Tax Planning Update

The end of the financial year can be a busy time with the budget announcement in May as well as planning for 30 June. In this newsletter we will highlight several key items that may affect you as well as some general tax planning strategies. We have included information for individual and business clients in this newsletter.

Please contact your C&J advisor if you wish to discuss any of the items below:

Recent Changes & Tax Planning Strategies:

Index

1. Temporary Full Expensing of Assets

2. Loss Carry Back Tax Offset

3. Changes to Superannuation Guarantee Contributions from 1 July 2021

4. Superannuation Contributions

5. Excess Concessional Contributions and Division 293 Assessments

6. Accounting and Tax Treatment of Stimulus Payments

7. Cryptocurrency Gains

8. General Tax Planning Considerations

1. Tax Deduction for Depreciating Assets for Small Businesses

Businesses will be able to claim a 100% tax deduction for assets or improvements to assets purchased for business purposes. In order to claim the deduction the asset must have been purchased and installed ready for use between 6 October 2020 and 30 June 2022. The deduction will be able to be claimed at the time the asset is installed ready for use i.e.) if you purchase an asset today but it is not delivered until July 2021 then the deduction will be claimed in the 2022 financial year. If the businesses turnover is less than $50 million then the asset can be new or second hand. Businesses with turnover of greater than $50 million can only tax deduct new assets.

Assets purchased and ready for use prior to 6 October 2020 will be able to be deducted providing the asset cost was less than $150,000.

Please note that motor vehicle purchases are still subject to the depreciation cost limit which is currently $60,733. The deductible amount of car purchase is limited to your business use (logbook) percentage times $60,733.

2. Loss Carry Back Tax Offset

Businesses who are loss making in the 2020, 2021 or 2022 financial year will be able to apply those losses against profits that have been generated and taxed in the 2019, 2020 or 2021 year. This will provide an offset to tax paid in the earlier year and may lead to a refund of tax paid.

We will be reviewing this when completing the 2021 returns for eligible clients.

3. Changes to Superannuation Guarantee Contributions from 1 July 2021

The rate of super guarantee contributions will change from 1 July 2021:

The rate of super that is required to be paid on behalf of employees is increasing from 9.5% to 10% on 1 July 2021. Please make sure you have reviewed the rate of super that your payroll software is calculating and ensure that this has been increased to 10%.

The affect this will have on your payroll will depend on how you have structured your employment contracts:

• If your employment contracts state that remuneration is salary plus super, then the employer will be responsible for funding the additional 0.5% super with no change to the base salary.
• If the contract is worded as the total package including super, then you may be able to reduce the employees base salary to factor in the additional super into the stated package.

You should inform your employees of this change to their remuneration and, if we process payroll for you, inform us of your approach.

Please note that the contribution rate is intended to increase by 0.5% per annum until it reaches 12% by 1 July 2025. The approach that you take to the current change may set a precedent for your staff that will also effect the future changes.

4. Superannuation Contributions:

Tax Deductible Contributions - Concessional Contributions:
The limit for the 2021 financial year for tax deductible contributions is $25,000. This will be increasing to $27,500 from 1 July 2021.

Please note that if you are intending to claim a tax deduction for contributions made in the 2021 financial year then the contributions need to be PAID by 23 June 2021. Contributions made after this date may be received by funds after 1 July 2021.

If you are contributing into your own SMSF then contributions need to have cleared into the SMSF account prior to 30 June 2021.

From 1 July 2017 all members under the age of 65 have been able to make personal concessional contributions directly to super and claim a tax deduction for the contributed amount. The requirement for these contributions to be made via a salary sacrifice arrangement have been removed.

Taxpayers between 65 and 75 can also contribute providing the work test is passed.

To claim the deduction for the superannuation contribution the following must apply:

• The contribution must be made before 23 June 2021.
• You must notify your super fund of your intention to claim a tax deduction for the contribution. Your fund will have a form to notify them of this. If you have a SMSF that we administer, please let us know and we can help with the required reporting.
• You can only claim deductions up to your concessional cap of $25,000. Please note that this cap includes any super guarantee contribution made by your employer.
• It is possible to prepay super contributions and effectively receive a double deduction in one financial year.  This may be an option if you have made a large capital gain for instance, and you are willing to commit funds to super. Please contact your C&J adviser to discuss this option.

