We all would like to reduce our tax exposure and minimise risk of an audit by the regulators.
Reducing your tax exposure, maximising the opportunities available to you, and reducing your risk of an audit by the regulators is in your best interests. With the end of the financial year fast approaching, this update will help you do exactly that:
- Summary of key changes and actions
- Top Tax Tips– Our tips to reduce your company’s tax liability and risks.
What’s New:
- Superannuation Guarantee increases to 11%
- $20,000 small business incentives for energy efficiency
- Warning: Companies entitled to trust income
- Temporary full expensing concludes 30 June 2023
- $20k Instant asset write-off from 1 July 2023
- Ability to ‘carry back’ losses against prior year profits ends
- Contractor or employee?
Financial Housekeeping:
- Payment deferrals
- Reporting payments to contractors
- Shareholder loan agreement minimum repayments
- Before you roll over your software
- Employee reporting: Single touch payroll
- Do you need to do a stocktake?
What we need from you:
- What we need from you – a general list of what to prepare before your next meeting with us
We want to help you achieve the best result. If there is any additional assistance we can provide, or if you would like us to review your situation, please call us on 02 8378 2421
In brief
| Date | Changes and actions |
| 1 July 2022 |
|
| 30 November 2022 |
|
| 21 May 2023 |
|
| 25 June 2023 |
|
| 30 June 2023 |
|
| Pre-30 June 2023 |
|
| 1 July 2023 |
|
| 14 July 2023 |
|
| 28 July 2023 |
|
| 28 August 2023 |
|
| 30 June 2024 |
|
| 1 July 2024 |
|
*Subject to legislation. Not yet law.
What’s new
Superannuation Guarantee increases to 10.5%
The Superannuation Guarantee (SG) rate will rise from 10.5% to 11% on 1 July 2023 and will continue to increase by 0.5% each year until it reaches 12% on 1 July 2025.
If you have employees, what this will mean depends on your employment agreements. If the employment agreement states the employee is paid on a ‘total remuneration’ basis (base plus SG and any other allowances), then their take home pay might be reduced by 0.5%. That is, a greater percentage of their total remuneration will be directed to their superannuation fund. For employees paid a rate plus superannuation, then their take home pay will remain the same and the 0.5% increase will be added to their SG payments.
$20,000 small business incentives for energy efficiency
The Government has announced a Small Business Energy Incentive that provides an additional 20% deduction on the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible with a maximum bonus deduction of $20,000. The incentive is available to small and medium businesses with an aggregated annual turnover of less than $50 million.
While the full detail of what qualifies for the incentive is not yet available, it is expected to apply to a range of depreciating assets and upgrades to existing assets such as electrifying heating and cooling systems, upgrading to more efficient fridges and induction cooktops, and installing batteries and heat pumps.
Some exclusions will apply including electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels. Eligible assets or upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024 to qualify for the bonus deduction.
This initiative is not yet law. Please do not take action on the energy boost until it is confirmed. We will keep you up to date.
Warning: Companies entitled to trust income
The ATO has finalised its guidance on unpaid distributions owed by trusts to companies. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of the integrity provisions in Division 7A. That is, if the trust does not physically pay a distribution owed to your company by the time the tax return is lodged (or due for lodgement), the ATO may consider the unpaid distribution to be loan and if there is not a loan agreement in place by the relevant deadline, then the company will be taxed on the unpaid distribution.
The ATO’s guidance applies to unpaid distributions arising on or after 1 July 2022. It looks at when an unpaid entitlement to trust income will start being treated as a loan to the company.
Under the ATO’s final guidance, if a trustee resolves to appoint income to a corporate beneficiary, then the unpaid distribution will generally be treated as loan for Division 7A when the trust accounts are finalised. This is normally after the end of the year in which the entitlement arose.
This is largely consistent with the approach that has applied in the past and its only in limited circumstances where a loan for Division 7A purposes might arise in the year the entitlement arises.
The timing of when a loan arises for Division 7A purposes is relevant in determining when a complying loan agreement needs to be put in place to prevent the full unpaid amount being treated as a deemed dividend for tax purposes and when the trust needs to start making principal and interest repayments to the company.
The ATO’s view on “sub-trust arrangements” has changed. Basically, the ATO is suggesting that sub-trust arrangements will no longer be effective in preventing an unpaid trust distribution from being treated as a loan for Division 7A purposes if the funds are used by the trust, shareholder of the company or any of their related parties. This effectively limits when “sub-trust arrangements” can be used.
For many trusts, the new guidance may not have much of an impact. For others, and especially those using “sub-trust” arrangements, the management of unpaid entitlements will need to be reviewed.
Temporary full expensing concludes 30 June 2023
Temporary full expensing enables your business to fully expense the cost of:
- New depreciable assets
- Improvements to existing eligible assets, and
- Second hand assets
in the first year of use.
This measure enables an asset’s cost to be fully deductible upfront rather than being claimed over the asset’s life, regardless of the cost of the asset. The last day to utilise the expensing measures is 30 June 2023 at which point, normal depreciation arrangements will apply.
