With the impact of COVID-19 on your business, whether directly or indirectly, tax planning for 2020 is essential. It is critical that you take every opportunity to optimise your tax and financial position before the 30 June 2020 deadline, even if your business turnover has decreased. With the government’s response to COVID-19, there are various initiatives available to business owners which could have a positive effect this year and in future years.
Company tax rate changes
For the 2020 tax year, the company tax rate is 27.5%. From the 1st of July 2020 the company tax rate will be reduced to 26%, then further down to 25% from 1st of July 2021. This rate applies to base rate entities (which is generally all small business trading companies) For other entities not deemed as base rate entities (a corporate beneficiary or large company for example) the tax rate is still 30%.
This means that most small businesses operating as a company will pay 1.5% less tax in 2021 as compared to 2020.
Taking advantage of franking credits
This reduction in the company tax rate will change the maximum franking rate which applies to dividends paid by base rate entities. Under the old rules, if a company was taxed at the lower corporate tax rate in the previous year then a lower maximum franking rate will apply to dividends paid in the current year. As an example, the maximum franking rate for a BRE that pays a franked dividend in the 2020 year is 27.5%. However, in 2021, the maximum rate will be reduced to 26%.
If your company has franking account balances which have accumulated over time, it is important to consider how these credits can be utilised in an efficient manner. You could bring forward the payments of dividends to utilise the current 27.5% franking rate before the company tax rate reduces to 26%. If you have large amounts of franking credits in your company, it may be worth considering a special dividend in 2020 to capture the full 27.5% credit for shareholders before its reduced to 26% next year.
Tax treatment of Government grants and relief packages
Due to the pandemic, bushfires, and floods, there have been many grants and loans made available to businesses in order to help them through the crisis. The way these loans and grants are taxed will vary. Here’s a brief summary;
- JobKeeper subsidy – included in taxable income
- ATO Cashflow Boost (via Activity statement) - tax free
- State government grants – generally taxable, but check each grant individually as they may have varying treatments
Generally, there is no GST on grants.
The $150,000 instant asset write-off
With the instant asset write off you can claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed. The COVID-19 stimulus measures temporarily increased the threshold to claim the instant asset write off. It is now been increased from $30,000 to $150,000 between 12 March 2020 and 30 June 2020. On 9 June 2020, the government announced that it was extending the $150,000 immediate write off threshold to 31 December 2020. As well as this, the access threshold has been increased so businesses with a turnover of up to $500 million can now access the asset write off.
Where the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20).
The business’ use percentage also needs to be taken into account when calculating the deduction.
|Small Business Immediate Write Off Thresholds|
|1 July 2019 – 12 March 2020||$30,000|
|13 March 2020 – 30 June 2020||$150,000|
|1 July 2020 – 31 December 2020*||$150,000|
|*The extension of the $150k immediate write off to 31 December 2020 was announced on 9 June 2020|
For assets costing over $150,000
For small business assets costing $150,000 or more can be allocated to a pool and then depreciated at a rate of 15% in the first year, and 30% each year after. If the closing balance of the pool, adjusted for current year depreciations is less than $150,000 at the end of the 2020 income year, then the pool can be written-off as well.
Eight 2020 business tax planning tips
1. Declare dividends to pay outstanding shareholder loan accounts
In the case where your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder to use assets owned by the company, then these can be treated as a taxable dividend. It is expected that top up tax should be paid by shareholders at their marginal tax rate once they can access to these profits, assuming any applies.
If you do have any shareholder loan accounts from previous years that were placed under complying agreements, the minimum loan repayment must be made by 30 June 2020. In some cases, it may be necessary for the company to declare dividends before 30 June 2020 to make these repayments.
2. Directors’ fees and employee bonuses
Expected directors’ fees and employee bonuses may be deductible for the 2020 financial year if the payment has been ‘definitely committed’ at a quantified amount by 30 June 2020. This can happen even if the fee or bonus is paid to the employee or director after 30 June 2020.
3. Write-off bad debts
For debt to be bad debt, you need to have brought the income to account as assessable and given up attempts to recover it. From there it will need to be written off your debtors’ ledger by 30 June, or have a director’s minute confirming the write-off is appropriate.
4. Review your asset register
If obsolete plant and equipment is sitting on your depreciation schedule, rather than depreciating a small amount each year, scrap it and write it off before 30 June. In the case where your business was previously classified as a small business and assets were allocated to a small business pool, you can claim one deduction for each pool for these assets.
5. Bring forward repairs, consumables, trade gifts or donations
Consider paying any required repairs, replenishing consumable supplies, trade gifts or donations to claim a deduction for the 2020 financial year.
6. Pay June quarter employee super contribution
If you want to claim a tax deduction in the current year on super contributions, pay June quarter contributions this financial year. The next quarterly superannuation guarantee payment is due by 28 July 2020, however, you can make the payment early to bring forward the tax deduction.
Don’t forget your own superannuation contributions. Remember the contributions need to be received by the funds before 30 June. If you want to take advantage of this, we recommend paying super at least a week prior to 30 June to ensure that the super is processed in time and that you won’t miss out on the tax deduction this year.
7. Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains made during the year by realising any capital losses. This means, sell the asset and lock in the capital loss. These transactions need to be genuine to be effective for tax purposes.
8. Raise management fees between entities
In the case where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Make sure these charges are commercially reasonable and documentation is in place to support the transactions. If the transactions are undertaken with an international party, then the transferring pricing rules need to be considered, and the ATO will have greater expectations regarding documentation.
The lead up to 30 June is a critical time of the year for you to be speaking with your accountant. If you don’t have a great accountant you can talk to about tax planning for your business, its time you did. Reach out to Link Advisors for a chat to make sure your business is in the best possible position prior to 30 June 2020.