As the end of the 2018 financial year is almost upon us, we have made a detailed list below of measures that can be undertaken prior to the 30th June to minimise this year’s income tax payable and get yourself ready for the end of financial year.!
If you have any questions at all or would like to discuss any of your business’ tax planning, please don't hesitate to give us a call on 1300 22 46 86 or send us an email email@example.com.
Getting Ready for Grants
Is your business eligible for the Research & Development Tax Incentive or Export Market Development Grant? Applications open on 1 July 2018, and the sooner you apply, the sooner you receive your benefit. To see if you’re eligible, talk to Grant, our AI Chat bot here: https://www.igniteinnovation.com.au/grant and feel free to contact us for more information.
Bring Forward Expenditure
Bring forward any expenditure prior to the 30th June that would normally be incurred after the 30th June in the ordinary course of business. Examples include office / stationery supplies, training courses, prepaid interest expenses, capital expenses less than $20,000 (see more details below) etc.
Remember it’s just a timing difference to defer tax, don’t purchase items you wouldn’t have otherwise bought in the ordinary course of business.
If cash flow permits, invoice clients after the 30th June (i.e. 1st July) that would have otherwise been invoiced prior 30 June. This means you will not pay tax on these invoices until the 2018 tax year. Of course, you would need to ensure that this does not have a detrimental effect on your business cash flow in deferring these invoices.
Employee Superannuation Contributions
Ensure all employee and employer superannuation contributions are made prior to 30th June in order to claim a tax deduction in the 2017 tax year.
Concessional Superannuation Contributions
Consider making concessional superannuation contributions to take advantage of differing income tax rates for superannuation contributions being 15% and your higher corporate and/or individual marginal tax rates.
If you wish to make additional superannuation contributions, please speak to us as there are strict limits to the amount of contributions that can be made in the one year.
On 12 May 2015 the government brought in the immediate asset write off for assets costing less than $20,000 for small businesses. The scheme is extended for another year. If your turnover is less than $10m. You may also be entitled to claim an input tax credit for GST on the asset you have purchased, and deduct any interest you pay for financing the asset. Consider purchasing all assets prior to the 30th June that you may have wanted to purchase next year, to take advantage of the immediate deduction in the 2018 tax year.
Repay Director Loans
Borrowings by shareholders from their private companies are referred to as debit loans or Division 7A loans and extend to almost all types of payments or advances to shareholders and their associates (excluding loans to another company). Division 7A continues to apply to the use of company assets where inadequate consideration is paid to the company. Borrowings that do not satisfy the required exemption tests under Division 7A are deemed to be unfranked dividends and fully taxable in the recipient’s hands. It is essential that private company directors ensure that any payments on behalf of shareholders or their associates are either repaid prior to the due date of lodgement of the company's tax return or that the borrowings are covered by a complying Division 7A loan agreement, the terms of which must be strictly complied with each year.
Repay director loans to the extent possible prior to the 30th June to minimise any Division 7A loan balances outstanding and thereby minimise any dividends required to be paid as income to shareholders.
If you are going to donate to charity, now is the time. Any donations you make to deductible gift recipients can be deducted this year. Remember, if you received something in return for the money, like goods purchased at a charity auction, you may not be able to claim a deduction for the full payment. There are special rules dealing with this situation that need to be taken into account.
Review your Debtors and Creditors
Review your receivables and payables and make sure they are all up to date. If you cannot recover some debts and then they can be written off as bad debts, then you will not pay tax for them.
Perform a Stocktake
For small businesses hold inventory, if your trading stock is over $5,000, you are required to conduct a stocktake to confirm the stock on hand value as of the end of financial year end. An accurate stock control will help you better manage your cash flow and reduce the holding costs. In order to write-off obsolete and worthless stock in the 2018 tax year it is necessary to either physically scrap the stock prior to 30 June 2018 or to identify such stock and set it aside for scrapping within a reasonable time after year-end.
Most taxpayers are not entitled to claim a deduction in the 2018 tax year for any part of a prepayment that relates to the period after 30 June 2018. Certain expenditure is excluded from this rule, as follows.
- Where the payment amount is less than $1,000 (excluding GST);
- Amounts required by law or an order of the court (e.g. workers’ compensation premiums, land tax, etc.);
- Under a contract of service (e.g. salary or wages);
- Where the payment relates to non-business expenditure made by an individual taxpayer (e.g. interest on rental property); and
- Where the payment is made by a taxpayer who qualifies as a Small Business Entity (SBE). Taxpayers who qualify as a SBE (i.e. under $10 million turnover) or individuals with non-business expenditure (e.g. investments, property, etc.) are able to claim prepayments where the period of service does not exceed 12 months and the period of service ends in the next tax year (i.e. before 30 June 2019).