Certain expenditure is excluded from this measure, such as improvements to land or buildings that are not treated as plant or as separate depreciating assets in their own right. Expenditure on these improvements would still normally be claimed at 2.5% or 4% per year.
The car limit will continue to place a cap on the deductions that can be claimed for luxury cars $60,733 in 2021-22 and $64,741 in 2022-23).
$20k Instant asset write-off from 1 July 2023
As temporary full expensing expires at the end of this financial year, the ability for your business to fully expense the cost of purchasing depreciating assets is more restricted moving forward.
For depreciating assets that are acquired and first used in the 2023-24 income year, the Government in the recent 2023-24 Federal Budget announced a new instant asset write off threshold of $20,000 for small businesses with an aggregated annual turnover of less than $10 million.
Legislation enabling the instant asset write-off has not been introduced into Parliament and is not yet law.
Ability to ‘carry back’ losses against prior year profits ends
Temporary loss carry back rules allow companies that have tax losses in the 2020, 2021, 2022 or 2023 income years to offset the losses against taxable profits made in the 2019, 2020, 2021 or 2022 income years.
This relief is in the form of a refundable tax offset that is claimed in the company tax return when it is lodged. To utilise the offset, the tax lodgements for the last 5 years need to be up to date.
The loss carry back rules are optional and a number of conditions need to be satisfied. The last year to utilise the loss carry back rules is the 2023 income year.
If this is relevant to your company, we will discuss with you whether to claim the prior year losses or carry them forward to future years and the implications of the decisions.
Contractor or employee?
Many business owners assume that if they hire independent contractors, they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations.
However, each set of rules operates a bit differently and in some cases, genuine contractors can be treated as if they were employees. Also, correctly classifying the employment relationship can be difficult and there are significant penalties that might apply if you get it wrong.
Following two landmark decisions handed down by the High Court, the ATO has issued a new draft ruling on determining whether a worker is an employee or an independent contractor.
The ATO has not disturbed the approach of looking at the totality of the relationship between the parties to determine this classification. What has changed is that, where the parties have entered into a written contract, the analysis to determine whether a worker is a contractor or employee should focus on the terms of that contract to establish the nature of that relationship (rather than the conduct of the parties). For example, if you are dealing with sub-contractors who are sole traders, merely labelling a worker as an independent contractor doesn’t necessarily make it so if this is inconsistent with their rights and obligations under the contract. A genuine independent contractor will typically be:
Autonomous rather than subservient in their decision-making;
Financially self-reliant rather than economically dependent upon the business of another; and,
Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.
Together with the updated draft ruling, the ATO has issued a draft compliance guide that sets out four risk categories. While the ATO looks at a number of factors, arrangements will tend to be viewed in a more favourable light where:
There is evidence to show that you and the worker have agreed on the classification;
There is evidence that you and the worker understand the consequences of the classification;
The performance of the arrangement hasn’t deviated significantly from the terms of the contract;
Specific advice has been sought confirming that the classification is correct; and
Tax, superannuation, and reporting obligations have been met when the worker is classified as an employee or independent contractor (whichever relevant).
If your business employs contractors, you should have a process in place to ensure the correct classification of employment arrangements and their risk rating under the draft compliance guide. These arrangements should also be reviewed over time.
Even when a worker is a genuine independent contractor, this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet. For example, some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.
Financial house-keeping
Having trouble with tax debt?
If you are having trouble paying your tax liability, please let us know as soon as possible so we can negotiate a deferral or payment plan with the ATO on your behalf.
Small business lodgment penalty amnesty
Small businesses with an aggregated turnover of less than $10m can access a lodgment penalty amnesty program. The amnesty applies to tax obligations, including income tax and business activity statements, that were originally due from 1 December 2019 and 28 February 2022. If those returns are lodged between 1 June 2023 and 31 December 2023, any failure to lodge penalty applying to the late lodgment will be automatically remitted.
Reporting payments to contractors
The taxable payments reporting system requires businesses in certain industries to report payments they make to contractors (individual and total for the year) to the ATO. ‘Payment’ means any form of consideration including non-cash benefits and constructive payments. Taxable payments reporting is required for:
- Building and construction services
- Cleaning services
- Courier services
- Information technology (IT) services
- Road freight services
- Security, investigation or surveillance services
- Mixed services (providing one or more of the services listed above)
The annual report is due by 28 August 2022.
Shareholder loan agreement minimum repayments
Division 7A is a section of the tax law that ensures shareholders don’t access company profits in a way that circumvents income tax.
If any loans or payments have been made to shareholders, or debts forgiven, these amounts generally need to be put under a complying loan agreement or paid back before the earlier of the due date and actual lodgement date of the company’s tax return to prevent a deemed unfranked dividend from being triggered.
To be a complying loan agreement the agreement requires minimum annual repayments to be made over a set period of time and there is a minimum benchmark interest rate that applies – currently 4.77% for 2022-23.
If the money is not paid back and there is not a loan agreement in place, the amount is treated as a deemed unfranked dividend and taxable at the taxpayer’s marginal tax rate.
