Small businesses may be eligible for a range of tax benefits. To assist, CPA Australia has put together the following tips.
Are you eligible for the small business tax regime?
This year there has been an important uplift in one of the small business thresholds. As a result, small businesses (sole traders, partnerships, companies and/or trusts) with turnover of less than $10 million may now be eligible for a range of tax benefits.
These include being able to immediately write off the value of assets costing less than $20,000 (see following), the new 27.5 per cent company tax rate, simplified depreciation, restructure rollover relief, and accounting on a cash basis.
Broadly, the small business must carry on a business and its annual turnover (excluding GST) cannot exceed $10 million, which will also be aggregated to include the annual turnover of certain affiliates and entities connected with the taxpayer.
Meeting the $10 million turnover test automatically entitles small businesses to choose concessions such as simplified rules for both tax depreciation and trading stock. However, the turnover threshold for small business capital gains tax concessions remains at $2 million, and additional eligibility tests apply to claim a concession.
Maximise depreciation deductions
Small businesses can still receive an immediate tax deduction for nearly all individual assets purchased by 30 June 2017 that cost less than $20,000, to the extent the assets are used for an income-producing purpose and are used or installed ready for use by the end of the financial year.
For businesses registered for GST, the $20,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.
A depreciating asset that is not immediately deductible (an asset costing $20,000 or more) will be automatically depreciated at a flat rate of 15 per cent in the year it was bought, to the extent the asset is used for income-producing purposes and is used or installed ready for use by 30 June 2018. On that basis, the asset’s adjustable value can be depreciated at 30 per cent in subsequent years.
As mentioned, the good news is that this measure is now available to businesses with a turnover of up to $10 million per annum, up from the prior $2 million cap. Notably, it has been extended until 30 June 2018.
Companies and franking of dividends
The reduction in the company tax rate from 1 July 2016 for many small companies may mean some companies could have over-franked dividends declared during the year. We suggest you consult the Australian Taxation Office’s (ATO) draft PGC 2017/D17 for a more complete explanation of this business risk and what to do if it impacts you.
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 2016-17 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.
As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.
Seeking professional advice when starting a business
Professional expenses associated with starting a new business – such as legal and accounting fees – are now deductible in the year the expenses are incurred, rather than deductible over a five-year period as was previously the case.
If you established a business during the year, speak to your CPA Australia-registered tax agent about claiming professional advice fees as an expense.
Small business restructure rollover relief
From 1 July 2016, small businesses have been able to change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.
This rollover applies to active assets that are capital gains tax (CGT) assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.
Business restructuring can be complex, so first speak to your CPA Australia-registered tax agent.
Stream trust capital gains and franked dividends
Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to the amounts. The trustee must document this resolution before 30 June and the beneficiary receives – or is entitled to receive – an amount equal to the net financial benefit of the gain or dividend.
Again, however, streaming rules are complex and taxpayers should consult their CPA Australia-registered tax agent for advice.
Private company loans
Income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer, unless an exemption applies:
- a payment or a loan by a private company to a shareholder or an associate (like a family member)
- forgiveness of a shareholder’s or associate’s debt
- use of a company asset by a shareholder or their associate, or
- the transfer of a company asset to a shareholder or their associate.
The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.
There are various initiatives a private company can take before its 2016-17 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend. Depending on circumstances, such strategies may include repaying a loan, declaring a dividend, or entering a complying loan agreement before the return needs to be lodged.
Because the rules around private company loans are also complex, it is advisable to consult your CPA Australia-registered tax agent on the matter.
Prevent deemed dividends in respect of unpaid trust distributions
An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company; that is, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in 2016-17.
However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company's 2016-17 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.
If applicable, trustees and beneficiaries should consult their CPA Australia-registered tax agent on the full implications of these very complex rules.
Write off bad debts
Businesses can only obtain income tax deductions for bad debts when various conditions are met.
A deduction will only be available if the debt still exists at the time it is written off. Therefore, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available. The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed.
The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business. Certain additional requirements must be met where the creditor is either a company or trust.
Seek independent advice on end of year tax-effective investment products
End of the financial year often sees the emergence of what claim to be tax-effective investment products. If considering such an investment, seek independent advice before making a decision, particularly from your CPA Australia-registered tax agent.
Specific tips for primary producers
Farm management deposits
One of the best tax planning measures available to primary producers is to utilise the farm management deposits (FMD) scheme. This has become an even more effective business and cash flow planning tool this year due to legislative changes that took effect from 1 July 2016.
The changes include doubling of the cap on deposits from $400,000 to $800,000, the re-establishment of an early access trigger during drought, and allowing FMDs to be used to offset the interest costs on primary production business debt.
There have also been some changes to income averaging arrangements to allow primary producers to return to income averaging 10 years after they opted out. Primary producers who opted out of income tax averaging for 2006-07 – or an earlier financial year – will resume income tax averaging for the first financial year after 2017-18, in which their taxable primary production income is greater than in the previous financial year.
Other primary producer-specific tax concessions
Don’t forget to consider the uncapped immediate write-off for capital expenditure on water facilities and fencing assets, the outright deduction for landcare operations, and the accelerated write-off for horticultural plants and grapevines.
Why it's a brave new world for tax practitioners