11 essential action items for business owners before EOFY (End of Financial Year)

Depreciation

Do you turnover less than $10million per year? We have some GREAT news for you, you can get an immediate tax deduction for most assets purchased before 30 June 2020 that cost less than $150,000. This means that now is the perfect time to get that asset you have been needing (shopping spree time!). Remember that the asset has to be ready for use before 30 June 2020 and must be used for income-producing purposes. It’s a great opportunity to purchase a new computer, printer, welder, trailer or another asset under $150k. If your business is registered for GST the $150,000 limit is GST exclusive, otherwise it is GST inclusive.

If the asset you need to purchase (or have purchased) is valued at over $150,000, it is not immediately deductible, but depreciated over a number of years in line with tax law.

Professional fees for starting your business

Changes to Australia’s tax laws back in 2018 mean that any professional expenses (such as accounting and legal fees) you incurred to start a new business in the 2020/21 financial year are now immediately deductible. In previous years, these expenses were deductible over a five year period.

Is it time to change your legal structure?

Is it time to change your legal structure? Could a different structure save you tax? Did you know that a small business can change its legal structure without gaining any income tax liability when the business assets are transferred from on entity to another. When changing legal structure things like CGT assets, trading stock, revenue assets and depreciating assets can also be rolled over to the new entity.

Employee Bonuses

Want staff bonuses to be expenses in the 2020/21 financial year? Ensure they are finalised by 30 June, this will mean the amount of bonus is finalised and any authorised are also completed prior to the end of financial year. This will allow the business to claim a deduction even if the payments are not made until after 1 July 2020.

Write off your bad debts.

Have some bad/unpaid debts owed to you?  In some cases these should be written off and become  tax deductions before the end of the financial year. This is only possible if the debt still exists at the time it was written off, meaning it is not possible to claim a tax deduction if the debt is forgiven or compromised before it is written off as bad in your accounts. It is also key that the debt is unrecoverable and written off in the accounts the same financial year as the deduction is claimed. Finally the bad debt must have been accounted for as assessable income or lent in the ordinary course of carrying out money lending. If the creditor is a company or a trust other requirements must also be met.

Finalise superannuation entitlements

Are you employees entitled to superannuation? Are you able to pay your June superannuation contributions prior to 30 June? Superannuation contributions are only tax deductible once they are paid. This means that if you pay prior to June 30 your contributions will be deductible in the current year, reducing your taxable income.

Beware of the “tax effective” investment ploys

Around this May/ June each year we see a massive influx of advertising and promotion for products that are said to be tax effective. Often the advertising of these can be very convincing. Unfortunately, the reality is often quite different and many bear the brunt of large tax bills or even tax pentalties. For honest advice on tax effective investments contact a qualified accountant and tax agent.

Check your company tax rate

Is your business a company with turnover less than $25 million? You will generally being paying tax at a rate of 27.5% for the 2017/18 financial year. Tax laws currently state that if you have turnover of less than $25million and are “carrying on business” you qualify for the lower 27.5% rate. For companies that earn most of their income from passive sources such as from rental properties or bank interest the tax rate will continue to be 30%. It is important to understand that companies paying the reduced 27.5% tax rate can only frank dividends up to that rate.

Review loans

Does your company have loans? Company loans have a number of tax implications, which are important to understand before 30 June. Did you know that unless an exemption applies the following could be seen by the ATO as a unfranked dividend?

• A Payment or a loan by a private company to a shareholder or an associate (including a family member)
• Use of a company asset by a shareholder or their associate
• Waiving of a shareholder’s debt
• Transfer of a company asset to a shareholder

To reduce the risk of the ATO seeing the above as a form of dividend, a written loan agreement requiring minimal interest or principal repayment is a great idea

Finish trust resolutions

Do you have a discretionary trust? You will need to decide on how the income from the trust will be distributed to the beneficiaries of the trust for the 2019/20 financial year prior to 30 June. The decisions need to be properly documented as resolutions. Failing to create these resolutions by 30 June 2020 may mean any default beneficiaries are subject to taxation even if they do not receive a cent in cash distribution. Another consequence of not documenting the resolutions by 30 June is the trustee being assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust. This means you save big tax $$$ being organised pre June 30.

To create a resolution meeting minutes, file notes or correspondence such as emails or letters need to be documented before 30 June. Just keep in mind, if you have a corporate trustee you may need to allow additional time for a directors meeting to be called to pass and record the resolutions.

Unpaid trust distributions

Do you have unpaid trust distributions that are owed to a related company? Did they occur after the 2015/16 financial year? The ATO can treat these as a loan if the company is controlled by the same family group. The trust can then be assessed as deriving a deemed dividend from the unpaid distribution in 2017/18. To prevent this occurring it is essential that any distributions are paid out or a loan agreement is created before the income tax returns are lodged. This type of deemed dividend can also be avoided if there is an eligible sub-trust agreement in place for the sole benefit of a private company.