Tax Planning

EOFY and tax planning for entrepreneurs

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The end of the financial year (EOFY) is just around the corner and preparing your tax is no longer as easy as in previous years. During this time, business owners and taxpayers alike need to be aware of several things, and COVID-19 has made the process more confusing. Here are some EOFY obligations that you need to be aware of:

Running a company through family foundations

  • For anyone using an escrow structure to run their business, it is important to ensure that they are complying with not only tax requirements but also the terms of the trust deed. It is the deed that determines how and to whom the proceeds of the trust may be distributed.
  • Before the end of the financial year, the trustee of the trust must pass a resolution, usually in writing, stating which beneficiaries of the trust should receive the income and in what proportion. This is then used to determine the amount of net income with which each beneficiary is assessed for tax purposes.
  • The ATO has certain criteria regarding the information a trustee resolution should contain and they also require certain relevant elements to be completed on the escrow tax return in order to comply with the regulations.

For more information, see the Trustee Dissolutions page on the ATO website.

Immediate asset depreciation for eligible companies

  • In order to make use of the “preliminary full offsetting” and to deduct the acquisition costs of an asset immediately in this financial year, the asset must be used for the first time or installed ready for operation by June 30, 2021. This is in addition to the sales tests applied to new assets (sales less than $ 5 billion) and used assets (sales less than $ 50 million).
  • An asset acquired after June 30, 2021 may still be eligible for immediate deduction, but in the year ended June 30, 2022.
  • Businesses should also note that the current $ 59,136 depreciation charge limit for passenger cars in 2021 continues to apply under the “Temporary Full Cost Accounting” rules.
  • A passenger car is defined as a passenger car that is designed for a load of less than one ton and fewer than nine passengers. The depreciation cost limit means that the deduction is limited to the economically used portion of the cost limit amount minus GST.

Please visit the ATO Immediate Asset Depreciation Page for Eligible Companies for more information.

Super charging for SMEs

  • As part of any good tax planning strategy to minimize taxes, taxpayers are often advised to maximize their retirement savings whenever possible. It goes without saying that employers will already pay in the minimum pension guarantee of 9.5% for their eligible employees.
  • However, there is an option to deposit additional amounts up to the applicable “reduced” contribution cap of $ 25,000 to maximize the deduction for the employer’s business.
  • Alternatively, an employee or self-employed taxpayer can contribute to the retirement pension out of his own pocket and receive the deduction as a membership fee. Taxpayers just need to be aware that if the total “reduced” contributions on their behalf exceed the $ 25,000 limit, they may be liable for excess tax.
  • Pension contributions must be in the fund by June 30, 2021 to be deductible for that financial year. For membership fees, the Fund must also provide confirmation of the taxpayer’s intention to deduct the amount before filing their tax return.
  • Taxpayers should keep in mind that anyone aged 67 to 74 will be subject to a “work test” for contributing in 2021. This means that these people must have worked at least 40 hours in a consecutive period of 30 days per year in order to be able to claim a contribution deduction.
  • Note that effective July 1, 2021, the employer’s mandatory super guarantee rate will increase from 9.5% to 10% and the cap on reduced pension contributions will increase from $ 25,000 to $ 27,500. The work test for the 67 to 74-year-olds will also be omitted from July 1, 2022.

Investment losses

  • Investment losses are treated differently depending on whether the taxpayer is holding the asset as a “passive” investment for potential capital growth or investing in those assets.
  • The term “negative gearing” is often used to describe a passive investment that is losing money, such as when financing is used to finance a rental property or to buy stocks. These losses can be offset against other income of the taxpayer and thus help to minimize taxes.
  • The buying and selling of assets in capital accounts is subject to Capital Gains Tax (CGT) with a 50% discount if the item is held for at least 12 months. Note that cryptocurrency falls into this category and taxpayers should make sure they keep a record of their transactions in this area.
  • If the taxpayer meets the relevant criteria for buying and selling assets, such as stocks or real estate, all income or losses are treated like any other company. The purchase of the assets would be treated as the cost of the goods sold and the sale as qualifying income. The value of all assets on June 30th would be treated as the company’s inventory.

COVID-19 support programs

  • For those who have received any of the amounts available under the stimulus package launched during COVID-19, payments for tax purposes will be treated as follows:
    • Cash flow boost – Final payments in October 2020, these are payments not taxable to the employer
    • JobKeeper – Final payments in March 2021, these are payments taxable to the employer
    • JobMaker Hiring Loan – applies from October 7, 2020 to October 6, 2022, these payments are taxable to the employer

For more information, see the ATO’s page on Government Grants and Payments During COVID-19.

Note: Another tax planning strategy to minimize taxes is for primary producers to deposit funds into a farm management deposit by June 30, 2021. An FMD is deductible for the individual provided their non-primary taxable manufacturing income is $ 100,000 or less and the deposit is not withdrawn within 12 months. The minimum deposit per person is $ 1,000 and the maximum deposit is $ 800,000.

** The information contained in this article is general advice and does not take into account the personal circumstances of any individual. People are encouraged to seek their own financial and tax advice from a qualified accountant or registered tax agent.

See Also: The 2020 Small Business Tax Time Toolkit: Making Your Taxes easier to prepare

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