Unused Concessional Cap Carry Forward:

From 1 July 2018, if you have a total superannuation balance of less than $500,000 on 30 June of the previous financial year, you may be entitled to contribute more than the general concessional contributions cap and make additional concessional contributions for any unused cap amounts. Unused amounts are available for a maximum of five years, and after this period will expire. Please contact your super fund if you would like to investigate the possible unused cap available.

After-tax Contributions - Non-Concessional Contributions:
When you make a contribution from your after-tax savings this is officially called a non-concessional contribution. The annual non-concessional cap is $100,000 for the 2021 financial year. A three year bring forward rule will still apply for members under 65 years old hence a maximum contribution of $300,000 may be possible.  The cap is increasing to $110,000 from 1 July 2021 and the three year bring forward amount is $330,000.

Non-Concessional contributions can only be made if your balance in super is less than $1.6 million. If your balance is approaching this figure, please contact us so we can review your ability to make additional contributions.

Superannuation Co-contributions:

If your “adjusted” income is between $39,837 and $54,837 for the 2021FY and you make a non-concessional contribution of up to $1,000 before 30 June, the Government will contribute 50% to your fund to a maximum of $500.  You must also have a total super balance of under $1.6m at 30 June 2020.

Spouse Superannuation Contributions:

You can claim the maximum tax offset of $540 if:

• you contribute to the eligible super fund of your spouse, whether married or de facto, and
• your spouse's income is $37,000 or less.  The tax offset completely phases out when your spouse’s income reaches $40,000.

5. Excess Concessional Contributions AND Division 293 Assessments:

You may have received an additional assessment from the ATO for either of these items. As they are not well understood we have provided some information regarding each below:

Excess Concessional Contributions (ECC):

• When concessional contributions, to super, in excess of the $25k cap are made on your behalf the ATO will assess additional tax to you personally on the excess amount.
• The ATO adds the excess amount to your personal income hence you are taxed on this component at your marginal tax rate.
• The ATO allows a 15% offset to take into account the 15% tax already paid in the super fund on the contribution.
• The only “penalty component” to ECC tax is that the ATO will add an interest charge to recognise the fact that the tax is being paid later than if the income was originally taxed as personal income.

When you receive an ECC Assessment you have the option to release the excess contribution from super. You can release up to 85% of the excess contributions. The release form can be lodged online and must be completed within 60 days of the original assessment. The funds are then released from your super fund to the ATO, any additional amounts will then be refunded back to you.

Please note that if you choose not to release the excess concessional contributions then they will be converted to non-concessional contributions in your super fund. You need to be aware that if you have “maxed out” your non-concessional limit by making contributions or you are unable to make non-concessional contributions as your balance is over $1.6mill then this may cause issues with you breaching the non-concessional cap.

Division 293 Assessments (Div 293):

• A Div 293 assessment will be issued to you if your adjusted personal income is greater than $250k and concessional contributions have been made on your behalf.
• This assessment levies an additional 15% contribution tax on the excess contributions that take your adjusted income over $250k. 
• Only the concessional contributions up to $25k are assessed for the additional 15% tax.
• As this is capped at the concessional contributions cap the maximum assessment you can currently receive is $3,750.

The additional assessment will be sent to the individual member who can then choose to pay the assessment directly OR release the tax amount from your fund. The release form must be lodged within 60 days of the date of the original assessment.

If you are unsure about either of these additional assessments, please contact your C&J adviser.

6. Accounting and Tax Treatment of Stimulus Payments

Please see a summary of the tax and accounting treatment of the various stimulus packages that you may have received:

JobKeeper:

• The JobKeeper payment is a wage reimbursement.
• The payments will be included in your taxable income although you will be able to deduct the wage payments made to your staff.
• There is no GST on the payment.
• The payments should be coded to an appropriately named account in the “other income” area in your accounting system with the Non-Reportable or BAS Excluded code.

