As we are quickly approaching the end of financial year 30 June 2021, now is a good time to start tax preparation and have a look at both your expected taxable income for the current financial year 2020-21 and your projected taxable income for 2021-2022 as they will help guide your Tax Planning Strategy.
Have you ever heard the saying, ‘A stitch in time saves nine’? The same philosophy holds true for tax planning. It should be started as early as possible so that you are not in a rush at EOFY time.
At the heart of every business success is good planning. COVID-19 affected every business and individual, some more adversely than others. The speed of change was like nothing the world had ever seen, let alone the business world. No one could really plan for it. However, you can plan for the future. Business owners should be meeting with their tax accountant before 30 June 2021 to plan for EOFY.
Starting early gives you many advantages in planning your taxes in an effective manner. Here are some of the advantages which you can get:
1. Pay Superannuation contributions
For the purpose of claiming a tax deduction, your superannuation payments for the 2020-21 year must be received by the superannuation fund on or before 30 June 2021. If you are using a clearing house, that needs to be done by 23 June to allow enough time for funds to be disbursed to the relevant superannuation funds. Remember also that the maximum superannuation deduction is $25,000 per person for the year ending 30 June 2021. From 1 July 2021 this cap will be increased to $27,500.
Related: Tax Alert ~ Tax Benefits From Superannuation Contributions
2. Paying employee bonuses
If you pay staff bonuses and you want to bring expenses into the 2021-22 year, ensure they are qualified and documented in a properly authorised resolution (e.g. Board minute) prior to year end. This enables a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.
Related: Reminder To Lodge 2021 FBT Return ~ FBT Due Date 25 June 2021
3. Write off bad debts
While it never seems like a good idea to write off bad debts, it’s one effective way you can offset your taxable income, especially if you’re still chasing invoices from last financial year. Review your current debtors list and if you see any of those invoices that you believe won’t be paid by 30 June, write these off. However, you must be able to show that you have sufficiently attempted to collect these invoices.
4. Stocktake count
In addition to meeting your tax obligations, doing a stocktake towards the end of the financial year means you get a better understanding of your stock levels and whether you should write off any damaged or obsolete items. You may also decide that converting that stock into quick cash by selling them at a reduced price is a viable option. The purpose of a stocktake is to help you make legitimate tax deductions when they are warranted.
5. Take advantage of the Instant Asset Write-Off Scheme
The Instant Asset Write-Off Scheme is one of the best tax breaks for businesses to claim an immediate tax deduction. From 12 March 2020 the government increased the instant asset write-off from $30,000 to $150,000 per asset. Additionally, if installed ready for use after 6 October 2020, there is no cap on the immediate write off rules if your aggregated turnover is less than $5b. While this scheme will reduce the tax your business has to pay, it is not a rebate. Your cashflow will still have to be able to support any outright purchases. To claim the deduction, the asset must be used or installed by 30 June 2021. Note that the immediate deduction for a car cannot exceed the cost limit of $59,136.
6. Claim all deductions
Business owners sometimes buy work-related expenses by using personal credit cards or cash. Now is the time to sort through your personal accounts and find those transactions. Proof of purchase will be required to support the claim. Do not assume that because you paid for it personally, you cannot claim it through the business.
7. Take out any deferred revenue
Deferred revenue is common with subscription-based businesses that are invoiced twelve months in advance. In some cases, you may have invoiced for part of a job that hasn’t been completed or delivered. In these scenarios, you should look at adjusting your revenue by the income amount that hasn’t been earned yet to offset your taxable income. We note however that the timing for tax purposes will depend on the terms of your engagement and the refundability of any unearned revenue.
8. Prepay expenses
While most businesses have been impacted by COVID-19, some businesses may have surplus cash that can be used to prepay expenses. The most typical ones that come to mind are rent, insurances and professional fees. In connection with this we note that the concessions surrounding the ability to claim an upfront deduction for prepaid expenses have been expanded to include businesses with an aggregated turnover of up to $50 million. Therefore, this strategy can be accessed by significantly more businesses than prior years.
9. Loss Carry Back Rules
If as a result of COVID-19 your business has made a loss for tax purposes in either the year ending 30 June 2020 or the current year ending 30 June 2021, yet paid tax in either the 2019 or 2020 financial years, then subject to your franking account balance you will be able to carry the loss backwards and get a refund of some of your previous tax payments. If you believe you may be able to take advantage of these rules then you will need to consult with your tax agent as the quicker you lodge your 2021 return the quicker you can potentially get a refund.
10. Make trust resolutions by 30 June
As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2020-21 financial year by 30 June.
If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.
A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust's accounts do not need to be prepared by 30 June.
Azure Group have a specialist Taxation team, who manage the taxation and advisory function for a myriad of businesses and can offer a range of services. Partnering with a firm that is commercially minded and tax savvy can add significant value to your overall business and tax and accounting functions. Get in touch if you need help.
Related: Super Guarantee rate increases to 10% from 1 July 2021
Have you noticed our #EOFYTaxTips... here's one that relates to #BusinessEfficency
"EOFY is a perfect time for reviewing your business structure with your Accountant, is it still appropriate for your needs? Review your accounting software needs, is it time to go to the cloud? What add-on options can make your business more efficient and free up your time?"