No one likes to pay a dollar more tax than you have to but that is even more the case in the current environment where every dollar counts. To make sure you are ready for the end of another tax year, these are our last minute tax planning tips.
Immediate deduction for assets costing less than $150k
[this is the big one for 30 June 2020]
One of the most popular tax strategies in recent years has been the instant asset write-off concession but with the COVID19 economic stimulus package increasing the threshold to $150,000, this measure has become a massive opportunity.
If you are looking to buy some new equipment or a new car in the near future, it may be worth bringing the deduction forward into the 2020 financial year. The instant asset write-off can be used for new and second-hand assets that would normally be subject to depreciation. It does not apply to hard fit-out costs like walls, electrical, and plumbing but would apply to desks, air-conditioning units and computer systems.
It also applies when you buy multiple of the same asset [eg a group of desks or chairs] as long as the cost of each individual asset is less than the threshold [which I daresay will not be a problem with the current threshold].
You will now be eligible to apply this threshold if your turnover is less than $500,000.
This concession applies to most business assets such as plant, equipment and motor vehicles used in your business. However, the asset must be installed ready for use by 30 June 2020 in order to claim a tax deduction in the 2020 financial year.
*At the time of writing there was also an announcement to extend this write-off to 31 December however this is yet to be legislated. Current legislation defaults the threshold back to $1,000 from 1 July 2020 and only applying to businesses with turnover of less than $10 million.
Yes, you can use the instant asset write-off for the purchase of a car but please note the following:
- The write-off is limited to the luxury car cost limit which is currently $57,581
- If you purchase the car in a company or trust that qualifies for and has chosen to use the simplified deduction rules, FBT may be payable on the car.
- Otherwise the write-off will be limited to the business or work-related portion of the cost or luxury car cost limit.
Write-off previously purchased assets if written down value for tax purposes is <$150,000 – small business only
One of the flow on effects of the increase in the instant asset write-off threshold is that if you have chosen to apply small business simplified depreciation rules, you can now also write-off any accumulated balance of other depreciable assets as long as the balance of these assets is less than $150,000 at 30 June 2020.
The simplified depreciation rules apply if you have an aggregated turnover for your group of less than $10 million.
Note: There’s also an investment incentive the government has legislated as part of the economic stimulus package that allows a 50% write-off of some other assets but this has little value in the real estate industry this year unless you are buying an asset costing you more than $150,000.
Deductible superannuation contributions
Another common strategy is to top up your super balance by making tax-deductible contributions to reduce the tax liability of you or your business. The annual limit for tax-deductible contributions you can make for the 2020 financial year is $25,000. This cap includes compulsory employer contributions as well as voluntary contributions made through the business or from your personal name.
The super fund will incur a 15% tax on the contribution. So, for an individual in the top marginal tax rate [47%] the potential tax benefit is up to 32%. This benefit will be reduced for those individuals with adjusted taxable income over $250,000 who are paying the additional 15% surcharge on super contributions.
You may be able to contribute even more than the $25,000 concessional contributions cap if you have unused contribution thresholds from previous years. This is only available if your super balance is less than $500,000 and is someone complicated depending on your personal situation. Seek advice before making any contributions.
Superannuation for employees
You are only able to claim a tax deduction for superannuation contributions when the payment is made. For employers, this means you need to pay your compulsory 9.5% employee super by 30 June 2020 to get a tax deduction in the 2020 financial year.
There is also an opportunity to take advantage of the Government’s Super Guarantee (SG) amnesty which allows employers to self-correct any underpaid historical superannuation guarantee underpayments. Importantly, employers will be able to claim a tax deduction for payments made for underpayment of their obligations whereas normally these would not be tax deductible.
The amnesty strictly only applies to super obligations from the period between 1 July 1992 and 31 March 2018 where underpayments may have taken place [ie any underpayments after 1 April 2018 aren’t covered under this amnesty].
The amnesty period ends and any catch up payments need to be made by 7 September 2020.
Push income out + pull expenses forward
The oldest tax planning tricks in the book involve pushing income into the next financial year and bringing forward expenses into June.
Small business entities (turnover of your business and related parties of less than $10 million) may be eligible to claim an immediate deduction on certain prepaid expenses.
Prepaying interest on a loan or for services like insurance and IT maintenance for 12 months in advance is a tax tactic for some businesses. Beware, if you do not do it again next year, the timing benefit will catch up on you.
Bonuses for employees
If you have a formal bonus or commission structure in place with your team, any amounts payable as at 30 June 2020 are also deductible. But if you want to pay a discretionary bonus to staff, to get a tax deduction in the 2020 financial year you will need to show that you have paid it or are definitively and legally committed to paying the bonus.
If you have any debtors that are unlikely to be collected, consider whether these should be written off before 30 June 2020 to claim a tax deduction. A debt is considered bad when a genuine commercial decision has been made that it is no longer recoverable. So take the time to review your debtors list for any debts that can be written off.
Get your trust distributions right
For those of you that have businesses or investments held in trust structures it is important to consider the most tax effective way to distribute any income. This must generally be documented by way of resolution prior to 30 June each year.
If you have a business making decent profits, consider distributing some of the business profits to a company to access the corporate tax rate. This will either be 27.5% or 30% depending on your circumstances. If you are already in the top tax bracket of 47% in your own name, this can be a useful tax deferral. Just remember that this has to come out of the company at some point in the future as a dividend.
Stock on hand
Where you carry on a business that has goods for resale it is important to review your stock on hand at 30 June 2020. For each individual item of stock you can choose to value it at cost, market value or written-off altogether where the stock has no value. The best way to reduce the amount of income from trading stock is to consider which value provides the lowest amount for each individual item of stock.
Manage capital gains tax liabilities
If you have sold or are looking to sell investments [like shares] this year it is important to consider how you can manage any capital gains tax liability. One simple trick is to review your investment portfolio for under performing assets. Consider selling some of these assets before 30 June and triggering a capital loss that can be offset against gains made.
It is important to keep in mind that most of these tax planning strategies only provide a timing benefit by pushing out tax into future years. The real advantage of these strategies is the ability to invest these tax savings to grow your business or investment portfolio.
If you have any questions about what you need to be doing this end of financial year, simply touch base with a tax consultant here at businessDEPOT.