Year End Tax Planning for Businesses: Optimising Tax Outcomes and Ensuring Compliance
With the end of the financial year approaching, businesses need to prioritise their tax planning to maximise benefits and meet their compliance obligations. This article highlights key areas that can significantly impact tax liabilities. From leveraging depreciation and superannuation guarantee rate increases to utilising loss carry-back provisions and addressing Division 7A loans, we explore crucial considerations. We also touch upon franking and dividends, trust resolutions, and the ATO’s risk assessment framework for employee classification.
To help you streamline your tax planning process, we have prepared an accompanying Tax Planning Checklist at the end of this article. By taking proactive measures and following the checklist, businesses can optimise their tax outcomes and navigate the evolving tax landscape effectively.
Depreciation on plant and equipment
Temporary full expensing provisions Businesses with an aggregated turnover of less than $5 billion can claim the full cost of an eligible depreciating asset purchased between 6 October 2020 and 30 June 2023. These provisions are generally not compulsory, and most businesses can opt in and opt out on an asset-by-asset basis. Furthermore, businesses with an aggregated turnover of more than $5 billion may have access to these provisions under an alternate test. These provisions are compulsory for small business entities with an aggregated turnover of less than $10 million which use the simplified depreciation provisions. The temporary full expensing provisions will no longer be available from 1 July 2023.
Employer obligations – increase in superannuation guarantee rates
The superannuation guarantee rate will rise from 10.5% to 11% from 1 July 2023. The rate will subsequently rise by 0.5% each year until it reaches 12% by the 2024-25 income year. It is prudent to review your employment contracts and ascertain whether the employee’s package is inclusive of or excluding superannuation guarantee once again.
Loss carry-back for companies
The loss carry back provisions have been extended to the 2022-23 income year. Companies which carry on a business and have an aggregated turnover of less than $5 billion are eligible for the loss carry back provisions provided certain criteria are met. The loss carry back rules are optional and broadly give companies an option to carry back their tax losses to an earlier year and claim a refund for tax paid in a previous income year. Losses incurred in the 2019/20, 2020/21, 2021/22 and 2022/23 income years can be carried back to the 2018/19, and later income years. The refundable amount of the tax offset is restricted to the lesser of:
- the tax paid in the earlier income year, or
- the company’s franking account balance at the end of the current income year.
Companies will not be able to carry back their losses from 1 July 2023.
Review loans to shareholders and associates (Division 7A loans)
The Government had previously announced its intention to introduce changes to the operation of Division 7A. However, at this stage, no draft legislation has been released. Shareholder loans from companies need to be properly documented and put on a commercial footing in line with the Division 7A tax legislation. In addition to documenting such loans, it is important to ensure interest rates are correctly applied and the minimum repayments are being made to ensure no deemed dividends arise. The Australian Taxation Office (ATO) continues to undertake audits to ensure payments made by private companies are correctly accounted for and company loans are not used to distribute tax-free profits. In addition to Division 7A loans, you should also review any unpaid present entitlements (UPEs) where trust distributions remain unpaid at the end of the year. We recommend speaking to one of our advisors who can guide you through the complexities of the Division 7A provisions.
Franking and dividends
If you are planning on paying any dividends in your company prior to year-end, it is important to ensure that you have met the documentation/notification requirements. In addition, ensure your franking account is up to date as it is imperative that you have sufficient franking credits to avoid paying franking deficits tax at a later date. Ensure the company has applied the correct franking rate.
Trust resolutions
Trustees of discretionary and family trusts must make valid distribution resolutions before 30 June to effectively distribute trust income to eligible beneficiaries. The resolution must be made in accordance with the Trust Deed. If the Trust has not made a valid distribution by 30 June 2023, the Trustee may be liable to pay tax on the Trust’s taxable income at the highest marginal tax rate (subject to any default beneficiary clauses present in the Trust Deed).
Furthermore, late last year the ATO finalised its guidance on s100A of ITAA 1936. Broadly, s100A gives the ATO powers to assess the Trustee of the trust at the highest marginal tax rate if the ATO considers the distribution part of a reimbursement arrangement and the “ordinary family and commercial dealings” exclusion does not apply. The finalised guidance issued by the ATO provides its views on when the ordinary family and commercial dealings exclusion may apply.
ATO risk areas – employee vs independent contractor
The ATO released draft Practical Compliance Guideline (PCG) 2022/D5 which sets out their compliance approach for businesses that engage workers and classify them as employees or contractors. In 2022, the High Court handed down two decisions that impact how businesses distinguish between employment and contractor relationships. The ATO’s risk assessment framework provides their compliance approach on how they will apply compliance resources in determining whether arrangements have been classified correctly. The key theme from the various risk zones is that the ATO expects businesses to get specific advice from appropriate professionals to fall into the lower risk zones. An arrangement is high risk if the arrangement does not fall into the white, green, or yellow zones and to fall within any of those zones, there is a requirement to get advice in relation to this issue from the engaging entity’s in-house counsel or an appropriately qualified third party, such as a solicitor or tax professional, an administrative body or client-specific written advice from the ATO.
Tax planning checklist
| Item | Enhance your tax deductions |
|---|---|
| Accrued expenses | Ensure you accrue expenses where you have a present existing liability to pay the expense irrespective of the fact that you may receive the invoice or make the payment after year end. Example: Accrued wages – for instance, if you have a monthly pay cycle ending on 15 June, you can accrue the costs of your payroll from 16 June to 30 June and claim the wage cost as a tax deduction in the 2023 year itself. |
| Bad debts | Review your debtors listing and determine whether any debts can be written off. A written record should be kept evidencing the decision to write off the debt from the accounts. |
| Bonuses | If you have not paid your bonuses by 30 June, you may still be able to claim a deduction provided you have an obligation to pay this. To substantiate this, ensure the amount is quantifiable and approved (via minutes) and the staff are notified of the bonus. |
| Deferring income | The ability of a business to defer income will depend on each business, cash flows and the type of income derived. |
| Plant and equipment | Consider the impact of the temporary full expensing provisions on depreciating assets purchased during the 2022-23 income year. |
| Prepayments – immediate deductions | If you are a small or medium business (aggregated turnover of less than $50 million), you may be entitled to an immediate deduction for certain prepaid expenses where the goods or services will be provided within 12 months from the date of expenditure. Examples of items that may be deductible under the 12-month rule include subscriptions and prepayments of interest on a loan used for income producing purposes. |
| Simplified trading stock rules | If you are a small business (aggregated turnover of less than $50 million), the simplified trading stock rules may apply. Broadly, you do not have to account for changes in trading stock for tax purposes where the difference between the value of the original opening stock and a reasonable estimate of the closing stock is $5,000 or less. |
| Stock– obsolete | Review your stock on hand and identify any obsolete stock. You should conduct a detailed physical stock take of all stock on 30 June. Retain your detailed stock sheets as part of your taxation records. |
| Superannuation– June 2023 quarter | If you would like to claim a deduction for your superannuation guarantee accrued during the June 2023 quarter, ensure it is paid by 21 June 2023 (The ATO advice). The amount should be received into the employees’ fund by 30 June 2023. |
| Salary and wages (incl. director fees) | Ensure PAYG withholding and reporting obligations have been met to prevent loss of deduction for non-compliant payments. |
Get in touch
At Star & Associates, we understand the importance of year-end tax planning. Contact us now to ensure compliance, optimise your deductions, and maximise your tax benefits.