Tax Planning Strategies 2020
Major Assets and Capital Improvements
The instant asset write-off for assets purchased under $150,000 has been extended until 30 June 2020. This means there is still time to take advantage of the higher depreciation opportunities before it reduces back down to $1,000 on 1 July 2020 (unless updated by in change in legislation).
The total cost of an asset also includes any additional transportation and instillation expenses. To claim a deduction the asset must be installed and ready for use by 30 June 2020.
Under the simplified deprecation rules any Small Business Pool opening balances below $150,000 will also be written-off.
Capital Gains and Losses
If your business is expecting to dispose of an asset in the near future it may be worth considering whether it should be sold before or after 30 June.
Should the sale of an asset result in a capital gain then consider delaying crystallising this gain until the 2020/21 financial year. By doing this it will allow you a full fiscal year to set in place options to offset the gain. For example it may be worthwhile selling an underperforming asset and realizing a capital loss.
On the other hand, if the sale of an asset will result in a loss then crystallising this loss in the year where other assets have been sold and capital gains have arisen will mean the loss can be used to offset the gains.
Be mindful that it is the contract date and not the settlement date that will determine in which year the assets is disposed of.
Trading stock valuation is often an important area for consideration. By selecting the lower of cost, market selling or replacement value any profits will be postponed until the product is sold. You may want to reassess whether any stock has become obsolete or unsaleable and should be reduced to scrap value.
For tax purposes each item of trading stock can be valued differently.
Legitimate bad debts can be written off and transformed into a tax deduction. To be claimable they must be written off in your accounts by 30 June 2020.
To claim a tax deduction these debts must have originally been recoded as income. The debt must now be “unrecoverable” and not merely doubtful.
In some circumstances only a part of the debt may be deductible. For example, when a portion of the debt is secured by property.
If you have any questions regarding the ATO rules for claiming bad debts expense please call our office.
Prepaid expenses can be claimed up to 12 months in advance by small businesses (those with a turnover of under $10 million). Larger businesses will generally be limited to prepaid expenses below $1,000. Common expenses that can be prepaid are lease payments, insurance and annual subscriptions.
Businesses operating on an accruals basis are able to claim a tax deduction for employee and director year-end bonuses that will not be physically paid until following financial year. The company must, before the end of the financial year, commit to the payment specific amount. The amount need not be quantified but the calculation methodology must be fixed (for example, a formula based on profits or revenue amounts yet to be finalized).
If your business has employees it is likely that you will be required to pay the 9.5% Super Guarantee by the 28th of July 2020. To claim a tax deduction in this financial year the funds must be received by the Super Fund or the Small Business Superannuation Clearing House by 30 June 2020.
Concessional Super Contributions
Employers and those who are self-employed are able to claim a tax deduction for personal super contributions up to a cap of $25,000. Furthermore, since the 1st July 2017, most employees can now make “top-up” personal tax deductible superannuation contribution up to the maximum $25,000 minus any employer contributions.
Wages for Family Members
If you have any dependent children that “labour” in the business operation during school holidays / weekends etc., the payment of an appropriate casual wage to the child should be tax deductible to the business and generally not assessable unless the child’s income exceeds $18,200. The child must have a Tax File Number and a PAYG Tax Summary must be issued by the 30th June 2020.
Non-Commercial Loss Tests
Are you expecting a loss from your business activity this financial year? This loss can be used to offset income derived from other sources if one of the non-commercial loss tests and all income requirements are met. Failing this, non-commercial losses will continue to be deferred.
If Income is predicted to decline or the business is expected to be wound up in coming years it is possible that these carry forward losses will become unrecoverable. You may want to consider bringing forward or delaying income and asset purchases depending on your particular circumstances.
Once the income requirements and test/s are met then all prior non-commercial losses become ordinary tax losses
To access the four tests the total of your taxable income, reportable fringe benefits, reportable super contributions and net investment losses must be below $250,000.
Primary production and professional arts are considered excepted activities. The non-commercial loss measures do not apply if income from other sources not relating to the business activity is below $40,000 and the $250,000 income requirement is met. Taxpayers can then use these business losses to offset their other income.
The Four Tests
- Assessable income generated from the business at least $20,000
- The business has produced a profit for tax purposes for 3 out of the last 5 years (this includes the current financial year)
- The value of, or interest in, real property (excluding private dwellings) was at least $500,000
- The value of certain other assets (not including cars, motor cycles or like vehicles) was at least $100,000
It is within the Commissioner’s powers to issue a product ruling or a private binding ruling to allow you to claim a loss for the income year.
If you are expecting to have a lower taxable income during the 2020/21 financial year (thereby falling into a lower tax bracket) you may want to defer income until after 30 June 2020. One method is to arrange for term deposits to mature on a set date in the next financial year.
For couples and joint tenants it may be advantageous to purchase income producing property in the name of the partner with the lower income. Assets that are negatively geared should be held in the partner’s name with the higher taxable income.
Making any deductable donations in the name of the partner with the higher taxable income can also help reduce the overall tax payable.
Since the 1st July 2017, most employees can now make “top-up” personal tax deductible superannuation contribution up to the maximum $25,000 minus any employer contributions.
Companies with an annual turnover of less than $50 million will now fall into the small business category. The current company tax rate of 27.5% will be reduced to 26% from 1 July 2020. This will allow for planning opportunities.
Farm Management Deposits
Farm management deposits continue to be a useful risk-management tool for those with fluctuating incomes. The maximum amount that can be held has increased to $800,000. Primary producers suffering from severe drought can now access their FMDs within 12 months from the date of deposit.
The 2020 accelerated depreciation rates for primary produces will remain the same as for the prior year:
- Fencing assets (excluding expenditure relating to stockyards, pens or portable fencing) will continue to be immediately deductable.
- Water improvements and Fodder storage assets will now be immediately deductible when incurred.
If you are expecting a permanent reduction in income you may want to consider withdrawing from the tax averaging system. Once this is done, you will not be able to opt back in for 10 years.
The concessional contributions cap for all ages is $25,000. Concessional Contributions (before-tax) include the 9.5% Super Guarantee and amounts paid through a salary sacrifice arrangement. Any excess concessional contributions will be included in your individual tax return and taxed at your marginal tax rate in addition to an excess concessional contributions charge.
Additional 15% tax on contributions
Division 293 tax of an additional 15% on concessional contributions applies where the total of the individual’s adjusted taxable income and low tax contributions exceed $250,000 for the year ended 30 June 2020.
If cash flow permits, a payment of a “non-concessional” or “non-tax deductible” contribution could be made to superannuation. Effective for the 2020 year and onwards, a maximum non-concessional contribution of $300,000 over 3 years exists where the fund value is less than 1.6 million. This could enable the purchase of property or share in a more favourable tax environment to exist.