Important End of Financial Year information

 

2019-20 has been an unusual year. This year, more than ever, we want to ensure that we help you reduce your tax exposure and minimise the risk of an audit by the regulators. This end of financial year update outlines the actions to take to do exactly that.

 

We want to help you achieve the best result possible. If there is any additional information we can provide, or if we can assist you with your individual situation, please contact us today. You can reach us by phone on 6442 3772 or by e-mail to [email protected]

 

 

What’s changing on 1 July?

  • Company tax rate reduces to 26% for base rate entities
  • $150k instant asset write-off scheduled to reduce back to $1,000 for small business entities and will no longer be available for entities with aggregated annual turnover of $10m or more, although accelerated depreciation rules apply to certain entities until 30 June 2021
  • Cents per km rate for work-related car expenses increase to 72 cents
  • Expected reforms to allow 66- and 67-year olds to make voluntary superannuation contributions without satisfying the work test. This reform is not yet law.
  • Age limit for making superannuation contributions to your spouse increases from 69-74. This reform is not yet law.
  • For those 67 and under, reforms will enable you to use the ‘bring forward rule’ to make up to three years of non-concessional contributions. That is, you can make non-concessional contributions of up to $300,000 from the 2020-21 financial year.

 

What’s new

 

2020-21 Federal Budget delayed until October

The release of the 2020-21 Federal Budget has been postponed from its traditional date in May until 6 October 2020. We expect there will be a number of reforms and measures to tighten spending, recover revenue, and range of productivity measures. We will keep you advised of significant changes that might impact on you and your company.

Tax treatment of Government grants and relief

During the pandemic, bushfires and floods, grants and loans have been available to help business and individuals through the crisis. The way these grants and loans are taxed will vary.

 

If you carry on a business and the payment relates to your continuing business activities, then it is likely to be included in your assessable income for income tax purposes. This position is likely to be different where the payment was made to enable you to commence a new business or cease carrying on a business.

Grants will generally be assessable income unless a law has been passed to specifically exclude the grant or loan from tax. For example, the special disaster grant for the bushfires was made non‑assessable and non-exempt income. Also, amounts provided under the cash flow boost measure are non-assessable non-exempt income.

 

When it comes to GST treatment, the key issue is whether the grant is consideration for a supply. That is, was the business expected to deliver something for the grant? The following government payments are not consideration for a supply and therefore not subject to GST or included in your GST turnover:

 

  • JobKeeper payment
  • Cash flow boost payment
  • The Early Childhood Education & Care Relief Package paid to approved child care providers
  • Payment of grants to an entity where the entity has no binding obligations to do anything or does not provide goods and services in return for the monies.

Superannuation guarantee amnesty

7 September 2020 is the last day for employers to take advantage of the superannuation guarantee (SG)  amnesty. The amnesty provides a one-off opportunity to disclose historical non-compliance with the superannuation guarantee rules and pay outstanding superannuation guarantee charge amounts.

 

To qualify for the amnesty, employers must disclose the outstanding SG to the Tax Commissioner. You either pay the full amount owing, or if the business cannot pay the full amount, enter into a payment plan with the ATO. If you agree to a payment plan and do not meet the payments, the amnesty will no longer apply.

 

Keep in mind that the amnesty only applies to “voluntary” disclosures. The ATO will continue its compliance activities during the amnesty period so if they discover the underpayment first, full penalties apply. The amnesty also does not apply to amounts that have already been identified as owing or where the employer is subject to an ATO audit.

 

Even if you do not believe that your business has an SG underpayment issue, it is worth undertaking a payroll audit to ensure that your payroll calculations are correct, and employees are being paid at a rate that is consistent with their entitlements under workplace laws and awards.

 

If your business has engaged any contractors during the period covered by the amnesty, then the arrangements will need to be reviewed as it is common for workers to be classified as employees under the SG provisions even if the parties have agreed that the worker should be treated as a contractor. You cannot contract out of SG obligations.

