to amend the operation of the Division 7A on 22 October 2018, however the Budget 2019 announcement delayed the start date of amendments to Division 7A by 12 months to 1 July 2020.
Prepayments
» Generally, businesses must deduct expenses of $1,000 or more over the relevant period to which they relate. However, if the entity is a small business entity (generally, aggregated turnover <$10m), they may prepay up to 12 months’ worth of expenses and claim the full amount in the current year.
» Taxpayers that are not in business may also prepay up to 12 months’ of deductible expenses, including interest on investment loans, insurances and work- related subscriptions.
Year End Stock Take / Work in Progress
» If applicable, you need to prepare a detailed stock take and/or work in progress listing as at 30 June 2019. Review your listing and write-off any obsolete or worthless stock items.
» If the taxpayer is a small business entity, stock valuation is not required if the difference between opening and estimated closing value of trading stock for the year is $5,000 or less.
Write-off Bad Debts
» Review your trade debtors listing and write off all bad debts before 30 June 2019. Prepare a minute of a Directors’ meeting, listing each bad debt, as evidence that these amounts were actually written off prior to year-end.
» Bad debts may not be deductible if there has been a change in ownership or control of a company or trust (unless company passes the same business test).
Employee Superannuation Payments
» The current superannuation guarantee charge rate is 9.5% of an employee’s ordinary time earnings and will remain at this rate until 30 June 2021.
» Contributions are only deductible when paid and when on time. Please ensure all contributions are paid within 28 days after the end of the quarter. All payments must be made electronically and the fund must be notified in an electronic format.
Single Touch Payroll
» You should contact your payroll software provider to ensure their software has the ability to report to the ATO directly under the single touch payroll system from 1 July 2019. Single Touch Payroll became mandatory for employees with 19 or less employees form 1 July 2019.
Dividends
» You may wish to pay dividends on or before 30 June 2019 in order to ensure that the dividend income is derived by the relevant shareholders during the 2019 income year (particularly where shareholders, or beneficiaries of a family trust that is a shareholder of a company have losses or are otherwise on low tax rates so as to minimise the overall tax payable). Note, however, the Commissioner’s views in relation to ‘reimbursement agreements’, that is, where trustees make a tax distribution to a low rate beneficiary as part of an arrangement whereby the actual benefit is received by a higher rate beneficiary. In these circumstances, the Commissioner may seek to assess the trustee at the top marginal tax rate.
» Changes to the company tax rates now means that franking credits attached to franked dividends are limited to the corporate tax rate applicable to the entity paying the dividend. This means that entities that now have access to the 27.5% tax rate will only be able to frank dividends at the franking rate of 27.5%, irrespective of whether the tax rate applicable to the profits generating the franking credit was at the 30% rate.
Research & Development Tax Concessions
» As part of the 2018 Budget, the Government has proposed changes to the R&D tax offset for companies with turnover > $20M to introduce a R&D premium whereby the rates of the non-refundable R&D tax offset is based on the incremental intensity of R&D expenditure as a proportion of total expenditure for the year. As follows:
• 4% for R&D expenditure between 0%-2% R&D intensity
• 6.5% for R&D expenditure between 2%-5% R&D intensity
• 9% for R&D expenditure between 5%-10% R&D intensity
• 12.5% for R&D expenditure above 10% R&D intensity
Changes to the R&D tax offset announced in the 2018 Budget were introduced as Bill and it is proposed to start from 1 July 2018.
Trustee Resolutions
» Ensure that the Trustee Resolutions are prepared and signed before 30 June 2019 for all Discretionary (“Family”) Trusts. Most trust deeds (and the tax law) generally require such discretion to be exercised by 30 June each year and in the absence of such exercise, either:
• default beneficiaries under the trust will be assessable in relevant proportions (and this may not be tax effective); or
• in the absence of default beneficiaries, the trustee will be assessed at the top marginal tax rate.
Trust To Trust Distributions
» Trusts are generally subject to carry forward loss rules, including the ‘income injection’ test. However, if trusts are within a ‘family group’, trust income from one trust may be ‘injected’ into a loss trust so as to soak up the losses and reduce assessable income – have you made appropriate Family Trust Elections and/or Interposed Entity Elections?
» Trust deeds should be regularly reviewed to confirm how it interacts with the various tax requirements, some of which are mentioned above.
Reference: Hall Chadwick Year-end Planning Key Issues