Accounting and Tax

Smart tax strategies for business owners and investors

Daniel Slabicki
24 April 2024
9 min read

To help you understand what’s available, our tax advisors have prepared a list of the more important considerations business owners and investors should consider when undertaking tax planning for the income tax year. Your tax advisor can 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 Australian Taxation Office (ATO) scrutiny.

Shareholder loans

Where a private company makes a payment, loan, or forgives a debt to a shareholder or an associate of a shareholder, Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) 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 advisor before making any decisions.

Trust distributions

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 that the Trustee prepares a resolution to distribute income to beneficiaries prior to 30 June 2024 (or earlier as required by the Trust Deed).

Failure to do so may result in the Trustee being taxed on profits at the highest marginal rate of tax (45% + Medicare levy) or distributions being assessed to default beneficiaries.

Beneficiaries must also be notified of their entitlement to trust income by the earlier of the due date and actual date of lodgement of the Income Tax Return for the trust.

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 advisor well before year end. The validity of trustee minutes is routinely the subject of ATO audit activity.

Reimbursement agreements

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 advisor prior to year-end to discuss section 100A and how to minimise the risk of it applying to your trust.

Personal deductible superannuation contributions

The concessional contributions cap is $27,500 for the 2023/24 financial year.

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.

Non-commercial losses

The non-commercial loss provisions will apply 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 (carry on a business and have 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 advisor 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 is 25%. 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 net capital gains.

Where a company was a base rate entity in the previous year (i.e. 2022/23), its dividend franking rate in the current year (i.e. 2023/24) will be 25%. If these conditions are not satisfied, the 2023/24 franking rate will be 30%.

Franking credits

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.

Family trust elections

Where you manage a discretionary trust that has incurred losses or has received franking credits on dividends and distributions, you should consider the appropriateness of putting a family trust election in place.

A family trust election makes it easier to carry forward and deduct a trust loss in a later year and it also allows the trust to satisfy the holding period rule for claiming franking credits.

A family trust election will, however, restrict who can benefit from the trust to those of the ‘family group’. Distributing to persons or entities outside the family group will incur family trust distribution tax at 47%.

The rules for family trust elections are complex and you should discuss with your tax advisor about whether your trust currently has an election in place or whether an election should be made.

Personal services income

The personal services income (PSI) regime is an antiavoidance 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 advisor 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 ATO 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.

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. Contact a Findex Tax Advisor to review arrangements in relation to the allocation of professional firm profits in light of this ATO guidance.

Author: Daniel Slabicki | Senior Manager