As 30 June 2020 approaches, now is the time to consider available options to reduce your income tax in the current financial year (2020FY).

The 2020FY has been extraordinary, starting with the devastation of the eastern seaboard bushfires which was followed by the significant economic and social upheaval associated with the arrival of the COVID-19 pandemic. In response, both Federal and State Governments have implemented an unprecedented level of economic relief measures to Australian businesses and workers.

The weakened economic climate together with a raft of economic stimulus measures to navigate through has created a very challenging business environment and a knock-on effect on business performance. As such, these factors must be considered as part of a proper tax planning assessment in 2020FY and 2021FY.

Further, the drop in the company tax rate for eligible companies from 27.5% in 2020FY to 26% in 2021FY provides tax planning opportunities as we leave the 2020FY and move into the 2021FY in the weeks ahead.

Starting point

Any assessment of income tax starts with up-to date and reconciled business financials which contain the Income Statements and other reports necessary to assess business income and the tax payable on that income.

At a minimum, ensuring the bookkeeping and accounting ledgers are accurate, complete and reconciled before year end is a pivotal springboard into meaningful tax planning.

2021 corporate tax rate change

Eligible companies with aggregated business turnover under $50M in the 2021FY will enjoy a reduction in the corporate tax rate from 27.5% in 2020FY, to 26% in 2021FY.

Companies with a mixture of passive income and business income where passive income exceeds 80% will be taxed at the older 30% corporate rate.

As a general proposition, actions to defer company income for eligible companies to the 2021FY and maintaining passive income levels under 80% will assist in securing the lower corporate tax rates.

Special rules apply to corporate beneficiaries of Trusts that should be considered by your tax adviser as part of the tax planning process.

COVID-19 related tax matters

The major Government business relief measures targeted employment support. The two main measures are:

Cash Flow Boost – a PAYG withholding support incentive of between $20K and $100K credited against PAYG withholding amounts payable. From a tax perspective, these relief payments are tax free income.

JobKeeper Payments – a flat $1500 per fortnight (per employee) incentive payment to be on-paid to employees retained in the business. These incentive payments are taxable receipts (but should be offset against the tax deduction for on-payment to the employees).

In addition, the following business incentives were included as part of the Covid-19 business stimulus measures:

Instant Asset Write-Off – Eligible businesses with turnover under $500M can deduct in full the cost of acquiring eligible assets costing less than $150K acquired between 12 March 2020 and 31 December 2020 (extended from 30 June 2020).

Business Investment Allowance – Eligible businesses with turnover under $500M can claim the normal depreciation permitted on new assets acquired not eligible to the above Instant Asset Write-Off, plus a bonus 50% depreciation deduction.

ATO Administration Relief – Taxpayers affected adversely by Covid-19 can access certain ATO relief measures as follows:

    • Vary PAYG instalments to nil for the March 20 and June 20 quarters

    • Claim a refund of PAYG instalments for the September 19 and December 19 quarters

    • Defer Business Activity Statement (BAS) payments and Income Tax Assessments payments to 12 September 2020

    • Change BAS reporting cycles from quarterly to monthly in order to access refund amounts earlier

    • Remission of interest and penalties on certain outstanding tax liabilities

    • Free up access to low interest payment plans of existing tax debts

Other general tax planning considerations

The following is a list of some of the more traditional tax planning matters to consider before financial year end:

Deferral of income – Income becomes taxable when it is derived. Businesses reporting income on an accruals basis could consider deferring invoicing where possible. Businesses reporting on a cash basis derive their income on a receipts basis. Taxable companies eligible to the reduced 26% company tax rate in 2021FY will benefit from any deferral.

Derivation of income (income received in advance) – For businesses in receipt of income in advance of the supply made, an assessment should be made to determine when the income is derived for tax purposes. A supply-based derivation could potentially allow a deferral of income to the 2021FY, even though payment was received in advance in the earlier 2020FY.

Bringing forward deductible expenses – Expenses are generally deductible when they are incurred, ie when the recipient is committed by liability to pay the expense. Whilst expense prepayments are generally deductible in the period they relate to (subject to certain exemptions, certain expenses can be deducted by bringing an order and commitment forward.

Trading stock – Stock takes of Inventory and Work In Progress should be organised at year end. This is an opportunity to identify items that slow moving, obsolete and that should be scrapped. This will help with income tax at year end.

Bad debts – Recoverability of invoices should be carefully assessed before year end. Reasonable past attempts at debt recovery will provide the basis to write off those debts at or before year end with a tax deduction claimed. Further, a GST refund claim can be made on those bad debts for businesses registered for GST purposes on an accruals basis.

Superannuation – Employee superannuation contributions are deductible when paid, rather than when due. The 30 Jun 2020 quarter employee superannuation contribution are due 28 July 2020. However, if they are paid and received by the superannuation fund on or before 30 June 2020, they will be deducted for tax in the 2020FY. For eligible companies, this will be ahead of the 2021FY reduction in the corporate tax rate for eligible companies.

Your next step

To discuss your options for reducing your income tax in 2020, please contact your accountant at Rosenfeld Kant on (02) 9375 1200 or email  gary@roskant.com.au,  raul@roskant.com.au or  elias@roskant.com.au

Partnering with you to deliver efficiencies, growth and success for your business.

The information (including taxation) contained within this article is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Rosenfeld Kant strongly suggest that no person should act specifically on the basis of the information in this document but should obtain appropriate professional advice based on their own personal circumstances.