Small business owners often interact with the ATO and their tax agent throughout the year. Tax time provides an added opportunity to ensure your tax affairs are in order, obtain essential tax advice and see if you can improve your tax position.
You should obtain professional tax advice, especially in areas where more complex tax issues arise.
This includes refinanced debt, losses, restructures, capital gains tax, personal services income, trust declarations and distributions, and private company loans.
If you are seeking advice, have made errors or need to correct your business records, speak with a CPA Australia-registered tax agent who can work with you to get things right.
Getting the basics right has never been more important – good record keeping, substantiation, correct account codes, properly accounting for private use and declaring all cash transactions are essential to assure yourself, your tax agent and the ATO that your tax affairs are in order.
Small businesses must ensure their bookkeeping and lodgments are correct and up to date. The onus is on business owners to correctly report their income, claim their expenses and have the appropriate records.
When keeping your records, make sure to:
- record cash income and expenses
- account for personal drawings and use of company money or assets
- record goods for your own use
- separate private expenses from business expenses
- keep valid tax invoices for creditable acquisitions when registered for GST
- keep adequate stock records
- keep adequate records to substantiate motor vehicle claims.
The ATO is getting smarter with its data, and business owners are increasingly being contacted regarding their income and expense claims.
The ATO will look for discrepancies in returns when compared against pre-fill data or business benchmarks, and has increased resources to deal with the cash economy.
Contact the ATO to rectify any errors or mistakes. If you make a voluntary disclosure, you can generally expect a reduction in the administrative penalties and interest charges that would normally apply.
Your tax agent is required to take reasonable care when preparing your return, which means they may ask you detailed questions about your cashflow, business performance, personal use of assets and records.
JobKeeper payments are assessable as ordinary income. You can claim deductions for the wage payments, including amounts subsidised by JobKeeper, you made to employees.
Ensure that your reporting and documentation are correct. You must keep this information for five years after the payment was made.
Cash flow boost
Check that you have correctly received cash flow boost amounts. Cash flow boost payments are classified as non-assessable, non-exempt income so no tax will be payable.
The cash flow boost is not subject to GST and you are still entitled to a deduction for PAYG withholding paid.
If you distribute the cash flow boost from the business to another entity (for example, making a trust distribution or paying a dividend to shareholders) there may be tax consequences for the recipient.
Covid-19 and disaster payments
Many businesses received COVID-19 or other disaster-related support from government during the year.
Unless there is a specific exception, government payments to assist a business to continue operating are assessable. This includes assistance provided as a one-off lump sum or a series of payments.
The ATO has published information on the tax treatment of a range of federal, state, territory and local government assistance packages. You should also check the tax treatment of disaster assistance payments.
If you use an assistance payment to purchase items for your business, the normal conditions for deductibility apply. The fact that money from a relief fund is used to purchase an item doesn't affect the deductibility of that item.
Personal services income rules
Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. It commonly includes medical practitioners, construction workers, financial professionals and IT consultants.
The PSI rules are designed to ensure you can’t reduce or defer your income tax by diverting income received from your personal services by using companies, partnerships or trusts.
You need to check whether the PSI rules apply or whether you’re running a personal services business (PSB). If more than one individual is generating PSI through an entity such as a company, partnership or trust, you'll need to work through the steps separately for each individual.
Many businesses make mistakes with the PSI rules. This is hardly surprising given their complexity and the fact that their applicability can change from contract to contract.
The tax laws that apply to investment and financial activity undertaken in a conventional manner (for example, buying goods and services, buying shares, lending money) apply in the same way to investment and financial activity conducted under crowdfunding.
Optimise depreciation deductions
There are several ways you can depreciate your assets. The Federal Government introduced and has extended the instant asset write-off, temporary full expensing and backing business investment measures as part of its COVID-19 economic stimulus packages.
The ATO provides information on the interaction of the various tax depreciation incentives introduced by the government to help businesses.
Many businesses use the simplified depreciation rules which include the instant asset write-off and the general small business pool. Under temporary full expensing, you deduct the balance of the small business pool at the end of the income years ending between 6 October 2020 and 30 June 2022. The methods are discussed in more detail below.
The instant asset write-off and temporary full expensing deduction methods are not available for all assets. In such cases, the asset will be allocated to the general small business pool and depreciated at the appropriate rate, depending on if it is eligible for accelerated depreciation.
Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.
If you purchase a car for your business, the depreciation amount is limited to the business portion of the car limit of $59,136 for the 2020–21 income tax year. You cannot claim the excess cost of the car under any other depreciation rules.
