Recommended tax minimisation strategies from a small business tax consultant
1 March 2022
Robust annual tax planning with a tax consultant is a particularly important exercise for small and medium-sized enterprises to undertake to help minimise their exposure to income tax.
We’ve compiled some of the more important considerations small and medium-sized business enterprises should be considering when undertaking tax planning with their tax consultant this income tax year.
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.
Small business entity depreciation rules
A Small Business Entity (SBE) is broadly an entity conducting a business with an annual aggregated turnover of less than $10 million.
If you are an SBE that chooses to apply the simplified depreciation rules, then you must deduct the closing balance of your small business general pool for an income year ending between 6 October 2020 and 30 June 2023.
The lock out rules that prevented SBEs from accessing the simplified depreciation regime for five years if they opt out of the regime are suspended until 30 June 2023. This allows SBEs to take advantage of temporary full expensing. Speak to your tax consultant to find out if you can take advantage of this.
Other concessions available for small businesses
Small businesses can qualify for a number of income tax concessions that may be relevant for their year-end tax planning. Provided your business has a turnover of less than $50 million, it may qualify for:
A lower corporate tax rate of 25%.
Immediate deduction for certain start-up expenses and prepayments.
Simplified trading stock rules.
PAYG instalment concessions.
A two-year amendment period.
Businesses with a turnover of less than $10 million may also qualify for a roll-over concession when undertaking a genuine restructure of a small business.
Trusts remain a popular vehicle in Australia from which to conduct businesses or own the equity in a business. If your business structure involves a trust, then it is crucial that you prepare a trustee resolution to distribute income to beneficiaries prior to 30 June 2022 (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.
Variation of PAYG instalments
Subject to a review of your year-to-date tax position, it may be possible to reduce the amount of your March and June 2022 quarterly PAYG instalments. This can help improve your cashflow now rather than waiting until your lodge your Income Tax Return to get a refund.
If you have any bad debts, ensure that these are written off prior to 30 June 2022 to claim a deduction. Minutes should also be prepared to formally document the write off.
The non-commercial loss provisions act denies 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.
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 discuss with your tax consultant before entering into a contract to sell a business or other business asset to determine your eligibility to apply these concessions.
Timing of income and expenses
Consider the recognition of income leading up to 30 June 2022, such as:
Timing of sales income.
The date of signing a contract for the sale of a CGT asset.
Also consider bringing forward deductions prior to 30 June 2022, such as:
Acquiring depreciating assets.
Undertaking repairs on property and machinery.
You should undertake a stocktake on 30 June 2022.
Stock can be valued under different methods for each item of stock:
Lower of market value or replacement cost.
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. 2020/21), its dividend franking rate in the current year (i.e. 2021/22) will be 25%. If these conditions are not satisfied, the 2021/22 franking rate will be 30%.
The superannuation guarantee rate increased from 9.5% to 10% from 1 July 2021. The rate is expected to progressively increase by 0.5% each year until it reaches 12% on 1 July 2025.
Single touch payroll (STP)
From 1 July 2021, payments made to closely held employers must be reported through STP. There will now only be very limited circumstances when STP will not be used.
The end-of-year STP finalisation must be lodged by 14 July for arms-length employees. However, you have until 30 September to lodge the end-of-year STP finalisation for closely held payees.
Small business income tax offset
For individuals that carry on a small business (aggregated turnover of less than $5 million) as a sole trader, or have a share of net small business income from a partnership or trust, you may be eligible to claim a small business income tax offset of up to $1,000.
You must first determine the percentage of your total net small business income for the year over your taxable income for the year multiplied by your income tax liability for the year. The offset is then calculated as 16% of this amount up to a maximum of $1,000.
Loss carry back tax offset
An eligible company can carry back a tax loss it makes in one or more of the years between 2020 and 2023 and apply it against a tax liability from an earlier year from 2019 to 2022.
The tax offset is calculated as the amount of the tax loss for the relevant year (less unapplied exempt income for that year) multiplied by the company’s tax rate for the year in which the loss was made.
The tax offset is limited to the company’s franking account balance at the end of the year in which the offset is being claimed, and it is also limited to the amount of tax that the company paid in the relevant years.
While not exhaustive this tax planning list gives you an idea of the scope of concessions that may be available to your business. 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.