As we are fast approaching the end of the financial year, it is worth recapping some of the common tax saving tips:
1. Superannuation
The superannuation contribution for self-employed and employees for the April to June 2020 quarter is not due for payment until 28 July 2020. However, given the deductibility of super is on a cash basis, it might be worth making the payment before 30 June 2020 so that the deduction can be claimed in the current financial year.
Another strategy that tax payers with their own self-managed super funds can use is the contribution reserving strategy. This strategy allows for a deduction to be claimed in the year the contribution is received by the SMSF, whereas the contribution won’t be allocated to the members’ accounts and count towards the members’ annual contribution caps until the following financial year. It is ideal for the situation where the tax payer’s taxable income is quite high in the current year and therefore a greater deduction is needed (for example where a once off capital gain is made), but a reduction in income is expected in the following income year.
For this strategy to work, the following should be noted:
The contribution must be allocated to the members’ accounts in the super fund within 28 days of receiving and the deed must allow for it
There should be a trustee’s resolution documenting the decision to allocate contribution at a later date
In the case of concessional contribution, the fund must notify the ATO by lodging “Request to Adjust Concessional Contributions” (NAT74851); the trustee of the fund should also write to the ATO in the case of non-concessional contribution so that the ATO won’t treat the extra contribution as excess contribution.
2. Prepaid Expenses
A payment for an expense is usually only deductible when incurred. For example, a payment made on 1 January 2020 for insurance premium that covers the period 1 January 2020 to 31 December 2020 can only be claimed progressively each month until 31 December 2020.
However, small businesses have the concession to claim prepayments in full when paid, provided that:
The period covered by the prepayment does not exceed 12 months, and
The period ends in the next financial year
As a result, a small business can claim most prepayments in full in the current financial year if paid by 30 June.
3. Review Accounts Receivable
Year end is a good time to review your debtors and write off any bad debt as a deduction. Given the negative impact on business operation due to COVID-19, the level of bad debt is expected to increase. One of the conditions to claim bad debt as a deduction is that the bad debt must be written off and documented in the year deduction is claimed. In other words, if there is any bad debt to be claimed in the 2020 financial year, it must be documented by 30 June 2020.
4. Review Stock on Hand
Stock on hand should also be reviewed as part of the year end stocktaking process. Again, stock may be moving slower than usual in the current situation due to business closure or decrease in revenue. It is important to make sure damaged and obsolete stock is written off.
5. Small Business Instant Asset Write-off
In light of the current COVID-19 situation, the ATO has temporarily increased the small business asset instant write-off threshold. It allows businesses with turnover of less than $500 million to fully write-off an asset that costs $150,000 or less, and is purchased and first used between 12 March 2020 and 30 June 2020. So if there are any major assets that you have been planning to purchase, such as a motor vehicle, this is the time.
Based on the current legislation, from 1 July 2020, the instant asset write-off will only be available for small businesses with a turnover of less than $10 million and the threshold will be reduced to $1,000. However, the government is talking about extending the higher threshold until 31 December 2020, but it is yet to be legislated.
6. Main Residence Exemption Removed for Foreigners
New legislation has passed to disallow tax payers to claim the main residence exemption on the sale of their Australian home if at the time of sale the tax payer is a non-resident for tax purpose. The new legislation is relevant especially for tax payers who had been a resident while using the property as their main residence however ceased to be a resident later on. Unless the life event test is satisfied, the main residence exemption will be denied for:
Properties purchased after 9 May 2017, and
Properties purchased before 9 May 2017 and sold after 30 June 2020
If your property was purchased before 9 May 2017 and you satisfy other conditions of the main residence exemption, you will have until 30 June 2020 to dispose the property to claim the exemption.
Note that if you have never been an Australian resident for tax purpose, it is unlikely that you will satisfy other conditions to claim the main residence exemption.
7. Discretionary Trust Distribution Resolution
Almost all discretionary trust deeds require an income distribution resolution be done by 30 June each year. Failing to do so may result in the trust net income to be either accumulated in the trust or distributed to a default beneficiary (depending on the deed), which might not be the most desired result.
Drafting the distribution resolution will require an overall review of the group’s tax position for the current financial year. As much as it sounds like an administrative burden, it can prove to be a beneficial tax planning exercise.
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