2023 tax strategies business owners and investors should discuss with their tax consultant
30 March 2023
Business owners and investors may be able to take advantage of a range of tax planning opportunities to reduce their tax exposure this financial year. To help you understand what’s available, our tax consultants have prepared a list of the more important considerations business owners and investors should consider when undertaking tax planning for this income tax year.
Your tax consultant should also make you aware of the common tax traps in relation to the operation of your business or investment structures, helping you to avoid tax risk areas likely to be subject to ATO scrutiny.
Where a private company makes a payment, loan, or forgives a debt to a shareholder or an associate of a shareholder, the Division 7A rules may apply to deem an unfranked dividend payable to the shareholder or associate.
To avoid an unfranked dividend, it is important that the shareholder either repays the loan or puts a complying loan agreement in place by the earlier of lodgement or due date of lodgement, of the tax return for the year in which the loan was made.
A complying loan agreement sets out the minimum yearly repayment and interest to be charged. A Division 7A loan that has a complying loan agreement must be repaid over a maximum term of seven years. However, it may be advantageous to secure the loan by a registered mortgage to extend the maximum term to 25 years, which will reduce the minimum yearly repayment and improve cashflow.
Division 7A compliance is a focus area of ATO review so please get advice from a tax consultant before making any decisions.
Trusts remain a popular vehicle in Australia from which to conduct businesses or own the equity in a business. If your structure involves a trust, then it is crucial you prepare a trustee resolution to distribute income to beneficiaries prior to 30 June 2023 (or earlier as required by the Trust Deed).
To ensure the resolution can be made with tax effective considerations in mind and also be documented prior to year-end, allow plenty of time to meet with your tax consultant well before year end. The validity of trustee minutes is routinely the subject of ATO audit activity.
The ATO has an increased focus on the application of reimbursement agreements under section 100A ITAA 1936, having finalised its guidance material in December 2022 (TR 2022/4 and PCG 2022/2).
Broadly, a reimbursement agreement will arise where:
A beneficiary (who is not under a legal disability) is presently entitled to a share of trust income in an income year.
It is in connection with a reimbursement agreement whereby money is paid, property is transferred, services are provided, or some other benefit is provided to a person other than the beneficiary.
At least one of the parties entered into the agreement with the purpose of obtaining a tax benefit.
The arrangement was not entered into in the course of ordinary family or commercial dealing.
The ATO applies a compliance framework to assess the level of risk regarding trust distribution arrangements, which directs the level of ATO engagement.
Where the ATO determines that section 100A applies, the net income that would otherwise be assessed to the beneficiary will instead be assessed to the trustee at the top marginal tax rate plus Medicare levy. Note that the ATO has an unlimited amendment period to make an assessment under section 100A.
Documents and records should be maintained to demonstrate how a beneficiary has been notified of their present entitlement to trust income and how that present entitlement has been satisfied.
We recommend that you speak with your adviser prior to year-end to discuss section 100A and how to minimise the risk of it applying to your trust.
Temporary full expensing
Almost all businesses in Australia can now write off the full cost of acquiring a depreciating asset under the temporary full expensing rules.
To be eligible, the depreciating asset must be:
New or second-hand (if it is second-hand, your aggregated turnover must be less than $50 million).
First held by you at or after 7.30pm (AEDT) on 6 October 2020.
First used or installed ready for use by you for a taxable purpose between the above date and 30 June 2023.
The following assets are excluded from temporary full expensing:
Assets allocated to a low-value pool or a software development pool.
Certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you are a small business entity who chooses to apply the simplified depreciation rules to these assets.
Buildings or other capital works for which you can deduct amounts under Division 43.
Assets that will never be located in Australia or will not be used principally in Australia for the principal purpose of carrying on a business.
You can claim an immediate deduction for the business portion of the cost of any improvements to an eligible asset (including improvements on assets acquired before 6 October 2020) if they are incurred before 30 June 2023.
Taxpayers that calculate depreciation under Division 40 can make an irrevocable choice to opt-out of temporary full expensing on an asset-by-asset basis. Small business entities that use the simplified depreciation rules cannot opt-out of temporary full expensing.
Personal deductible superannuation contributions
From 1 July 2021, the concessional contributions cap increased to $27,500.
Any unused concessional caps from the previous five years, starting from 1 July 2018, can be carried forward to make additional concessional contributions. The total value of your superannuation fund account balances must have been less than $500,000 on 30 June of the previous year to be able to carry forward the unused caps.
