6 ESSENTIAL TAX PLANNING TIPS (2021)
- May 25, 2021
- Posted by: Tony Dimitriadis
- Category: Uncategorized
Our latest blog details 6 important strategies that you will find very useful going forward.
Tax planning must be based on sound commercial principles regardless of the tax advantages gained. If the transaction does not make sense commercially, the ATO will argue that the dominant purpose of the transaction was in fact to gain a tax benefit. This will put you at risk of penalty.
Essentially, tax planning is all about effectively managing your income and expenses. Here is a list of some strategies you should always consider when tax planning.
Category One – Income:
- Business income — If you derive business sales income, you may be able defer sales invoicing or bring forward sales invoicing (in appropriate circumstances).
- Accrued / unearned income — If you record accrued or unearned income in your accounts, you may be able to defer recognition of that income for tax purposes.
- Trade incentives — Discounts and other incentives on trading stock or services are typically brought to account in a different income year for tax as compared to accounting.
- Disputed amounts — It may be possible to defer the recognition of disputed income amounts until you have settled the dispute.
- Construction contracts — Where you enter into construction contracts that are not your trading stock, you may be able to utilise one of the different methods of income recognition allowed by the ATO for tax purposes.
- Insurance proceeds — If you received insurance proceeds, you should examine whether the proceeds are in fact assessable and when you need to bring the proceeds to account for tax purposes.
- Grants, bounties, subsidies — If you receive grants, bounties or subsidies, you should examine whether they are in fact assessable and when you need to bring the proceeds to account for tax purposes.
- Interest income — For interest received around year-end, examine the timing of interest income closely for tax purposes as interest is typically assessable on a receipts basis.
- Dividend income — Dividends accrued may not be assessable at year-end if they are only declared by not paid. Make sure you also take into account franking credits in your tax planning.
- Trust distributions — Year-end tax planning should take into account the expected tax distribution that you may receive from trusts (rather than the expected accounting / cash distribution amount).
- Rental / leasing income — Consider whether your rental income activities are passive (and therefore on a cash basis) or constitute a business (and therefore possibly on an accruals basis). This can have an effect on the timing of income brought to account.
- Personal services income — If you provide services through a trust or company, there is a risk that the income could be your personal services income and attributed to you. You should consider the personal services income rules appropriately before year-end.
- Extraordinary items — If you have received extraordinary (or significant) receipts during the year, these items must be examined closely from a tax perspective.
Category Two – Deductions:
- General rules — Consider all material expense items to determine whether there is any risk that certain items may not be deductible (e.g. they are of a capital nature). You should ensure an appropriate review of all such expenses to determine their deductibility and any opportunities that may exist for such expenses.
- Capital expenditure — If you have identified non-deductible capital expenditure, you should consider your ability to claim a blackhole deduction over five years or (alternatively) include the costs in your cost base of an asset.
- Bad debt deductions — If you have doubtful debts, you can possibly bring forward deductions if you are able to write those amounts off as bad debts for tax purposes before 30 June.
- Trading stock valuation — Where you hold trading stock, you can choose to value trading stock at year-end at cost, market selling value, replacement value or obsolete stock. This can have the effect of either bringing forward deductions or shifting the amounts to the following year.
- Depreciating assets — If you have depreciating assets, there are a number of options that allow you to accelerate depreciation claims for the current year.
- Internal labour costs — Where you internally construct assets, you may be required to capitalise labour costs for tax. This may defer deductions claimed (i.e. over the depreciable life of the asset).
- Employee bonuses — Consider whether your accrued employee bonus plan for 30 June can be treated as deductible for the current year by changing aspects (e.g. approval timing) of your plan.
- Exempt income deductions — If you derive exempt type income, a number of your expenses are likely to be non- deductible. This should be reviewed to determine the correct position.
- Gifts and donations — Review your deductions (or proposed deductions) for gifts and donations and their impact on your tax losses.
- Prepaid expenditure — There are still some opportunities for some prepayments to be fully deductible upfront if they: are made by individuals and small businesses; or represent excluded expenditure for all other taxpayers.
Category Three – Company loans/losses:
- Division 7A — You should review Division 7A before year-end to ensure that you do not inadvertently trigger a deemed unfranked dividend to a shareholder or associate for any loans, payments or debt forgiveness transactions provided by the company.
- Company losses — If you are utilising prior year tax losses, or have tax losses in the current year, you will need to consider the carry forward tax loss provisions.
- Share capital transactions — If your share capital account has moved for the current year, you should examine those movements very carefully. They may result in an unfranked dividend or untainting tax liabilities. You may be able to correct these if identified before year-end.
- Loss carry back tax offset — Eligible entities get the offset by choosing to carry back losses to earlier years in which there were income tax liabilities.
- PAYG instalments — Determine whether the PAYG instalment for the fourth quarter for 30 June can be varied.
- Director penalty regime — Ensure that you are up to date with super and PAYG payments and consider implementing control procedures dealing with the director penalty regime.
Category Four – Capital Gains:
- CGT General — Ensure that you have considered all contracts and capital receipts for the year to determine whether a capital gain or loss has occurred.
- Small business CGT concessions — Where you conduct a business (either directly or indirectly), consider your ability to reduce capital gains under the small business concessions.
- CGT discount — Consider whether assets disposed of were held for over 12 months and thus qualify for the CGT discount. If the amounts are material, you may need to review whether the ATO may treat the amounts as being on revenue account (and not eligible for the 50% discount).
- CGT exemptions and rollovers — Consider the many CGT exemptions and rollovers that may apply to reduce your capital gain or loss.
- Loan rationalisation and debt forgiveness — You may wish to consider rationalising inter-entity loans at year-end, to simplify loan arrangements and Division 7A However, consider the tax consequences that may occur on a loan rationalisation or debt forgiveness during the year.
- Interest deductibility — If you have significant interest or debt deduction costs during the year, you should closely consider whether you are precluded from deducting such amounts.
Category Five – Superannuation:
- Deductions for contributions — You may be able to claim a deduction for superannuation contributions by paying the amounts to the fund (i.e. received by the super fund) before year-end.
- Super guarantee — Ensure that you have complied with the superannuation guarantee requirements, especially for bonuses paid and payments made to contractors, consultants or members of the board who are not paid via the payroll.
- Contribution caps — Make sure you have complied with the annual concessional and non-concessional contribution caps.
- Personal contributions — Consider whether the individual is eligible to make a deductible concessional contribution before 30 June and ensure notice requirements are met within time.
- Excess contributions — When reviewing your superannuation strategy for year-end, carefully consider whether payments are within your contributions cap.
Category Six – GST:
- Accounting for GST on a cash or accruals basis — If you currently account for GST on a cash basis you should consider whether you still satisfy the eligibility requirements for cash basis accounting.
- GST adjustments for change in use — If you have changed the extent to which an acquisition or importation is used for a creditable purpose, you should consider whether a change in use adjustment is required in the BAS for the period ended 30 June.
- Reporting requirements for construction — If you are in the building and construction industry, you need to consider the reporting requirements for payments made to contractors before 30 June.
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