Utilising the $150,000 instant asset write-off

The instant asset write-off enables your business to claim an upfront deduction for the full cost of depreciating assets in the year the asset was first used or installed ready for use for a taxable purpose.

 

The COVID-19 stimulus measures temporarily increased the threshold for the instant asset write-off between 12 March 2020 and 30 June 2020 from $30,000 to $150,000, and expanded the range of businesses that can access the threshold to those with an aggregated turnover of less than $500 million.

 

For example, if your company’s turnover is under $500 million and you purchase an eligible asset for $140,000 (GST-exclusive) on 1 June 2020 (and install it ready for use by 30 June 2020), then a deduction of $140,000 can be claimed. If the company is subject to a tax rate of 27.5% then this should reduce the tax payable by the company for the 2020 income year by $38,500.

 

If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a direct short-term benefit to you. However, if this measure is likely to reduce the taxable income of the business for the year then it may be possible to vary upcoming PAYG instalments to improve cash flow.

 

If the asset is a luxury car then the deduction will be limited to the luxury car limit ($57,581 in 2019-20).

 

The business use percentage of the asset also needs to be taken into account in calculating the deduction. For example, if a sole trader acquires a car for $40,000 but only expects to use it 80% in the business then the immediate deduction would be $32,000.

 

The increase to the instant asset write-off threshold in the stimulus package is the fourth increase or extension and businesses will need to be wary of what they are claiming and when:

 

Instant asset write-off thresholds

Small Business*

Medium business**

Large business***

1 July 2018 – 28 January 2019

$20,000

29 January 2019 – 2 April 2019

$25,000

2 April 2019 – 12 March 2020

$30,000

$30,000

12 March 2020 – 30 June 2020

$150,000

$150,000

$150,000

* aggregated turnover under $10 million ** aggregated turnover under $50 million ***aggregated turnover under $500 million

 

At this stage it is expected that the instant asset write-off threshold will reduce back to $1,000 from 1 July 2020 for small business entities and that the instant asset write-off rules will no longer be available to medium and large businesses.

For assets costing $150,000 or more

For small businesses (aggregated turnover under $10m), assets costing $150,000 or more can often be allocated to a pool and depreciated at a rate of 15% in the first year and 30% for each year thereafter. Having said that, depending on when the asset was acquired and first used in the business the rate of deduction in the first year could be higher (see accelerated depreciation deductions below).

 

If the closing balance of the pool, adjusted for current year depreciation deductions (i.e., these are added back), is less than $150,000 at the end of the 2020 income year, then the remaining pool balance can be written-off as well.

 

Pooling is not available for medium and large businesses, which means that the depreciation rules will apply to assets that don’t qualify for an immediate deduction.

Accelerated depreciation deductions

Businesses with a turnover of less than $500 million can access accelerated depreciation deductions for assets that don’t qualify for an immediate deduction for a limited period of time.

This incentive is only available in relation to:

 

  • New depreciable assets
  • Acquired on or after 12 March 2020 that are first used or installed ready for use for a taxable purpose by 30 June 2021.

 

It does not apply to second-hand assets or buildings and other capital works expenditure. The rules also won’t apply if the business entered into a contract to acquire the asset before 12 March 2020.

 

Businesses are able to deduct 50% of the cost of a new asset in the first year. They can then also claim a further deduction in that year by applying the normal depreciation rules to the balance of the cost of the asset.

 

Accelerated depreciation deductions apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years. 

 

For example, let’s assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2020-21 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation on the balance of the cost. If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e., 15% x $125,000). The total deduction in the 2020-21 tax return would be $143,750. Without the introduction of accelerated depreciation the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).

Reporting payments to contractors

The taxable payments reporting system requires businesses in certain industries to report payments they

make to contractors (individual and total for the year) to the ATO. ‘Payment’ means any form of

consideration including non-cash benefits and constructive payments. Almost every year a new industry or sector is drawn into the taxable payments reporting net.