High income earners
An additional 15% tax on concessional superannuation contributions applies to individuals who earn more than $250,000 per annum. High income earners should consider this when contemplating whether to make additional personal superannuation contributions this year.
The non-commercial loss provisions act to deny an individual from offsetting a loss from a business activity against other income earned during the income year unless one of the following four tests are passed:
1. Assessable income test
The assessable income from the activity for the year must be at least $20,000.
2. Profits test
The activity must have resulted in a profit in at least three out of the last five income years, including the current year
3. Real property test
The total reduced cost bases of real property or interests in real property used on a continuing basis in carrying on the activity must be at least $500,000.
4. Other assets test
The total value of other assets (other than motor vehicles) used on a continuing basis in the activity must be at least $100,000.
There is an exception for primary production and professional arts businesses if your assessable income from other sources not related to that particular business activity is less than $40,000, excluding any net capital gains.
Individuals with an adjusted taxable income of $250,000 or more will generally not be able to offset losses from non-commercial activities against other income. However, you may be able to request the Commissioner’s discretion to allow you to claim the loss where special circumstances exist.
Small business capital gains tax (CGT) concessions
A capital gain on the sale of an active asset that is used in the course of carrying on a business may be reduced if certain basic conditions are satisfied. One of the entry tests is that you must either be a CGT small business entity (less than $2 million in aggregated turnover) or satisfy the maximum net asset value test (have an aggregated value of net assets of less than $6 million). The concessions include:
Small business 15-year exemption.
Small business 50% reduction.
Small business retirement exemption.
Small business roll-over.
There is the ability to make a contribution into superannuation under the CGT cap where either the 15-year exemption or the retirement exemption are applied. Contributions made under the CGT cap do not count towards the concessional or non-concessional caps. Where certain conditions are met, you may be able to contribute a large portion of the proceeds from the sale of an active asset into your superannuation fund.
These concessions can be extremely valuable to business owners looking to sell or restructure their affairs. The concessions can be complex to correctly apply, particularly when they are applied to a business conducted via a structure involving multiple entities. We recommend you contact your tax consultant before entering into a contract to sell a business or other business asset to determine your eligibility to apply these concessions.
Reduction in company tax rate
The company tax rate for base rate entities has reduced to 25% for the 2021/22 and later income years. The tax rate for all other companies is 30%.
A base rate entity is a company that has an aggregated turnover of less than $50 million and no more than 80% of its assessable income is ‘base rate entity passive income’. Base rate entity passive income broadly includes interest, dividends, rent, royalties, and capital gains.
Where a company was a base rate entity in the previous year (i.e. 2021/22), its dividend franking rate in the current year (i.e. 2022/23) will be 25%. If these conditions are not satisfied, the 2022/23 franking rate will be 30%.
Shares must generally be held “at risk” for at least 45 days to be entitled to claim a franking credit. Individuals and superannuation funds can receive a refund of excess franking credits. A company can convert excess franking credits into a tax loss.
Personal services income
The personal services income (PSI) regime is an anti-avoidance provision that acts to attribute income that is derived mainly as a reward for an individual’s personal efforts or skills to that individual rather than to another entity. This could capture income derived by consultants, IT contractors and other professionals for example.
The PSI rules also limit deductions to those which an employee would be entitled to. The income may be excluded from the PSI regime if it is determined that it has been derived as part of a personal services business, which requires assessment of several tests.
We recommend you contact your tax consultant to discuss whether your income is subject to the PSI rules and the implications thereon.
Professional firm profits
Are you an individual professional practitioner (IPP) who has an ownership interest in a professional practice?
The ATO has issued guidance on the allocation of professional firm profits, which adopts a risk-based compliance approach when considering the allocation of professional firm profits or income in the assessable income of the IPP.
Based on the guidance in PCG 2021/4, an IPP will be assigned a risk rating by reference to:
The proportion of the profit entitlement from the whole of firm group that is returned in the IPP’s personal income tax return.
The total effective tax rate for income received from the firm by the IPP and associated entities.
The comparative remuneration in the hands of the IPP as a percentage of the commercial benchmark for services provided to the firm.
We recommend you contact your tax consultant to review arrangements in relation to the allocation of professional firm profits in light of this ATO guidance.
To help ensure you are able to make the most of these tax planning opportunities, talk to your adviser or get in touch with our tax consultants to discuss how you might be able to minimise your tax exposure.