Instant asset write-off
The instant asset write-off is available for:
- assets first used or installed ready for use from 12 March 2020 until 30 June 2021 and purchased by 31 December 2020
- assets costing up to $150,000 (up from $30,000)
- businesses with an aggregated turnover of less than $500 million (up from $50 million).
The instant asset write-off can be used for multiple assets, if the cost of each individual asset is less than the relevant threshold, and new and second-hand assets.
Temporary full expensing
The eligible assets must be first held, and first used or installed ready for use for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
Businesses can also immediately deduct the business portion of the cost of improvements to eligible depreciating assets (and to assets acquired before 7.30pm AEDT on 6 October 2020 that would otherwise be eligible assets) if those costs are incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
You can make a choice to opt-out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules.
If you are a small business that chooses to use the simplified depreciation rules, you apply the temporary full expensing rules with some modifications. This includes deducting the balance of your small business pool at the end of an income year ending between 6 October 2020 and 30 June 2022.
If you pay staff bonuses and you want to bring expenses into the 2020–21 year, ensure they are quantified and documented in a properly authorised resolution (e.g. in board minutes).
This must be done prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.
Many small businesses use the simpler trading stock rules as the value of their trading stock doesn’t vary by more than $5,000 a year. However, COVID-19 has affected the sales last year and consequently the inventory levels of some businesses reduced quite significantly and the market selling value or replacement value basis may be more tax-effective.
Where COVID-19 has materially reduced the market value of trading stock below its cost, such as for obsolete stock, this may result in your closing stock being valued at an amount less than cost and will generate an allowable deduction.
Write off bad debts
Businesses can claim a deduction for bad debts when various conditions are met. Examples include where the debtor cannot be traced, the debtor is in liquidation or receivership, there are insufficient funds or assets to satisfy the debt or there is little or no likelihood of the debt being recovered.
A deduction will only be available if the debt still exists at the time it is written off. If the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.
Certain additional requirements must be met where the creditor is either a company or trust. Special rules apply for private companies with debts related to shareholders or an associate of a shareholder.
Company tax rate
Most companies with an aggregated annual turnover of less than $50 million will pay tax at 26 per cent in 2020–21. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments, such as rental income or interest income.
These differential rates create a number of complexities for companies.
To qualify for the lower (base rate entity) tax rate:
- a company must have an aggregated turnover of less than $50 million where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity, and
- no more than 80 per cent of their assessable income is base rate entity passive income.
The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate.
In line with the changes to company tax rates, there have also been changes to the franking rules, which affects the allocation of franking credits.
Loss carry back tax offset
Eligible companies with a taxable loss may be able to claim the loss carry back tax offset.
In particular, eligible companies that find themselves in a taxable loss position due to the instant asset write off or temporary full expensing rules could use the loss carry back tax offset instead of carrying forward the losses to future years.
The offset effectively represents the tax an eligible company would save if it was able to deduct the loss in the earlier year using the loss year tax rate.
As it is a refundable tax offset, it may result in a cash refund, a reduced tax liability or a reduction of a debt owing to the ATO. The eligible company does not need to amend the earlier income years to claim the offset.
The amount of tax offset available is limited to your franking account surplus on the last day of the income year for which you claim it. The ATO will be checking franking accounts to ensure the offset is claimed correctly.
Businesses may find themselves in a taxable loss position or seek to use prior-year losses when their business performance changes.
Companies are subject to rules such as same majority ownership and control, same business test or similar business test.
We recommend seeking professional advice on issues like the loss tests, loss carry back tax offset, the effect of capital injections on continuity of ownership tests and unrealised losses from reductions in asset values.
In addition to the more widely available CGT concessions, small businesses can access the following specific concessions:
- 15 year-exemption
- 50 per cent active asset reduction
- retirement exemption
- restructure rollover.
You can apply as many concessions as you're entitled to until the capital gain is reduced to nil. There are rules about the order in which you apply the concessions, any current year or prior year capital losses, and the CGT discount.
The rules are complex and getting it wrong can be costly, so we recommend seeking advice before restructuring or disposing of assets and ensure your business structure is designed to take advantage of the available concessions.
PAYG instalment indexation suspended
Some businesses that reduced their instalment amounts during the year may receive a larger than expected tax bill. The ATO offers a range of payment plans to assist.
There are rules around taking money out of your business or using its money or assets for yourself and your family. This is often done by:
- payments of salary, wages or directors’ fees – withholding, superannuation and payroll reporting requirements for the company
- provision of fringe benefits – the company pays fringe benefits tax
- repayments of a loan to the company
- dividends – a profit distribution that may include franking credits
- company loans.
