2021 end of financial year is fast approaching, but there is still time to get your tax in order. Please find below a list of 2021 Year End Tax Tips for both business entities (Company, Trust, Partnership) and individuals. We have also provided important tax and administration points in relation to your SMSF and member contribution limits.
If you have any questions or would like to know more on anything outlined below please feel free to contact us and we would be more than happy to discuss your situation and help you to implement appropriate tax strategies.
Company tax rate / change
The Base Rate Entity company tax rate is reducing to 25% for the FY2022 financial year. There are several ongoing planning points in relation to the lower company tax rate:
- Determining whether the company is under the $50m aggregated turnover test and able to access the lower company tax rate
- Determining the character of income within company groups as ‘active’ or ‘passive’ and which tax rate applies. For example, income of an internal asset leasing entity is likely passive
- Managing trust distributions to companies to ensure the 80% passive income test is not breached, and
- Quarantining frankable profits at the 30% tax rate.
Depreciating asset acquisitions that are installed ready for use (generally delivered rather than merely ordered) prior to 30 June 2021 may be fully deductible in this financial year under asset write-off concessions. The recent Federal Budget extended the full expensing provisions until 30 June 2023.
There are several points to consider:
- If you are a small business (<$10m turnover) you will likely get an automatic tax deduction for the balance of all your undeducted depreciating assets on hand. You are not able to choose not to have this tax deduction and as a result you will need to factor this into your tax calculations and year-end planning strategies;
- Where you incur a loss from the asset write-off in a trust, it may impact the ability to distribute franking credits from the trust. You may need to consider a strategy to distribute additional income or dividends to the trust to use up the loss and be able to distribute the franking credits;
- Where you incur a loss from the asset write-off in a company you may be able to access the loss carry-back provision
It is important that any assets are acquired in the right entity to achieve the best tax advantage. If you are planning on purchasing any assets prior to 30 June 2021 please contact us and we can review your current structure for the best tax outcome.
The threshold for deducting ‘business’ prepayments has now increased to businesses with an aggregated turnover less than $50m. Therefore, where you prepay up to 12 months in advance for annual expenses (e.g. insurance, loan interest) before 30 June 2021 you may get a full tax
In order for a trust distribution to be effective, a trustee must prepare a minute resolving to distribute income to particular beneficiaries prior to 30 June 2021. It is important to review the requirements of your trust deed as all deeds are different but to be safe, it is best to document a trustee resolution prior to 30 June 2021.
Issues to consider in making effective trust resolutions include:
- You should plan to make sure that trust distributions are determined in a tax-effective manner.
- Children who have turned 18 prior to 30 June 2021 may receive a higher distribution without penalty tax rates applying;
- Use streaming provisions to stream franked dividends and capital gains to entities which will benefit from these types of income;
- It may be effective to distribute income to entities with tax losses (subject to managing specific anti-avoidance provisions).
Trust resolutions during the COVID period are extremely important to get right due to COVID concessions for exempt income (e.g. cash flow boost) and asset write-offs (reduce ‘tax’ income compared to ‘accounting’ income). You may need to amend the deed and/or properly document the minutes to make distributions of these amounts tax effective.
Whilst distributions don’t need to be paid in cash to be effective, in certain circumstances an unpaid distribution can lead to other tax implications, being Division 7A. Please contact us if you would like us to review your trust distributions for any tax issues or if you need assistance in determining the most tax effective distribution.
Company loss carry-back
The new loss carry-back measures apply to enable companies to use current year losses to obtain a refund of taxes paid in prior years.
The rules depend on:
- The amount of the tax loss
- The tax rate of the company in the year of making the loss
- The amount of tax paid in the earlier year, and
- The current franking account balance of the company.
If your company has made a loss in the 2021 financial year, we can review your eligibility for the loss carry-back provisions.
Employee superannuation deduction
Superannuation expenses are generally only deductible where the amount has been paid and received by the superannuation fund prior to 30 June 2021. We recommend making all employee superannuation payments by 23 June 2021 to ensure that enough time is provided for the superannuation funds to receive these payments by 30 June 2021.
Superannuation contributions are generally taxed in the fund at 15%. If you are planning on maximising your superannuation contributions to the $25,000 cap for the 2021 financial year, it is important to review the current position of your business as additional super contributions may not be tax-effective, for instance, if the business is in a loss and can’t access the loss carry-back provisions.
We note that this is not superannuation advice, simply an outline of the tax treatment and caps on concessional superannuation contributions.
Employee super packaging
The superannuation guarantee percentage is increasing to 10% from 1 July 2021.
Employers should make sure they review employee contracts to determine whether the employee is remunerated on a superannuation inclusive or exclusive basis and whether the additional cost will be passed on to the employee.
As mentioned above, Superannuation contributions need to be received by the fund before 30 June 2021 to be deductible and the concessional (deductible) limit for superannuation is generally $25,000. The individual will need to notify their superannuation fund of the deduction prior to lodgement of their return. Confirmation of the notice should be kept by the individual.
Individuals not carrying on a business (e.g. employees) are not entitled to the instant asset write-off or temporary full expensing measures. Employees are limited to expensing assets costing less than $300. Where employees wish to access the full expensing measure for larger purchases (e.g. work vehicles) they may need to consider acquiring assets in related business entities or packaging with an
Varying PAYG instalments
Consider varying the 4th quarter PAYG instalment in line with tax estimates where forecast tax is lower than instalments.
