Tax Planning Update

Although tax planning is really a year round exercise you may wish to consider the following general tax planning strategies. We have included information for individual and business clients in this newsletter.

Please contact us if you wish to discuss any of the items below:

Recent Changes & Tax Planning Strategies:

Index:

1. Temporary Full Expensing of Assets:

2. Changes to Superannuation Guarantee Contributions from 1 July 2022:

3. Superannuation Contributions:

4. Excess Concessional Contributions and Division 293 Assessments:

5. ATO Approach Regarding Trust Distributions

6. 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 before 30 June 2023.  In order to claim the deduction the asset must have been purchased and installed ready for use by this date

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.

Please note that motor vehicle purchases are still subject to the depreciation cost limit which is currently $64,741. The deductible amount of car purchase is limited to your business use (logbook) percentage times $64,741. This amount will increase to $68,108 from 1 July 2023

          2. Changes to Superannuation Guarantee Contributions from 1 July 2023:

The rate of super guarantee contributions will change from 1 July 2023:

The rate of super that is required to be paid on behalf of employees is increasing from 10.50% to 11% on 1 July 2023. Please make sure you have reviewed the rate of super that your payroll software is calculating and ensure that this has been increased to 11%.

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.

      3. Superannuation Contributions:

Tax Deductible Contributions - Concessional Contributions:

The limit for the 2023 financial year for tax deductible contributions is $27,500.

Please note that if you are intending to claim a tax deduction for contributions made in the 2023 financial year then the contributions need to be PAID by 23 June 2023. Contributions made after this date may be received by funds after 1 July 2023 and may not be tax deductible. If you are contributing into your own SMSF then contributions need to have cleared into the SMSF account prior to 30 June 2023.

It matters not whether contributions to the cap of $27,500 are made personally or from your employer – super guarantee OR salary sacrifice.  You can only claim deductions up to your concessional cap of $27,500.

There is no longer a work test for taxpayers between 67 and 75.

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

• The contribution must be made before 23 June 2023.
• 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, we will provide a Notice of Intent form.
• You may have a higher cap if you have an unused concessional cap from a prior year, please see details of this listed below - Carry-forward Concessional Contributions
• 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 us to discuss this option.

Carry Forward (Unused) Concessional Contributions Cap:

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 us, or 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 $110,000 for the 2023 financial year.

A three year bring forward rule applies for members under 67 years old hence a maximum contribution of $330,000 may be possible.

Non-Concessional contributions can only be made if your balance in super, at 30 June 2022 is less than $1.7 million. If your balance is approaching this figure, please contact us so we can review your ability to make additional contributions.

     4. Excess Concessional Contributions (ECC) tax AND Division 293 Assessments:

You may be assessed by the ATO for either of these items IF;

1. Your adjusted taxable income (income after adding back investment losses, personal super contributions and adding-in reportable FBT and super) is greater than $250,000 you will be liable for an extra 15% tax (Div.293) on your super contributions AND / OR:
2. You exceed the concessional super contributions cap of $27,500. ECC tax is not a penalty tax.  It simply taxes your ECC amount as though it was wages.  A modest  interest charge applies as the ATO has not received the tax in the normal timeframe.

Please see our past newsletters for a discussion of these assessments:

https://www.cjeffery.com.au/news/15-june-2021-tax-planning-update

     5. ATO Approach Regarding Trust Distributions

Trusts commonly form part of our business and investment client structures to legitimately minimise tax.  The ATO has updated its view on how trusts operate in relation to providing tax minimisation opportunities and expects to see the economic benefit of distributions  (the cash) to all trust beneficiaries follow the allocation of trust profits (tax and accounting) for the year.

If you have a trust as a shareholder of your company, or indeed as an operating or investment entity, and plan to make a resolution to distribute profits to adult children thought needs to be given to the quantum of any distribution allocated to that child.  We often balance this around tax and ensuring the lowest possible tax is paid across a family. 

This isn’t to say that all the profit of a trust must be paid out in cash to a beneficiary immediately following year-end.  Trusts can retain beneficiary entitlements and re-invest them in assets within the trust at the beneficiaries request. 

The ATO is targeting arrangements whereby trusts distribute profit to adult beneficiaries and then the beneficiaries do not directly benefit.  If you accumulate the funds within the trust to provide adult children with a benefit at a later date that is acceptable. Records should also be kept of expenses paid on behalf of beneficiaries as this can be used to evidence the economic benefits they have received.

      6. General Tax Planning Considerations:

Tax planning is an on-going activity 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.