- Warning to Businesses other than Small Business Entities (SBE) Businesses need to carefully identify all expenses exceeding $1,000 (excluding GST) paid in advance. This will include prepayments made throughout the financial year not just in June. For example, annual insurance premiums paid in December covering the calendar year (i.e. January to December) will be “caught” by these prepayment restrictions.
Tax Loss Situations
Where your business entity is likely to be running at a tax loss, there may not be any tax benefit in accelerating tax deductions or deferring revenue in the current year. Again, as the tax deductibility of donations is wasted in a tax loss situation it may be more beneficial for donations to be made personally.
One of the benefits of discretionary trusts is the ability to stream different types of income to different beneficiaries, and in particular franked dividends and capital gains. This streaming of income provides significant flexibility and tax benefits between the beneficiaries (usually family members). As in prior years and in accordance with the applicable Trust Deed, the trustee of a discretionary trust must resolve to distribute the income of the trust prior to 30 June each year. The ATO has requires that distributions of trust income are to be evidenced as follows:
- Where the Trustee is streaming franked dividends, the Trustee must not only pass a resolution distributing the income to the beneficiaries by 30 June but must record (in that character) in the trust’s accounts or records by 30 June;
- Where the Trustee is streaming capital gains, the Trustee must not only pass a resolution distributing the income to the beneficiaries by 30 June but must record (in that character) in the trust’s accounts or records no later than two months after the end of the financial year in which the distribution is made (i.e. 31 August);
- Where streaming is not undertaken it is sufficient for the Trustees to pass a resolution prior to 30 June and for it to be documented by a resolution minute post 30 June.
Trusts are under greater scrutiny from the ATO and we recommend all Trustees review their Trust Deeds (the rules of the Trust) to ensure the trust is conducted in accordance with the deed, including:
- Check the vesting date
- Confirm the eligibility of the beneficiaries
- Clarify the definition of “income” and the availability of income streaming
- Whether a “Family Trust Election” has been lodged or is required
What are the changes from 1st July 2018?
Personal tax bracket changes - The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000*.
Introduction of the Low and Middle Income Tax Offset* providing a tax offset for those with taxable income of up to $125,333.
Single touch payroll
Employers with 20 or more employees at 1 April 2018 must use standard business reporting-enabled software from 1 July 2018 to report payments such as salaries and wages, PAYG withholding and superannuation. Single touch payroll is expected to be compulsory for businesses with 19 or less employees from 1 July 2019.
Company Tax Rate
Standard company tax rate for the 2018 year is 30%, however from 1 July 2016 companies qualifying as a small business (with an annual turnover of less than $10m) have benefited from a reduced tax rate of 27.5% (previously 28.5%) - note this concession is for trading businesses only and generally does not apply to investment companies. There are also small tax rate concessions for businesses conducted other than through companies.
Plant and Equipment ($20,000 Immediate asset Write-Off)
Small businesses (less than $10m pa turnover) may be eligible to use accelerated depreciation rates. These concessions allow small businesses to immediately write-off asset purchases of up to $20,000 each which are acquired and installed ready for use between 7:30pm (AEST) 12 May 2015 and 30 June 2018. Assets allocated to a small business general pool can also be written off if the pool balance is less than $20,000.
In order to write-off obsolete plant and equipment in the 2018 financial year and crystallise a tax deduction for the written down value, the assets must be physically scrapped or disposed of prior to 30 June 2018.
Below are key areas that you may need to consider this year-end, both in planning for the rest of 2018 and looking forward into 2019 and beyond:-
- From 1 July 2017, a $1.6m pension transfer cap applies per member and the earnings therefrom will continue to be tax free, however earnings on funds in excess of the $1.6 million cap will be subject to tax at 15% (if retained in superannuation).
- From 1 July 2017 fund earnings attributable to Transition to Retirement Income Streams (“TRIS”) are taxed at 15% rather than being tax free which has been the rule since 2007. • From 1 July 2017 individuals are able to save for their first home deposit by making voluntary contributions into their super fund of up to $15,000 per year (max. of $30,000 in total). Contributions and deemed earnings can then be withdrawn (from 1 July 2018) for a first home deposit.
- From 1 July 2018 a person aged 65 or over can make a non-concessional contribution into their super fund of up to $300,000 from the proceeds of selling their home (a couple can therefore contribute $600k into super). These contributions are not subject to the $1.6m limit described above.
The tax rate for complying superannuation funds in accumulation phase for the 2018 year is 15% (2017 15%). Superannuation funds in pension phase will continue to be tax free (subject to the new $1.6m cap mentioned above).
The changes to superannuation are complex so we encourage you to call us to discuss the changes further.