Tax time is always an important time for businesses and individuals, but this year it is more important than ever. COVID-19 has truly created unprecedented and uncertain situations for everyone. Which is why it is more important than ever to claim the right deductions this tax time. We are releasing key information on a range of issues to consider with tax deductions this financial year to make tax time easier for everyone.
Here’s a few final reminders about ways to reduce your tax for 2020:
- Write-off Bad Debts in your accounting / computer system before 30 June 2020.
- Write-off any trading stock that is damaged or obsolete.
- Review your Asset Register and scrap any obsolete plant and equipment.
- Pay for marketing materials, repairs, consumables, office stationery, and donations before 30 June 2020.
- Ensure employee superannuation contributions are made (and received by your employees’ superannuation fund/s) by 30 June 2020 to allow a tax deduction this financial year.
- Realise any capital losses you have before 30 June 2020 to offset against any capital gains you may have made.
Below is more detailed commentary and information that businesses should keep in mind this financial year in relation to tax deductions.
The most common type of super contribution regularly going into your employees’ accounts is likely their Superannuation Guarantee or SG. This is the contribution you are required to pay, large or small, on the behalf of your employees.
If you do not pay the required SG into your employees’ super accounts by 30 June 2020 – you will not be able to claim the unpaid portion of superannuation as a tax deduction.
Instant Asset Write-Off
There is a small window still available to take advantage of the recently increased $150,000 instant asset write-off. Small and medium businesses can now write-off eligible assets up to $150,000 each. This has been extended to 31 December 2020 however to get a tax deduction for 30 June 2020, time is limited but in some cases (if funds are available) it still possible to get a big tax deduction. It is important to investigate whether your assets are eligible for the deduction in this financial year or next financial year. The asset must be first used or installed ready for use by 30 June 2020 to claim a deduction this year.
WARNING on cars – the maximum deduction available for cars is the Depreciation Cost Limit as set by the ATO. This is currently $57,581 so don’t be fooled that you can buy a $150,000 car and get a full tax deduction. The maximum GST credit available on car purchases is limited to $5,234.
While this is subject to any Government announcements, we expect the instant asset write-off threshold will drop from $150,000 to $1,000 (and will revert to small businesses with a turnover up to $10 million) from 1 January 2021.
We do not like it but sometimes money owed to you just does not get paid. If you exhausted all avenues to collect the debt and you will not receive it, then it is likely a a bad debt. You can claim a deduction for bad debts, however you need to write it off. This means making the adjustment in your accounting records. To write off a bad debt, you need to remove the amount in your accounts receivable balance. This must be done by the 30 June 2020.
Franking credits may be refunded to you if they exceed the personal amount of tax you have to pay. This is a refund of excess franking credits. You may also receive a refund of the full amount of franking credits received even if you don’t usually lodge a tax return. At the moment, the corporate tax rate for imputation is 27.5%, which means you can frank your distributions based on this rate. After 1st July, 2020 this rate will drop to 26%.
An opportunity arises now where it is relevant to receive more franking credits and possible refunds, before 1 July 2020.
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.
Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2020 at the latest. Decisions made by the trustees should be documented in writing, preferably by 30 June 2020.
If valid resolutions are not in place by 30 June 2020, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).
Another benefit of resoling before 30 June how to distribute trust income is that you may be able to income split and lower the tax burden. Doing so now could result in significant tax savings later on.
Payroll Tax and Workcover
There has been a number of payroll tax relief measures to alleviate the impacts of COVID-19. Businesses with annual Victorian taxable wages up to $3million will have their payroll tax for the 2019-2020 financial year waived. Eligible businesses can also claim an emergency tax relief refund of payroll tax already paid in the 2019-2020 year, if it was paid via PTX Express.
The Victorian Government has also announced that any additional payments made to bridge the gap between your employee’s normal wage and the $1,500 a fortnight required for JobKeeper are now exempt from payroll tax and Work Cover premiums.
In general, government credits, grants, bounties, subsidies, and grants are considered assessable income of the recipient if it is received or in relation to the carrying on of a business. This also generally includes amounts of a capital nature. If you have received credits or grants during the COVID-19 crisis, MKS will help you manage the assessment.
To help relieve the stress of COVID-19 eligible employers will receive between $20,000 and $100,000 in cash flow boost amounts by lodging their activity statements up to the month or quarter of September, 2020. This income is non-assessable to businesses.
The JobKeeper subsidy was introduced to help those businesses affected by COVID-19. Eligible Employers participating in the scheme then nominate all the employees which the employer is entitled to claim for. JobKeeper payments received by an employer will be included in the employer’s assessable income as wage subsidies.
Deferral of Income
Businesses can legal reduce tax in certain circumstances by deferring income into the next financial year. This could be either a sale or receipt of income. Depending on your circumstances, this could result in signifcant tax savings.
If you have business loans and you have sufficient funds, you could prepay interest on these loans and get a tax deduction. You will need to be quick and reach out to your bank to determine if your loan is eligible for prepayment of interest.