In a relatively short period of time, COVID-19 has changed many things – from the way we interact with each other to the way we do business. Whilst year end tax planning is always an important focus, a number of COVID-19 induced factors means that your year end tax planning for this financial year may require a different approach.
Tax Minimisation Strategies
Delay Deriving Assessable Income
One effective strategy is to delay deriving your income until after June 30, 2020 by:
a. Delaying the Timing of the Derivation of Income until after June 30.
b. Timing of Raising Invoices for Incomplete Work
Where this strategy will not adversely affect your cash flow, consideration should be given to deferring the recognition of income until after 30 June 2020.
Consider delaying your invoices to customers until after July 1 – this will push the derivation of the income into the next financial year and defer the tax payable on that income.
Bringing Forward Deductible Expenses or Losses
Prepayment of Expenses – In some circumstances, Small Business Entities (SBE) should consider pre-paying expenses prior to 30 June 2020. A tax deduction can be brought forward into this financial year for expenses like:
- Travel and accommodation expenses
- Rent for July 2020 (and possibly extra months)
- Accounting fees
- Subscriptions and memberships to professional associations and trade journals
A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2020 for services to be rendered within a 12-month period.
Write-Off Bad Debts – if you operate on an accruals basis of accounting (as distinct from a cash basis) you should write off bad debts from your debtors listing before June 30. Unless these debts are physically recorded as a ‘bad debt’ in your system before 30th June 2020, a deduction will not be allowable in the current financial year.
Repairs and Maintenance – Where possible and cash flow allows, consider bringing these repairs forward to before June 30.
Obsolete Plant and Equipment – should be scrapped or decommissioned prior to June 30, 2020 to enable the book value to be claimed as a tax deduction.
TIP: We recommend that clients review their Depreciation schedules on a regular basis to indentify obsolete plant
Superannuation & Tax Planning Opportunities
The tax-deductible superannuation contribution limit or cap is $25,000 for all individuals regardless of their age. The advantage of making the maximum tax-deductible superannuation contribution before June 30, 2020 is that superannuation contributions are taxed at between 15% and 30%, compared to personal tax rates of between 32.5% and 45% (plus 2% Medicare Levy) for an individual taxpayer earning over $37,000 per annum.
Instant asset write-off increased and extended
Using the simplified depreciation rules, assets costing less than the relevant threshold are written off in the year they are first used, or installed ready-for-use. This threshold applies to each asset irrespective of whether the asset is purchased new or second-hand.
The accelerated depreciation write-off for small businesses has been extended to 30th June 2020 and the threshold has increased to $150,000
• $150,000 excluding GST from 12 March 2020 to 30 June 2020 (with business aggregated annual turnover up to $500 million)
• $30,000 excluding GST up to 11 March 2020 (with business aggregated annual turnover up to $50 million)
This applies on a per asset basis to new or second-hand assets.
• Capital Gain is determined at the time contract is entered into and not settlement date
• Consider delaying the signing of the contract until the new financial year.
• Consider realising capital losses if you have already realised capital gains on other assets.
TIP: The date of the contract is the realisation date for capital gains tax purposes and not settlement date.
• Pay Employee superannuation contributions for the June 2020 quarter by 30 June 2020, to obtain a tax deduction in the 2019 -20 year
• Payment means the funds have cleared the account by the end of business on 30 June.
ATO Administration Relief
The ATO will provide administration relief for some tax obligations for people affected by the Coronavirus crisis on a per business basis. Relief options include:
- Deferring payment dates of Business Activity Statements, income tax assessments, fringe benefit tax assessments up to 12 September 2020;
- Businesses on a quarterly reporting cycle can choose to change to monthly GST reporting to receive GST refunds sooner;
- Business can vary PAYG instalment amounts to zero for the March or June 2020 quarters and if they lodge this variation, they can also claim a refund for instalments made for the September 2019 and December 2019 quarters;
- Remission of any interest and penalties incurred on or after 23 January 2020; and
- Allowing affected businesses to enter into low interest payment plans on existing tax liabilities.
Although tax laws are complex and constantly changing, there are always opportunities to legitimately minimise your tax liability.
We should point out that the tax legislation also contains specific anti-avoidance provisions which target schemes entered into with the dominant purpose of tax avoidance.
Accordingly, it is essential that you consider your specific circumstances before proceeding with any tax planning measures to ensure these rules do not apply.
Author: George Pantahos | George Pantahos & Co Chartered Accountants & Business Consultants. (08) 8223 7649. www.pantahos.com.au