Small businesses may be eligible for a range of tax benefits. CPA Australia has put together the following tax tips to help small businesses.
Maximise depreciation deductions
Small businesses with an aggregated annual turnover of less than $10 million can still get an immediate tax deduction for nearly all individual assets purchased by 30 June 2018 that cost less than $20,000. Such assets must be used by the business for an income-producing purpose and they must be installed ready for use by 30 June 2018.
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 financial year of purchase to the extent the asset is used for income-producing purposes, and is used or installed ready for use by 30 June 2018. The adjustable value of such an asset can be depreciated, on that basis, at 30 per cent in subsequent years.
It is important to note that it is proposed that this measure be extended until 30 June 2019.
Make sure you pay the correct company tax rate
Most companies with an aggregated annual turnover of less than $25 million will pay tax at 27.5 per cent in 2017-18. However, some companies with a turnover below $25 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income. Companies that pay tax at 27.5 per cent can only frank dividends up to that rate.
As the law currently stands, to qualify for the lower tax rate in 2017-18, a company must have a turnover of less than $25 million and be “carrying on a business”. However, there is a proposal before Parliament to replace the ”carrying on a business” test with a test that will mean that companies below the $25 million threshold must earn no more than 80 per cent of that turnover from passive income such as rent, interest and net capital gains to qualify for the lower company tax rate company. This proposed change may lead to different tax outcomes from the current law for certain companies.
Both the current law and the proposed change create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your CPA Australia-registered tax agent is best placed to assist you with these issues.
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 2017-18 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.
Seek professional advice when starting a business
Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over a five-year period as was the case previously.
If you established a business during the year, you should speak to your CPA Australia-registered tax agent about claiming professional advice fees as an expense.
Consider whether your legal structure is right for your business
Small businesses are able to change their legal structure without incurring any income tax liability when active assets are transferred by one entity to another.
This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.
However, caution must be exercised. Business restructuring is complex, so you should first speak to your CPA Australia-registered tax agent.
Document the streaming of trust capital gains and franked dividends to beneficiaries
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 those 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 that gain or dividend.
These streaming rules are complex and taxpayers should consult their CPA Australia-registered tax agent for advice.
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Review your private company loans
The 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)
- the forgiveness of a shareholder’s or associate’s debt
- the 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 things a private company can do before its 2017-18 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.
Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement.
The rules around private company loans are complex and changing, therefore you should consult your CPA Australia-registered tax agent on this.
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, 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 2017-18.
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 2017-18 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.
Trustees and beneficiaries should consult their CPA Australia-registered tax agent on the full implications of these very complex rules if applicable.
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. Thus, 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.
Paying employee bonuses
If you pay staff bonuses and you want to bring expenses into the 2017-18 year, ensure they are quantified and documented in a properly authorised resolution (e.g. Board minute) prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.
Pay any outstanding superannuation entitlements
The Australian Government has announced a 12-month amnesty from 24 May 2018 for employers to pay any outstanding Superannuation Guarantee (SG) contributions for periods prior to 1 April 2018.
Employers who voluntarily disclose and pay previously undeclared SG shortfalls during the Amnesty and before an SG audit will not be liable for the administration penalties and will be able to claim a tax deduction for payments made during the 12-month period. The announcement is subject to approval by the Parliament.
Seek independent advice on investment products promoted as being tax effective
The end of the financial year often sees the promotion of investment products that may claim to be tax effective. If you are considering such an investment, seek independent advice before making a decision, particularly from your CPA Australia-registered tax agent.
Some specific tips for primary producers
Farm management deposits (FMDs)
One of the best tax-planning measures available to primary producers is effectively utilising the farm management deposits scheme, or FMDs. They are an effective business and cash flow planning tool.
Primary producers can deposit up to $800,000 in a FMD account, they can have early access to their FMD account during times of drought, and they may be able to offset the interest costs on primary production business debt.
Tax averaging enables primary producers to even out their income and tax payable over a maximum of five years to allow for good and bad years. This ensures that farmers don't pay more tax over time than taxpayers on comparable but steady incomes.
Primary producers who opted out of income tax averaging for 2006-07, or an earlier financial year, are able to choose to restart income tax averaging in 2017-18.
Other primary producer-specific tax specific concessions
Also, 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.
Tax office cracks down on work-related expense claims