 

Taxable payments reporting is required for:

 

  • Building and construction services
  • Cleaning services
  • Courier services
  • Road freight services
  • Information technology (IT) services
  • Security, investigation or surveillance services
  • Mixed services (providing one or more of the services listed above)

 

The annual report is due by 28 August 2020. This will be the first report for those businesses providing road freight, information technology, and security, investigation or surveillance services.

1 January 2020 changes to Super Guarantee calculation

From 1 January 2020, new rules came into effect to ensure that an employee’s salary sacrifice contributions cannot be used to reduce the amount of superannuation guarantee (SG) paid by the employer.

 

Previously, some employers were paying SG on the salary less any salary sacrificed contributions of the employee. Now, employers must contribute 9.5% of an employee’s Ordinary Time Earnings (OTE) and they choose whether or not to include the salary sacrificed amounts in OTE.

 

Under the new rules, the SG contribution is 9.5% of the employee’s ‘ordinary time earnings (OTE) base’. The OTE base will be an employee’s OTE plus any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

 

The amendments also ensure that where an employer has not fulfilled their SG obligations and the superannuation guarantee charge is imposed, the shortfall is calculated using the new OTE base.

Single touch payroll extension for closely held employees

Many small businesses have closely held employees such as family members, directors or shareholders of a company, and beneficiaries of a trust. Small businesses with 19 or fewer employees were to start reporting these closely held employees through single touch payroll (STP) from 1 July 2020. In response to the COVID-19 pandemic however, the ATO has granted an extension until 1 July 2021.

 

Your business can start voluntarily reporting these closely held employees, and many may have already done so to access JobKeeper payments, but it is not a requirement until 1 July 2021. 

 

All other employees should be reported through STP.

The JobKeeper estimates error

Hindsight is a dangerous lens as Treasury discovered last month announcing that the number of employees expected to be covered by the JobKeeper scheme was overstated in the original announcement by approximately 3 million. The overstatement reflects “the level and impact of health restrictions not having been as severe as expected and their imposition not having been maintained for as long as expected at the time,” the Treasury statement says.

 

At the time of the Treasury estimates, not long after the country went into lockdown, we simply did not know what to expect. The first stimulus measures had been announced and long queues formed in front of Centrelink offices. Supermarket shelves were being stripped of essentials. Alarming daily global updates showed the virus spreading unimpeded in many parts of the world. China demonstrated the need for fast, severe and extended lockdowns to remove the possibility of community transmission. For Australia, there was no appetite to wait and see what might happen as other countries with devastating death rates did. We acted swiftly and we have reaped the benefits of that action with a low death rate, albeit at an economic cost. For many businesses, estimating the potential impact of the pandemic, the expectations were the same – fast, severe and extended. Now, with the JobKeeper scheme entering a compliance phase, we need to go back and point to the facts that supported the estimates declared to the ATO.

The ATO’s JobKeeper targets

The ATO is looking carefully at businesses that appear to have made adjustments to their circumstances to meet the JobKeeper eligibility requirements where, if those adjustments had not been made, the entity would have been ineligible or had lower JobKeeper payments. Or, where adjustments have been made to enable another entity or subcontractor to meet the decline in turnover test.