The private use of company money or assets is a focus area for the ATO and the consequences of getting it wrong can be costly.
A payment or other benefit provided by a private company to a shareholder or their associate can be treated as a dividend for income tax purposes under Division 7A.
The income tax laws may treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:
- a payment or a loan by a private company to a shareholder or an associate (like a family member)
- the forgiveness of a shareholder’s or associate’s debt
- the use of a company asset by a shareholder or their associate, or
- the transfer of a company asset to a shareholder or their associate.
The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term. This may be seven or 25 years, depending on whether the loan is secured.
There are various things a private company can do before its 2020–21 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.
Division 7A also applies to certain benefits provided to shareholders or their associates from trusts where a private company has an unpaid present entitlement (UPE) to the profits of the trust.
Prepare trust resolutions by 30 June
As always, trustees of discretionary trusts are required to prepare and document resolutions on how trust income should be distributed to beneficiaries for the 2020–21 financial year by 30 June.
If a valid resolution is not executed by 30 June, 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).
Alternatively, the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.
A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust's accounts do not need to be prepared by 30 June.
As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.
Streaming capital gains and franked dividends
The streaming rules are complex but, generally, the trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts.
The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
Prevent deemed dividends
An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company, if 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 unpaid trust distribution in 2020–21.
However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company's 2020–21 income tax return needs to be lodged.
Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.
If a beneficiary’s entitlement arises out of a reimbursement agreement, the net income that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed to the trustee at the top marginal tax rate.
The exception is where the agreement is part of an ordinary family or commercial dealing or the beneficiary is under a legal disability (e.g. a minor), so make sure that any reimbursement agreements satisfy legal requirements.
Single Touch Payroll
Employers need to make a finalisation declaration by 14 July 2021 so that employees can access their tax-ready income statements.
Before finalising, make sure the STP information is correct and apply for a deferral if you need more time.
Ensure superannuation guarantee payments for employees are up-to-date. Employers can claim deductions for superannuation contributions made on behalf of their employees in the financial year they are received by the nominated super funds by 30 June.
Report and rectify any missed payments to the ATO. If you do not pay an employee's super guarantee on time and to the right fund, you must lodge a superannuation guarantee charge (SGC) statement and pay the SGC to the ATO.
The ATO has limited discretion in relation to overpayments, which can be exercised in certain circumstances.
The SGC is not tax-deductible and there are significant administrative charges, fees and penalties. It’s therefore important to ensure that you’re paying superannuation guarantee correctly throughout the year.
Taxable payments reporting system
Does your business earn income from building and construction, cleaning, courier, road freight, IT, security, investigation or surveillance services? If so, you may need to lodge a taxable payments annual report by 30 August 2021 to report payments made to contractors.
The details you need to report are generally contained in the contractors’ invoices and include ABN, name, address and total amounts paid for the financial year.
When you do a tax return for your business, your tax agent will often do a reconciliation against your GST accounts. This can identify misclassified transactions or unclaimed credits which will need to be fixed.
Many mistakes relating to GST and fuel tax credit can be corrected in your next BAS. If you can't correct your mistake in your next BAS, you need to lodge a revision.
It’s also an opportunity to ensure that your accounting software is correctly recording your GST transactions.
The ATO has worksheets to assist in calculating GST adjustments for sales, purchases, bad debts, creditable purpose and adjustments summary.
Businesses in financial distress
There are tax obligations to consider when deregistering a company and the ATO provides information for businesses in financial difficulty.
Individuals facing serious financial hardship can apply for release from their tax debts.
If you think your business is in financial difficulty, it is critical to get proper accounting and legal advice as early as possible.
Farm management deposits (FMDS)
One of the best tax planning measures available to primary producers is utilising the farm management deposits scheme (FMDs). They are an effective business and cash flow planning tool.
Primary producers can deposit up to $800,000 in an FMD account, and can then have early access to their FMD account during times of drought. They may be able to offset the interest costs on primary production business debt.
Tax averaging enables primary producers to even out their income and tax payable over a maximum of five years to allow for good and bad years.
This ensures that farmers don't pay more tax over time than taxpayers on comparable but steady incomes.
Other primary producer tax concessions
Other tax concessions you may be entitled to as a primary producer include:
- the uncapped immediate write-off for capital expenditure on water facilities and fencing assets
- the deduction for the full cost of a fodder storage asset if the expense was incurred or it was first used or installed ready for use on or after 19 August 2018
- the outright deduction for capital expenditure for land care operations and carbon sink forests
- the accelerated write-off for horticultural plants and grapevines.
Are you an employee, contractor, investor, in business or lodging your first tax return? Check out our tax tips for 2021
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