Director ID regime
The recently introduced director ID regime prevents the use of false and fraudulent director identities.
All those who were directors on or before 31 October 2021 must now have a Director ID (30 November 2023 for directors of corporations under CATSI). Unregistered directors face criminal penalties of up to $16,500 and civil penalties of up to $ 1,375,000.
All incoming directors must have a director ID prior to their appointment as a director.
Before you roll-over your software…
Before rolling over your accounting software for the new financial year, make sure you:
- Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2023-24 year. Once rolled over, the software cannot be amended.
- Do not perform a Payroll Year End function until you are sure that your STP finalisation declaration is correct and printed. Always perform a payroll back-up before you roll over the year.
Employee reporting
Single touch payroll
For payments to employees through single touch payroll (STP), a finalisation declaration generally needs to be made by 14 July 2023. However, there are some exceptions to this.
If your business has 20 or more employees and some of them are closely held employees (relatives for example), then the finalisation declaration for the closely held employees needs to be made by 30 September.
If your business has 19 or fewer employees and they are only closely held employees, the finalisation declaration should be made by the due date for lodgement of the tax return of the relevant employee.
Employees will be able to access their Income Statement through their myGov account.
Closely held payees
Small employers (19 or fewer) are required to use STP for closely held payees from 1 July 2021. Payments to closely held payees can be reported through STP in one of three ways:
- Reporting actual payments in real time – reporting each payment to a closely held payee on or before each pay event (essentially using STP ‘as normal’).
- Reporting actual payments quarterly – lodging a quarterly STP statement detailing these payments for the quarter, with the statement due when the activity statement is due.
- Reporting a reasonable estimate quarterly – lodging a quarterly STP statement estimating reasonable year-to-date amounts paid to employees, with the statement due when the activity statement is due.
Small employers that have arm’s length employees must report STP information on or before each payday regardless of the method that is chosen for reporting payments to closely held payees.
If your business has closely held employees, it will be important to plan throughout the year to prevent problems occurring at year end.
Reportable Fringe Benefits
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount. This is referred to as a `Reportable Fringe Benefit Amount’ (RFBA).
Do you need to do a stocktake?
Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business.
If your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000. You will need to record how you determined the value of trading stock on hand.
If you do need to complete a stocktake, you can choose one of three methods to value trading stock:
- Cost price – all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.
- Market selling value – the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).
- Replacement value – the price of a substantially similar replacement item in a normal market on the last day of the income year.
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.
Reduce your risks & minimise your tax
Top tax tips
1. Declare dividends to pay any outstanding shareholder loan accounts
If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top-up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2023. It may be necessary for the company to declare dividends before 30 June 2022 to make these loan repayments.
The tax rules in this area can be extraordinarily complex and can lead to some very harsh tax outcomes. It is important to talk to us as soon as possible if you think your company has made payments or advanced funds to shareholders or related parties.
2. Directors’ fees and employee bonuses
Any expected directors’ fees and employee bonuses may be deductible for the 2022-23 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2023, even if the fee or bonus is paid to the employee or director after 30 June 2023.
You would generally be definitely committed to the payment by year-end if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end.
The accrued directors’ fees and bonuses need to be paid within a reasonable time period after year-end.
3. Write-off bad debts
To be a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
4. Review your asset register and scrap any obsolete plant
Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.
5. Bring forward repairs, consumables, trade gifts or donations
To claim a deduction for the 2022-23 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.
6. Pay June quarter employee super contributions now
Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2023. However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.
Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal or company sponsored contributions need to be received by the fund before 30 June to be deductible.
7. Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes.
8. Raise management fees between entities by June 30
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.
What we need from you
This is a general list of what to have ready when we next meet with you:
- Accounts data file (MYOB, Quickbooks, access to Xero)
- Debtors & creditors reconciliation
- Stocktake if applicable (or if your business is a Small Business Entity, use the simplified trading stock rules mentioned above)
- 30 June bank statements on all relevant loan documents
- Documents on new assets bought or sold, including the date you entered the contract and the date the asset was first used or installed ready for use
- Details of any grants or disaster loans received
- Details of any insurance payouts for your business or business premises
- Payroll reconciliation
- Superannuation reconciliation
- Cash book (if applicable)
- Details of any transactions involving cryptocurrency (e.g., Bitcoin)
- 30 June statements on any investment or operating accounts
And, if we are preparing your individual income tax return:
- Income Statement
- Tax statements of managed investment funds
- Interest income from banks and building societies
- Dividend statements for dividends received
- For share sales or purchases, the purchase and sale contract notes
- For real estate sales or purchases, the solicitor’s correspondence for the purchase and sale
- Rental property statements from real estate agent and details of other expenditure incurred
- Work related expenses
- Self-education expenses
- Travel expenses
- Donations to charities
- Health insurance and rebate entitlement
- Family Tax Benefits received
- Commonwealth assistance notices
- IAS statements or details of PAYG Instalments paid
- Details of any transactions involving cryptocurrency (e.g., Bitcoin)
- Details of any income derived from participating in the sharing economy (e.g., Uber driving, rent from AirBNB, jobs completed through Airtasker etc.,)