 

Industries or businesses that have not experienced adverse trading conditions and those that appear to have increased staff numbers are likely to be looked at closely. In its guidance, the ATO sets out a series of examples that are likely to attract their attention:

 

  • Increase in staff – where the number of staff the business reports have increased beyond levels that were previously required to run the business prior to 1 March 2020.
  • Deferring supplies – in industries unlikely to be adversely impacted by the pandemic, the business agrees with its customers to defer making supplies, resulting in the company’s projected GST turnover declining to the level required to meet the turnover test.
  • Bringing forward supplies – in industries unlikely to be adversely impacted by the pandemic, the business brought forward supplies to be able to meet the decline in turnover test in a following month or quarter.
  • Restructures – the example given by the ATO is a company that leases assets to third parties. The leasing business is generally unaffected by the pandemic. However, the business restructures and transfers the assets of the business to a new company. It then withholds the payment of dividends from the new company to the business resulting in a decline in the turnover of the business.
  • Management fee manipulation – where inter-entity management fees are charged, the timing of the fee is changed to meet the decline in turnover test.
  • Reduction in payments to subcontractors – where a business has reduced or deferred payments to subcontractors to enable them to meet the decline in turnover test. The ATO has stated that they will review the business and the subcontractors.
  • JobKeeper used to reduce cost of supplies to customers – in this scenario, the business and its customers agree to reduce, waive or defer payments to enable the business to meet the decline in turnover test. JobKeeper is then used to fund the reduction in payments. In effect, JobKeeper is paying for the payment reduction.

Low risk scenarios

If your industry or business has been adversely impacted by the pandemic, regardless of your structure or arrangements, it is unlikely the ATO will review your situation unless there has been an obvious attempt to increase JobKeeper payments.

 

To add certainty, the ATO notes that where a service entity that employs staff for a related entity has reduced management fees, either because the service agreement has been changed to reduce the fee by an amount that is proportional to the reduction in the trading entity’s external turnover,  staff have been stood down, or where the related entities cannot afford to pay the fee, and the industry is adversely impacted by the pandemic, the ATO will not generally seek to apply compliance resources.

What happens if you got it wrong?

If your structure or the way you have accessed JobKeeper is on the ATO target list, this does not mean that there is a problem.

 

Eligibility to JobKeeper is generally based on an estimate of the negative impact of the pandemic on an individual business’s turnover. Some will experience a greater decline than estimated while others will fall short of the required 30%, 50% or 15%. There is no clawback if you got it wrong as long as you can prove the basis for your eligibility going into the scheme.

 

For those that, in hindsight, did not meet the decline in turnover test, you need to ensure you have your paperwork ready to prove your position if the ATO requests it. You will need to show how you calculated the decline in turnover test and how you came to your assessment of your expected decline, for example, a trend of cancelled orders or trade conditions at that time.

Manage your JobKeeper compliance

Monthly declarations of your current and projected GST turnover are due within fourteen days of the end of each relevant month.

 

It’s important to ensure that you have paid eligible JobKeeper staff at least $1,500 during each JobKeeper fortnight. If you pay employees less frequently than fortnightly, the payment can be allocated between fortnights in a reasonable manner. For example, if you pay your employees on a monthly pay cycle, your employees must have received the monthly equivalent of $1,500 per fortnight.

 

For the first two JobKeeper fortnights (30 March-12 April, 13 April-26 April), employers had an extension until 8 May to make the JobKeeper payments to eligible employees. For the remaining JobKeeper fortnights, employees will need to receive at least $1,500 by the end of each JobKeeper fortnight or the monthly equivalent of $1,500 per fortnight. Depending on your pay cycle, this may require some adjustments each month.

Living with JobKeeper 

The JobKeeper $1,500 per fortnight per employee subsidy is paid in arrears to businesses that have experienced a downturn of 30% or more (50% for businesses with turnover of $1bn or more). A 15% threshold is used for ACNC-registered charities. The purpose of the scheme is to keep workers employed and ensure there is a viable workforce on the other side of the pandemic.

 

At present, JobKeeper is set to continue until 27 September 2020. And for businesses, JobKeeper’s decline in turnover is a once only test. If the eligibility criteria were met at the time of applying for JobKeeper, a business can continue claiming the subsidy assuming the other eligibility criteria for them and the individual employees, are met.