Working from home deductions
Consider whether the ATO short-cut 80c per hour method or the normal 52c per hour with actual expenses for related home office equipment and internet costs will result in a better home office claim. There should be an expectation that home office claims will be higher during the COVID period where you were working from home.
Treatment of government grants and concessions
For a lot of taxpayers, the COVID grants and concessions may be their first dealings with Government Grants. It’s important to note that different grants have different tax treatments. The Cashflow boost is specifically non-assessable income, as are certain government grants where they have
been designated as tax-exempt. Other grants may only be assessable at a later time or when conditions attached to the grant are met. We can assist you to review the treatment of grants with your income tax compliance.
Review asset values
Tax rules require all of the assets of your SMSF to be valued at market value at year-end.
If your SMSF holds property, either directly or indirectly via a private company or unit trust, trustees must consider whether the last valuations are reasonable. As an SMSF trustee you must be able to provide the auditor with evidence to support the values, such as independent appraisals from real estate agents showing recent comparable sales, a formal valuation or your own research.
Many of the strategies, rules and concessions are linked to an individual’s Total Super Balance (TSB) so obtaining up-to-date valuations may open up opportunities that some members felt were closed to them.
If the members are in the retirement phase and drawing a pension, the minimum pension drawdown rates are linked to the year-end balances and if the fund values are not up to date, you are at risk of breaching the pension rules (which may impact the fund’s tax-free earnings proportions).
Check your investment strategy is up to date
As an SMSF trustee, one of your responsibilities is to formulate and implement an effective and proactive investment strategy for your fund. Click here for guidance on how you can ensure your strategy is up to date.
Investment Strategies remain a key focus by the ATO. It is essential that you have reviewed your investment strategy to ensure it covers all of the relevant areas before 30 June 2021 and that your auditor can see you have met your responsibilities as a trustee.
If your fund’s current investments are outside of the asset ranges highlighted in the strategy, it is important you acknowledge this in writing and document your intended action to address this (or update your strategy).
Have you documented all your trustee decisions?
Ensure all SMSF documentation is in place to record decisions and actions taken during the year such as lump sum withdrawals, rent relief provided to your SMSF’s tenant, or strategies regarding temporary imbalances to your investment strategy.
Ensuring the administration and structure considerations of your SMSF are up-to-date is also important, so:
- check all your SMSF investments are held in the name of the trustee;
- review your bank account for the year and make sure your SMSF has paid any SMSF related expenses;
- double-check that your SMSF had not paid any personal expenses – correct these now if you discover any;
- ensure each trustee reviews their enduring power of attorney to ensure it is still relevant. Contact your lawyer if you need to arrange one or make amendments. Incapacity issues are an important structuring consideration for fund. Please review this article and contact us with any queries.
- review your estate planning and binding death nominations and make sure they are still applicable.
Personal super contributions
Most people (employees or self-employed) can make contributions to their super fund and claim a tax deduction in the current financial year. If you are an employee, making a personal contribution may save the hassle of arranging salary sacrificing with your payroll, and still result the same tax benefits.
The contribution is generally taxed at up to 15% in the fund (or up to 30% if you earn $250,000 or more). Depending on your circumstances, this is potentially a lower rate than your marginal tax rate, which could be up to 47% (including the Medicare Levy) – which could save you up to 32%.
To do this, you need to allow enough time to ensure your superannuation fund’s bank account has deposited and cleared the contribution by 30 June.
Important points to consider:
- To claim a tax deduction – you will need to complete and lodge a Notice of Intent to Claim the Deductionand have this notice acknowledged (in writing) before the date you lodge your tax return, or the end of the financial year following the year you made the contribution – whichever is earlier. The accepted ATO form is here. If the paperwork is not completed, you cannot claim the deduction!
- If your income has dropped during the year, and you have already completed the paperwork to make a personal contribution, you can normally vary it before the due dates by completing the variation section in the ATO form.
- Make sure your personal superannuation contributions don’t create a tax loss, as you will be unable to claim the deduction as a concessional contribution.
- If you are aged between 67 and 75, you must have passed the work test to be able to contribute to super. The work test is met by working a minimum of 40 hours paid employment in a 30-day consecutive period during the financial year.
Consider after-tax (non-concessional) contributions
Another way to invest more in your super is with some of your after-tax income or savings, by making a personal non-concessional contribution.
While these contributions don’t reduce your taxable income for the year, you can still benefit from the low tax rate of up to 15% that’s paid in super on investment earnings. This tax rate may be lower than what you’d pay if you held the money in other investments outside super. Note, the general non-concessional cap (NCC) for the 2021 financial year is $100,000. Eligibility to utilise the cap can depend on your total superannuation balance (TSB). Details regarding TSB thresholds are below.
Members aged over 67 will need to meet the work test to make an NCC. The work test is met by working a minimum of 40 hours of paid employment in a 30-day consecutive period during the financial year.
If you are under 65 years of age at any time in the 2021 financial year, you may be able to bring forward three years of NCC, depending on your TSB. This enables up to $300,000 of NCC to be made in one year.
The bring-forward rule is automatically triggered if you make an NCC of more than $100,000 in one year. The total NCCs for the current year and for the next two years must be within the contribution cap of $300,000 total.
If you need assistance with any of the information provided, reach out to the HCG team here for help.