Tax Tips For Businesses
End of financial year is quickly coming up, so it's time for businesses to take stock, to ensure that companies operate tax effectively and ensure business finances are in order for the coming financial year.
1. Check eligibility for small business tax regime
Small business entities (SBEs), consisting of individuals, partnerships, companies and trusts with a turnover under $2 million may be eligible for a range of tax benefits, of which it cannot exceed.
While meeting the $2 million turnover test does automatically entitle a small business to certain concessions, additional tests apply in order to claim things such as small business CGT concessions.
2. Review salary sacrifice arrangements
Employees may wish to consider entering into tax-effective salary sacrifice arrangements under which gross salary may be foregone to obtain either a packaged car for fringe benefits tax purposes or to make additional superannuation contributions.
Subject to complex transitional rules, a 20 per cent flat rate applies in calculating a car fringe benefit under the statutory formula method regardless of how many kilometres the vehicle travels annually.
However, there may still be some tax savings in packaging a car under these rules compared to the cost of funding all your car expenses from your net salary.
In addition, employees who predominantly use the vehicle for work-related travel may be able to obtain tax savings associated in packaging a car by calculating the FBT paid on the car under the operating cost method rather than fund their car expenses from after-tax salary.
Salary sacrifice may also be an option for employees to forego gross salary for other fringe benefits for the nine0month period between 1 July 2104 and 31 March 2015, as it is proposed that the increase in the highest marginal tax rate to 49 per cent will only apply from 1 July 2014, whilst the fringe benefits tax rate will remain at 47 per cent up to 31 March 2015.
Advice should also be obtained from a CPA Australia registered tax agent as to whether such salary sacrifice arrangements would be tax effective.
3. Make trust resolutions by 30 June
Trustees of discretionary trusts are required to make and document resolutions as to how trust income for the 2013-14 year is to be distributed by June 30 at the latest.
Where a valid resolution is not executed by June 30, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal rate of 46.5 per cent regardless of circumstances.
A trustee must be able to evidence the making of an effective resolution in either draft minutes, file notes or an exchange of correspondence which has been documented before year end.
However, the trust’s accounts do not need to be prepared by 30 June. As a corporate trustee would need time to notify its directors that a meeting must be convened to pass and minute a resolution, such a notice should be sent out well before the 30 June deadline.
4. Stream trust capital gains and franked dividends
Trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries where the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts, and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
The balance of the trust’s taxable income excluding such gains and dividends will be proportionally assessed to beneficiaries to the extent to which the trustee has made the beneficiaries presently entitled to a share of trust income.
The trustee will therefore only be assessed on the trust’s taxable income at a rate of 46.5 per cent to the extent to which beneficiaries are neither presently entitled to trust income or specifically entitled to a capital gain or franked dividend. These streaming rules are complex and taxpayers should consult their CPA Australia registered tax agent if they require advice on how these rules work.
5. Private company rules
The ATO can potentially treat a payment or a loan by a private company to a shareholder or an associate (such as a family member) as an unfranked deemed dividend under Division 7A – unless an exemption applies or a formal loan agreement is in place requiring minimum interest and principal repayments.
There are various things a private company can do before the due date of lodgment for its 2013-14 income tax return to minimise the risk of a shareholder or an associate deriving a deemed dividend for the 2013-14 tax year. Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return’s due date of lodgment.
You should consult your CPA Australia registered tax agent if you believe such a deemed dividend has arisen for the year ended 30 June 2014.
6. Prevent deemed dividends in respect of unpaid trust distributions
Broadly, an unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2013 will be treated as a loan by the company where the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in the 2013-14 tax year.
In these circumstances a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the due date of lodgement of the company’s 2014 income tax return. Alternatively, a deemed dividend will not rise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company and certain other conditions are satisfied.
Trustees and beneficiaries should consult their CPA Australia registered tax agent on the full implications of these complex rules if applicable.
7. Write off bad debts
Businesses can only obtain income tax deductions for bad debts where various conditions are met.
A deduction will only be available where the debt is still in existence at the time it is written-off. Thus, if the debt is forgiven or compromised before it is written-off as bad in the accounts no deduction will be available.
Moreover, the debt must be effectively irrecoverable and written-off in the accounts as bad in the year in which the deduction is claimed. The amount representing the bad debt must also have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money lending business. Certain additional requirements must be met where the creditor is either a company or trust.
8. Maximise depreciation deductions
A taxpayer that is an eligible small business entity (SBE) may elect to claim tax depreciation deductions for most depreciating assets on a simpler and more concessional basis than other business taxpayers.
An SBE can claim an immediate deduction for a depreciating asset whose GST-exclusive cost is less than $6,500 in the 2013-14 year to the extent it is used or installed ready for use for an income-producing purpose by 31 December 2013.
Thereafter, the Federal Government has proposed that an SBE will only be able to claim an immediate deduction for a depreciating asset whose GST exclusive cost is less than $1,000 which is used or installed ready for use from 1 January 2014 to the extent that the asset is used for a taxable purpose.
It is important to note that the proposed reduction in the threshold for the immediate write-off of depreciating assets from less than $6,500 to less than $1,000 has not yet become law. Accordingly, businesses impacted by this proposed change should consult their CPA Australia registered tax agent on the application of the immediate deductibility rules applicable to depreciating assets which are installed ready for use on or after 1 January 2014.
Conversely, a depreciating asset which is not immediately deductible will be automatically depreciated at a flat rate of 15 per cent in the year of acquisition to the extent the asset is used for income producing purposes and it is used or installed ready for use by 30 June 2014. This will be the case regardless of the date the asset was acquired during the year. Thereafter the adjustable value of such an asset can be depreciated on that basis at 30 per cent in subsequent years.
For example, where a depreciating asset costing $10,000 (excluding GST) is acquired on 29 June 2014 a deduction for the decline in value of the asset of $1,500 is available in the 2013-14 year where the asset is used or installed ready for use by 30 June 2014 and it is fully used to derive business income. Thereafter, a deduction for the $2,550 can be claimed in the 2104-15 year being 30 per cent of the $8,500 tax written down value of the asset if it is fully used to derive assessable income.
9. Claim an immediate deduction for work car purchases
An eligible SBE can claim an immediate deduction for the purchase of a vehicle if its GST excluded cost is less than $6,500 and it was used or installed ready for use by 31 December 2014 to the extent it is used for income producing purposes.
Also where the car’s GST exclusive cost is $6,500 or more and it was purchased prior to 1 January 2014, an immediate deduction of $5,000 plus 15 per cent of the balance of the cost can be claimed in the year of acquisition to the extent the car is used for income producing purposes and it is used or installed ready for use by 31 December 2013. In subsequent years, the car can be depreciated at a rate of 30 per cent to the extent it is used to derive assessable income.
This concession does not apply to tractors, graders, road rollers, combine harvesters, trailers and earthmoving vehicles.
It is important to note that the proposed removal of this concessional deduction for motor vehicles costing more than $6,500 from 1 January 2014 has yet to be legislated. Businesses impacted by this proposed change should therefore consult their CPA Australia registered tax agent in respect of the tax depreciation of any car acquired for business purposes which is installed ready for use on or after 1 January 2014.