As we near the end of another financial year – a very challenging financial year – it is important to start thinking about strategies that can be implemented to reduce taxable income for the year ended 30 June 2021.
With tax planning, even implementing strategies to simply defer income to the following financial year can provide significant benefits and should be considered.
Listed below are 10 tax planning strategies that may be considered prior to 30 June 2021:
1. Deferring income
A really simple strategy has always been to consider deferring income until the following financial year by way of deferring invoices.
2. Reviewing debtors
Taxpayers with outstanding debtors should review them to determine whether any are bad and can be written off prior to 30 June 2021 in order to claim a bad debt deduction.
3. Prepaying expenses
Individual taxpayers not operating a business, Small Business Entities (entities with business turnover of less than $10M) and Medium Business Entities (entities with business turnover of between $10M – $50M) are able to claim a tax deduction for prepayments made for an advance period of up to 12 months after end of financial year. For these taxpayers, making prepayments accelerates the timing of the tax deduction that would otherwise be ordinarily claimable in the following financial year.
4. Maximising home office deductions
Many taxpayers are still regularly working from home. The ATO has issued a short-cut deduction methodology for the 2021 financial year which allows taxpayers to claim a deduction of 80 cents for each hour that they work from home. If the short-cut method is applied, no additional deductions can be claimed for phone expenses, internet, depreciation and utilities.
Taxpayers may elect to not use the short-cut method and can claim deductions for home office expenses based on actual costs incurred which directly relate to their work.
5. Maximising superannuation contributions
For the 2021 financial year, an individual taxpayer is able to make deductible concessional contributions (inclusive of employer contributions already made on their behalf) of up to $25,000. If the taxpayer has not already fully utilised the $25,000 threshold, the taxpayer should consider making additional concessional contributions to claim an additional tax deduction.
6. Making catch-up superannuation contributions (if you are eligible to)
For taxpayers with a superannuation balance of under $500,000, the Federal Government recently changed the law to allow taxpayers to make additional concessional contributions beyond their $25,000 concessional contribution cap if they did not fully utilise their available concessional contribution cap in prior years commencing from the 2019 financial year. For example, a taxpayer that has only made concessional contributions of $15,000 in each of the 2019 and 2020 years could potentially use this concessional to make a deductible superannuation contribution of $45,000 in the 2021 financial year.
7. Understanding the tax rate of Base Rate Entities
Base Rate Entities are companies that have turnover of under $50M and derive less than 80% of their income from passive sources.
For the 2021 financial year, the corporate tax rate of a base rate entity is 26% but this will reduce to 25% from the 2022 financial year. By a base rate entity deferring income to the 2022 financial year, the company can both (i) defer the timing on which it pays tax on the income; and (ii) reduce the tax rate on the income by 1%.
If a company is a base rate entity, it also impacts the rate at which the company can frank dividends to its shareholders. While a base rate entity can frank dividends declared in the 2021 financial year to 26%, it can only frank dividends declared in the 2022 financial year to 25%. The changes in the rate of franking credits that can be attached to dividends may make it preferable for a company to declare dividends to its shareholders in the 2021 financial year rather than the 2022 financial year.
8. Corporate beneficiaries with retained earnings
Many taxpayers utilise corporate beneficiaries to minimise the tax payable on trust distributions.
If a taxpayer has a corporate beneficiary that receives distributions of active business income, the corporate beneficiary could be classified as a base rate entity thus affecting the corporate tax rate of the beneficiary and the rate at which the corporate beneficiary can frank dividends (refer comments above).
For taxpayers that have corporate beneficiaries with retained earnings from prior years, consider establishing a new corporate beneficiary to receive distributions of active business income going forward so as to ensure that the pre-existing corporate beneficiary does not get characterised as a base rate entity and can continue to frank dividends declared from its retained earnings at 30%.
9. Claiming tax deductions for business related asset purchases
As part of the Federal Governments COVID stimulus policies, all businesses with turnover of under $5B are able to claim an immediate tax deduction for the purchase of new plant & equipment items. Furthermore, businesses with turnover of under $50M are able to claim an immediate tax deduction for the purchase of new or second-hand items of plant & equipment purchased.
(An important rider to this concession relates to businesses that purchase cars. Cars are subject to a separate depreciation cap that still remains. Thus, for the 2021 financial year, the maximum deduction that a business can claim for the purchase of a car is $59,136).
10. Consider restructuring inefficient business structures
There are various tax rollovers and tax concessions that can be used to restructure inefficient business structures without triggering any Capital Gains Tax implications.
Often, taxpayers establish business structures when they first establish their business that are no longer effective due to changes in business circumstances or personal circumstances.
Starting a new business structure effective from 1 July 2021 is the perfect time!
If you have any further questions relating to year-end tax planning, please do not hesitate to get in touch with us via your Banks Group representative, (03) 9810 0700 or firstname.lastname@example.org.