Ten tax issues your business needs to consider for 2020 year-end tax planning

29 May 2020

Tax laws are constantly changing and the tax issues you considered in previous years may no longer be relevant this year. With 30 June 2020 fast approaching, now is a good time to consider how to best manage your business’ tax affairs for the 2020 income tax year and meet with your adviser to understand your tax planning opportunities.

As a starting point when considering the tax position of your business, the main points to consider are:

  • How has the business been performing? Is it in line with budget and if not, why not?
  • Has there been significant changes to the business operations, such as changes in business structure or ownership?
  • If the business is a trust, how will trust resolutions be drafted?
  • If the business is company, how will the company be taxed and how will dividends be franked?

On top of this, you’ll need to consider the raft of COVID-19 stimulus measures introduced along with the general tax issues you need to consider every year.

To assist, we’ve compiled an overview of ten important issues your business should consider that could affect its 2020 financial and tax position.

1. JobKeeper and Cash flow boost

The JobKeeper payment scheme is a temporary six-month business subsidy to help enable employers to pay their employees when they have experienced a significant decline in turnover. Eligible employers[1] are reimbursed by the ATO $1,500 per fortnight for each eligible employee. The $1,500 payment from the ATO is taxable to the employer while the $1,500 payment from the employer to the employee is tax deductible to the employer.

Businesses that meet certain criteria[2] such as employing people and group wide turnover under $50 million, may also qualify for a cash-flow boost of $20,000 at a minimum and $100,000 at maximum. The cash-flow boost is triggered when the employer lodges its activity statements up to the month or quarter of September 2020. It is delivered as credits in the activity statement usually equivalent to the amount of tax withheld from wages paid to employees.

2. Extension of the instant asset write-off

Entities with group-wide turnover of less than $500 million qualify for an instant asset write-off on new or second-hand assets that:

  • Cost less than $150,000.
  • Were first used and installed from 12 March 2020 to 30 June 2020.

Prior to these new rules coming into effect (1 July 2019 to 12 March 2020), only entities with a group turnover of less than $50 million qualified for an instant asset write-off on new or second-hand assets that cost less than $30,000.

From 1 July 2020, once the extension finishes, only entities with a group turnover of less than $10 million will qualify for the instant asset write-off on new or second-hand assets costing less than $1,000.

If you’re an eligible small business entity whose general small business pool has a balance of less than $150,000 at the end of an income year that ends on or after 12 March 2020 but before 1 July 2020, you may be able to claim a deduction for the entire balance of the pool under the instant asset write-off rules.

3. Accelerated depreciation for 2020 and 2021

You may qualify for accelerated depreciation on assets purchased in 2020 and 2021 if you are an entity:

  • With group-wide turnover of less than $500 million.
  • That acquired new depreciable assets costing more than $150,000 and these assets were first used and installed on or after 12 March 2020 but no later than 30 June 2021.

Small businesses (group turnover under $10 million) can use the simplified depreciation rules and qualify for a first-year deduction of 57.5 percent. Larger entities (group turnover from $10 million to less than $500 million) can qualify for a first-year deduction of 50 percent of the cost of the depreciating asset and the usual depreciation calculated on the remaining 50 percent of the cost base of the asset.

4. New loss recoupment test

The loss recoupment tests have been modified to also include a similar business test. Arguably the similar business test is easier to satisfy than the same business test in the event the company has a change of 50 percent or more in its ultimate owners.

However, care needs to be exercised when determining whether a company can set off its losses against its income.

5. Company tax rates and franking of dividends

The rate at which companies are taxed depends on the type of income the company receives and the amount of the company’s turnover.

A company with turnover of less than $50 million with passive income such as dividends, rent, interest, royalties and net capital gains, making up to 80 percent or less of the total income of the company, will be taxed at 27.5 percent in 2020.

Dividends will be franked at 27.5 percent in 2020 if the turnover in 2019 was less than $50 million and passive income made up 80 percent or less of the total income of the company in 2019.

Because the company tax rate may not necessarily always be the same as the franking rate, there is a risk of:

  • Over-franking - where company profits are taxed at 27.5 percent, but such dividends are franked at 30 percent, which may lead to over franking tax.
  • Under-franking - where company profits are taxed at 30 percent, but such dividends are franked at 27.5 percent, which will lead to trapped franking credits that will be lost.

6. Review trust deeds and make trustee resolutions by 30 June 2020

Ensure trustee resolutions are prepared and signed before 30 June 2020 (or an earlier date if specified in trust deed).

7. Determine if your business qualifies for any tax concessions

Various tax concessions are available depending on the group-wide turnover of your business.

For example, businesses with a group turnover of less than $500 million can qualify for the instant asset write-off and accelerated depreciation. And businesses with a group turnover of less than $50 million can qualify for the cash flow boost and lower company tax rate.

Furthermore, businesses with a group turnover of less than $10 million can qualify for a variety of small business entity tax concessions such as:

  • Immediate deductions for pre-paid expenses that cover 12 months or less (e.g. loan interest, rent and subscriptions).
  • Immediate deductions for start-up expenses (e.g. professional legal and accounting advice and government fees and changes).
  • Simplified trading stock rules (i.e. where small business entities do not have to perform a stock-take under certain circumstances).

8. Manage Division 7A exposure

Business owners who have borrowed funds from their company in previous years must ensure the appropriate principal and interest repayments are made by 30 June 2020.

Current year loans must be either paid back in full or business owners must have entered into a loan agreement before the due date of lodgement for the company return, or risk having it counted as an unfranked dividend in the return of the individual.

Due to the current COVID-19 environment, the ATO has advised it is developing further guidance for compliance with Division 7A obligations to make minimum yearly repayments, with that guidance still to be released by the ATO.

9. Defer income and bring forward expenses

Businesses operating on an accruals basis can defer raising invoices for debt not yet recoverable and where possible only receive cash or debtor payments after 30 June 2020.

By prepaying business expenses such as superannuation guarantee payments, insurance premiums and stationery and office supplies, businesses can claim a deduction in the 2020 income tax year.

10. Review assets

Before 30 June 2020, businesses should:

  • Review their trading stock and value the trading stock at the lower of cost, market selling value or replacement value.
  • Identify obsolete plant and machinery and write it off.
  • Review all outstanding debtors and identify and write-off bad debts.

Tax planning is not just something to be done in June and it is important to stay up do date with the frequent tax changes during the year and understand how such changes can affect you.

Furthermore, tax planning is about identifying opportunities for you as well as managing your tax risks.

Please speak to your Findex adviser for assistance with any of the tax issues outlined above or get in contact with the Tax Advisory team for more information.

Findex has developed a Government Stimulus Health Check and free Business Wellbeing Toolkit to help businesses manage potential risks and take full advantage of eligible stimulus assistance. Book your Health Check here.

[1] https://www.ato.gov.au/general/jobkeeper-payment/employers/eligible-employers/

[2] https://www.ato.gov.au/Business/Business-activity-statements-(BAS)/In-detail/Boosting-cash-flow-for-employers/