 

However, we expect continuing eligibility to the subsidy will change over time as the regulators gain a clearer insight into the impact of the pandemic. Much of this data is likely to come from the actual and estimated GST turnover that forms part of the compulsory monthly JobKeeper reporting requirements in tandem with the volume of applications to Jobseeker. That is, are the right businesses receiving JobKeeper and is the subsidy keeping workers employed?

 

If your business did not initially qualify for JobKeeper, you can apply to start JobKeeper payments when you meet the eligibility criteria. Not every industry will experience the economic impact of the pandemic in the same way. Some will experience a greater decline in later months.

 

Making JobKeeper payments on time

To be eligible for JobKeeper payments, staff must be paid at least $1,500 during each JobKeeper fortnight. If you pay employees less frequently than fortnightly, the payment can be allocated between fortnights in a reasonable manner. For example, if you pay your employees on a monthly pay cycle, your employees must have received the monthly equivalent of $1,500 per fortnight.

 

For the first two JobKeeper fortnights (30 March-12 April, 13 April-26 April), employers had an extension until 8 May to make the JobKeeper payments to eligible employees. For the remaining JobKeeper fortnights, employees will need to receive at least $1,500 by the end of each JobKeeper fortnight or the monthly equivalent of $1,500 per fortnight. Depending on your pay cycle, this may require some adjustments each month.

Financial Housekeeping

Lodgement deferrals

The ATO has automatically deferred 2018-19 tax returns for companies, partnerships, trusts and individuals lodged through a tax agent until 5 June 2020. Payment of any tax liability will need to be made by this date. This deferral excludes large/medium taxpayers and head companies of consolidated groups.

If you are having trouble paying your tax liability, please let us know as soon as possible so we can negotiate a deferral or payment plan with the ATO on your behalf.

 

Before you roll over your software

Before rolling over your accounting software for the new financial year, make sure you:

  • Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2020-21 year. Once rolled over, the software cannot be amended. 
  • Do not perform a Payroll Year End function until you are sure that your STP finalisation declaration is correct and printed. Always perform a payroll back-up before you roll over the year.

Employee reporting

Single touch payroll

Where payments to employees have been reported to the ATO through single touch payroll, a finalisation declaration generally needs to be made by 14 July 2020 for employers with 20 or more employees and 31 July for those with 19 or fewer employees.

Payment summaries do not have to be provided to employees. Instead, employees will be able to access their Income Statement through myGov.

Reportable Fringe Benefits

Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount.  This is referred to as a `Reportable Fringe Benefit Amount’ (RFBA).

Do you need a stocktake?

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.

Reduce your risks & minimise your tax

Top tax tips

1. Write-off bad debts

To be a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, documenting the write-off is a good idea.

2. Review your asset register and scrap any obsolete plant

Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.

3. Bring forward repairs, consumables, trade gifts or donations

To claim a deduction for the 2019-20 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.

4. Pay June quarter employee super contributions now

Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2020.  However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.

Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal or company sponsored contributions need to be received by the fund before 30 June to be deductible.

5. Realise any capital losses and reduce gains

Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes.

6. Raise management fees between entities by June 30

Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.

 

For companies:

7. Declare dividends to pay any outstanding shareholder loan accounts

If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.

 

If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2020. It may be necessary for the company to declare dividends before 30 June 2020 to make these loan repayments.

 

The tax rules in this area can be extraordinarily complex and can lead to some very harsh tax outcomes. It is important to talk to us as soon as possible if you think your company has made payments or advanced funds to shareholders or related parties.

 

8. Directors’ fees and employee bonuses

Any expected directors’ fees and employee bonuses may be deductible for the 2019-20 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2020, even if the fee or bonus is paid to the employee or director after 30 June 2020.

 

You would generally be definitely committed to the payment by year-end if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end.

 

The accrued directors’ fees and bonuses need to be paid within a reasonable time period after year-end.

 

There are some more specific changes to those outlined below depending on your entity structure. Click the entity type to read more.

Company               Trust                               Partnership              SMSF               individual