Cash Flow Boost:

• The Cash Flow Boost is credited to your ATO account based on the PAYGW reported on eligible BAS’s.
• The payments are tax exempt and will not be included in your taxable income.
• There is no GST on the payment.
• The payments should be coded to an appropriately named account in the “other income” area in your accounting system with the Non-Reportable or BAS Excluded code.

7. Cryptocurrency Gains

If you are involved in acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences.  A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:

• sell or gift cryptocurrency
• trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
• convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or
• use cryptocurrency to obtain goods or services.

If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded. Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.

Cryptocurrency is not a personal use asset if it is kept or used mainly:

• as an investment
• in a profit-making scheme, or
• in the course of carrying on a business.

If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain. While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.

8. General Tax Planning Considerations

Tax planning is an on-going concern however it helps to pay particular attention to it at this this time of year. For your benefit and as a timely reminder we have listed below some year-end strategies that should be considered;  

• Trade debtors – Review aged debtors listing prior to 30 June and give consideration to the collectability of debtors. The decision to write off bad debts should be documented prior to 30 June and the accounting systems updated accordingly.
• Invoicing pre 30 June - Consider deferral of billing (for accrual based taxpayers only) to 1 July for clients or customers who are notoriously bad payers.
• Stock Valuation – Stock is required to be valued at the end of the income year at its cost, market selling price or replacement value. There is no obligation to use the same method for each item of stock. Therefore, consideration should be given to the valuation methodology for each stock item.
• For your reference, the definition of each method is as follows:
  • Cost – is the cost of acquiring the trading stock plus any further costs in getting it into its existing condition or location.
  • Market Selling Value – is the current selling value of the item in your selling market.
  • Replacement Value - is the cost of replacing the particular item.
  • Obsolete Stock – You may also elect to value an item of stock below the values determined above, if it is warranted, because of obsolescence or any other special circumstances.
• Trade Creditors – Review trade creditors as at 30 June to ensure all invoices have been received for goods and services provided during the period ended 30 June.
• Staff Superannuation – In order to obtain an income tax deduction for superannuation, the payments must be made to super funds prior to 30 June.  Ensure superannuation for all staff is up to date and paid prior to 23 June to ensure it has time to clear into the super fund prior to 30 June. This can also help avoid creating excess contribution issues for employees if contributions are delayed.
• Superannuation can also be prepaid for the next 12 months – please discuss this with your C&J adviser.
• Bonus Payments – Bonus payments will be deductible, even though the physical payment is not paid until the following year, if, prior to the 30 June, the company is definitively committed to the payment of a quantified amount. This will be evidenced by reference to employment contracts, General Ledger entries and directors resolutions.
• Asset Schedule Review – The asset register of the company should be reviewed on an annual basis prior to 30 June to determine whether there are any items present on the listing which have been scrapped since the last review. These assets need to be written off in the accounts of the company prior to 30 June.
• Prepayments – Individual and small business taxpayers can bring forward tax deductions by prepaying expenses, usually rent or interest, providing these are for a deductible purpose and for a maximum of 12 months. The prepayment must be made pre 30 June. Making a prepayment needs to be carefully reviewed in relation to cash flow requirements and likely taxable income for the following financial year.
• Capital Allowance & Depreciation Schedules for Investment Properties – Are you maximising your tax deduction for depreciation of your investment property? If you have a property that was constructed after 1 July 1985, or even renovated since that date, you may do well to commission a quantity surveyor to produce an extensive depreciation schedule for your property and even any eligible assets attached to the common property that you effectively have a pro-rata ownership interest in. The cost of the report is tax deductible and the tax savings from the depreciation claim will generally recoup the after-tax cost of the report within the first year. Please note that if your investment property was purchased after 9 May 2017 and the property was not purchased new from the developer depreciation entitlements are more limited.
• CGT considerations - Plan carefully: The end of the financial year is an opportune time to review your investment portfolio. When making a decision to sell assets, the tax effect of whether it results in a gain or loss should be considered and you should plan carefully to minimise the tax effect. Capital gains can be offset by capital losses, either brought forward or from sales within the same year of course. Also be aware that exchange of contracts is the critical date for crystalising capital gains.

Should you wish to discuss any of the above, then please get in touch with us either via phone (02) 9908 4744 or via email staff@cjeffery.com.au