12 tax tips for businesses, as we approach year end in the GHC

1. Make and document your trust commitments

Each year, before 30 June, the trustees of discretionary trusts are required to make and document their resolutions on how the income from the trust is to be distributed to its trustees.

Be sure to hold trustee meetings to plan distributions in advance of the end of financial year.

If a valid resolution is not executed by the year’s end, any default beneficiaries become entitled to the trust’s income and are subject to tax. For any income that is derived, but not distributed by the trust, the trust will be assessed at the highest marginal tax rate on this income.

2. Pay franked dividends

Companies can pay dividends from retained profits and pass on the benefit of franking credits to shareholders.

Companies that paid tax at 30% in 2019, and will pay tax at 27.5% in 2020, pay franked dividends to benefit from 30% franking credits.

As the rate of franking in 2020 is based on the 2019 tax rate, companies that paid tax at 30% in 2019 should consider paying dividends franked at 30% before 30 June 2020, if they will pay tax in the current year at 27.5%. This may be a one-off opportunity to use brought forward 30% franking balances as the company tax rate reduces to 25% over the next few years.

3. Pay superannuation guarantee contributions

Employers are required to pay 9.5% Superannuation Guarantee contributions on employees wages. These contributions are tax deductible for the employer.

To claim a tax deduction, employers must physically pay the Superannuation Guarantee contributions by the quarterly due date. No deduction is available even if just one day late, and the ATO may impose an additional Superannuation Guarantee Charge and penalties if contributions are paid after the deadline.

4. Take advantage of the increased instant asset write-off

Businesses with an aggregated turnover of less than $500m can now write-off the cost of new capital assets (not capital works) that do not individually exceed $150,000, if purchased between 12 March 2020 and 30 June 2020.

Businesses normally depreciate capital asset rates determined by the ATO, which can spread the tax benefit out over a long period. By advancing asset purchases to 30 June 2020, businesses can use the $150,000 instant asset write-off to accelerate the tax relief by reducing their 2020 taxable income.

5. Check ownership structure if using losses

Broadly, tax losses brought forward can generally only be used against current profits if the business is owned by the same entities that made the losses.

Check ownership changes if planning to use brought forward losses in companies or trusts.

Using tax losses in the current or subsequent tax years means making sure control or ownership changes in loss making entities are reviewed before tax returns are lodged. If control changes can be deferred past 30 June 2020, this may ensure losses can be used in later years and are not lost.

6. Approve and evidence directors’ bonuses and fees

Companies paying bonuses and/or directors’ fees can claim a tax deduction.

Approve directors’ bonuses and/or fees, and ensure they are evidenced in Board minutes.

For a company to claim a tax deduction for directors’ bonuses and/or fees, it must show it has definitively committed to paying or making available those amounts to the particular director by 30 June 2020 and has met company law requirements authorising those payments. Accruing the amounts in the accounts is not enough. The director will then be taxed on the bonus/fees in the 2020 income year.

7. Write off bad debts

Businesses can claim a tax deduction for debts proven to be bad, and claim repayment of GST.

Write off bad debts and keep evidence to show they are irrecoverable, then claim back GST if the BAS is prepared on accruals basis.

For normal trading businesses (not in the business of money lending) a bad debt deduction can be claimed if they can show that the debt is irrecoverable and it was included in assessable income. Evidence should be kept to show action to recover the debt and why it is reasonable to conclude it is irrecoverable, and the accounting records updated to write it off before 30 June 2020. A non-cash basis BAS can be adjusted for the bad debt write-off or for debts overdue for 12 months or more.

8. Complete a stocktake

Businesses should review the amount and value of stock on hand prior to the year end.

Scrap obsolete trading stock and revalue stock on hand at lower of cost, market value or replacement price.

Obsolete or worthless stock can be written down to amount lower than cost, market value or replacement price if a trading stock election is made for tax purposes. The write down can be claimed as a tax deduction if done before 30 June 2020.

9. Pay principal and interest payments on company loans

Loans to shareholders and their associates in a private company should have a complying loan agreement in place to avoid it being treated as a deemed dividend.

Pay principal and interest payments on Div 7A loans by 30 June 2020.

Loans made by private companies to shareholders and associates outstanding at 30 June are treated as deemed dividends if a complying loan agreement is not put in place by tax return lodgement. The minimum payment of interest and principle must be made by the following 30 June to avoid it being treated as a deemed dividend.

10. Forecast turnover for the next quarter to assess JobKeeper eligibility

Businesses that did not have a 30% decline in turnover for March/April 2020, and June 2020 quarter and did not qualify for JobKeeper, should review eligibility for the September 2020 quarter.

Project September quarter GST turnover to assess likely JobKeeper eligibility for the remaining period to 27 September.

Businesses that have a delayed impact of reduced trading conditions from the COVID-19 pandemic should continue to review eligibility until the end of the JobKeeper period on 27 September 2020. If eligible, wage subsidy payments of up to $10,500 per employee may be available post 30 June 2020.

11. Plan for business succession

If you are thinking about selling or handing over a business, it’s important to have a clear plan on how you might exit your business when the time is right.

Review your succession plan for completeness and tax impact pre and post 30 June 2020.

By planning how to access capital gains tax concessions, small businesses can save hundreds of thousands of dollars in tax at time of sale, so it is best to start planning early.

12. Consider the longer term, and be strategic

There are two types of tax planning: short-term and long-term. Short-term planning considers what you can do before 30 June to minimise your tax risk and liability for the current financial year. Long-term tax planning considers how you can utilise your business structure to minimise tax, and the type of investments you can make to minimise tax over the long term.

Are you being strategic with your tax planning? For assistance, contact your local Bentleys tax advisor.

Complex tax driven structures can be superficially attractive, but can divert management attention and resources, as well as rack up professional fees. An efficient tax structure should take second place to the commerciality of the business, but should enable the most effective distributions of profits, losses and assets to the owners. It can be a difficult balance to strike so talk to your local Bentleys tax advisor early.

We, at Bentleys, are doing everything we can to help businesses come out of this challenging time in good shape.

We will continue to update our COVID-19 resource hub with important developments, so please return soon.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.