With the end of the financial year fast approaching, now is the time to turn your mind to some tax planning. Not only is tax planning beneficial for understanding and managing the cash flow of your business in our current inflationary environment, but also many tax planning strategies need to be addressed before the end of the financial year. So, waiting until July when you think you will have more time may be too late.
This article highlights some last-minute end of year tax planning opportunities; but you need to be proactive and act quickly to take advantage of these strategies.. Reach out to Calibre Business Advisory as soon as possible to discuss and assess your tax planning options.
Personal loans from companies
If you are a shareholder or associate of a private company and have borrowed money from the company, it is important that you have made the necessary minimum loan repayments before 30 June 2022 to ensure no adverse tax consequences will arise.
Additionally, any new loans created during the current year will be required to be repaid or put on a complying loan agreement before the earlier of:
- the date the company lodges its 2022 tax return; or
- the lodgement due date of the 2022 tax return.
The interest rate for these loans (known as Division 7A loans) has remained at 4.52% for the 2022 financial year.
Discretionary trusts (and some fixed trusts) are required to prepare and execute distribution minutes prior to 30 June for each financial year. These distribution minutes detail how the income of the trust will be distributed to beneficiaries for the relevant financial year. Minutes must be prepared in accordance with the trust deed with details of any use of income streaming. For the 2022 financial year distribution minutes to be effective, they must be prepared and executed by 30 June 2022.
When preparing the trust distribution minutes, it is recommended to prepare the minutes in a way so that a nominal amount is retained in the trust for the 30 June 2022 income year. This will assist with generating a notice of assessment for the trust and effectively limiting the amendment period to 4 years (or 2 years for trusts that are considered a small business entity).
Personal exertion income
Broadly, personal exertion income is income derived by the personal efforts or skills of an individual. Typical industries where personal exertion income is derived include (but not limited to) medical professionals, financial professionals, information technology consultants and engineers.
Where personal exertion income is derived through structures such as trusts, partnerships or companies, the income (less certain deductions) is attributed to the individual who performed the services. It is important to ensure that profits earned from personal efforts when operating via a trust, partnership or company are appropriately paid out to the relevant individuals before 30 June 2022.
Deductibility of superannuation guarantee (SG) payments
Superannuation is deductible only when paid. Therefore, to claim superannuation as a tax deduction for the June quarter (or month where the business pays superannuation monthly), the business must ensure that this superannuation is paid into the employees’ superannuation fund before 30 June.
Importantly, if you use a clearing house such as the Small Business Superannuation Clearing House, you may have to make the superannuation payment to the clearing house much earlier to ensure the payment is made to the employees’ superannuation fund before 30 June.
SG rate changes
From 1 July 2022, the SG rate is set to increase by 0.5% to 10.5% for all employees. The SG percentage will increase to 12% by 1 July 2025 with increases of 0.5% scheduled each financial year through to 1 July 2025.
Due to the business cash flow implications of these changes, it is important for employers to factor these changes in when negotiating new salary and wage packages. Employers should also understand if the change in superannuation rates for current employees is a change in the allocation of their employment package or an additional payroll cost.
SG $450 de minimis threshold
From 1 July 2022, the $450 de minimis threshold for SG contributions will be removed. This will expand the SG coverage to all eligible employees over 18 years old regardless of their monthly pay.
Understanding the cash flow implications of this will be important, particularly for businesses that rely on casual staff.
Bad debts should be identified before 30 June 2022. To claim a tax deduction for a bad debt, you must determine that the debt is genuinely bad (not just doubtful) and unlikely to be recovered through any reasonable means and it must be written off (remove it from your customer accounts).
Temporary full expensing
Businesses should consider bringing forward certain expenses to claim as a tax deduction in the year ending 30 June 2022. The temporary full expensing incentive may assist here.
Temporary full expensing allows a business to claim an immediate deduction for the full cost of eligible depreciating assets, where they are first used or installed after 7 October 2020. Eligibility for temporary full expensing requires one of the following conditions to be met:
- a business with an aggregated turnover of less than $5 billion
- a corporate tax entity that meets the alternative income test.
It is important to consider the asset, timing of the purchase, installation and use of the relevant asset to determine eligibility for this deduction. Noting that the available deduction for a car may be limited to the car limit of $60,733 for the 2021-22 income year.
Broadly, businesses with an aggregated turnover below $50 million may deduct prepaid expenditure for the 2022 income year where:
- The total period covered by the prepaid expenditure is 12 months or less; and
- The period covered by the prepaid expenditure ends in the following income year (i.e., by 30 June 2023).
Businesses with an aggregated turnover below $50 million should review their expenses and, subject to cash availability, consider bringing forward any payments which are currently being paid monthly such as subscriptions and insurance.
Stock and depreciating assets
For tax purposes, most businesses that trade stock are required to do an annual stocktake as at 30 June. It is important to plan and execute a stocktake in a way which gives a reliable and accurate stock figure. As part of stocktake, you should identify any old, obsolete or damaged stock which can be written off or written down.
The fixed asset register should also be reviewed to write off obsolete, scrapped or damaged depreciating assets before 30 June 2022.
If you would like to learn more about the above, please contact Calibre Business Advisory on (02) 9261 2177, and our dedicated team will be more than happy to assist.