TAX TIPS FOR SMALL BUSINESS

Small businesses need to ensure their bookkeeping and lodgments are correct and up to date. You should obtain professional tax advice, especially in areas where more complex tax issues arise. This includes refinanced debt, losses, restructures, capital gains tax, personal services income, trust declarations and distributions, and private company loans.

COVID-19 ISSUES

Losses

Businesses may find themselves in a taxable loss position or seek to use prior year losses when their business operations or structure has changed during the year.

We recommend seeking professional advice on issues like ensuring the loss tests (continuity of ownership and same (similar) business tests are satisfied, the effect of capital injections on continuity of ownership tests and unrealised losses from reductions in asset values.

Bad debts

Businesses should review outstanding debts to assess their likely recoverability with a view to identifying genuine bad debts which could be written off for tax purposes. This includes ensuring that there is little to no prospect of recovery and that the debt is written off prior to year-end.

There may also be Division 7A consequences for the forgiveness of a shareholder’s or associate’s debt.

Trading stock

Many businesses use the simpler trading stock rules as the value of their trading stock doesn’t vary by more than $5000 a year. However, COVID-19 has affected the sales and consequently the inventory levels of some businesses quite significantly and the market selling value or replacement value basis may be more tax-effective. Where COVID-19 has materially reduced the market value of trading stock below its cost, such as for obsolete stock, this may result in your closing stock being valued at an amount less than cost and will effectively generate an allowable deduction.

Instant asset write-off

To assist in maximising your depreciation deductions, from 12 March 2020 until 30 June 2020 the instant asset write-off:

  • threshold amount for each asset is $150,000 (up from $30,000)
  • eligibility has been expanded to cover businesses with an aggregated turnover of less than $500 million (up from $50 million).

The government has also announced an extension of these increased thresholds until 31 December 2020.

JobKeeper

JobKeeper payments are assessable and you can claim deductions for the payments made to employees and business participants. If you have been making JobKeeper claims for your eligible employees and business participants, ensure that your reporting and documentation is up-to-date and correct, and keep this information for five years after the payment was made.

The ATO has identified behaviours of concern including falsifying records or revising activity statements to meet the fall in turnover test or failing to pass on the full $1500 JobKeeper payment to eligible employees. The ATO has signalled a focus on the application of the decline in turnover test, for example where actual and projected turnover have significantly diverged as well as issues identified in PCG 2020/4 Schemes in relation to the JobKeeper payment.

Contact the ATO to rectify any errors or mistakes, as the ATO has limited discretion in relation to overpayments which can be exercised in certain circumstances.

Cash flow boost

Check that you have correctly received cash flow boost amounts and contact the ATO if you find that you have either received an amount in error or have not received a credit when entitled. To assist, the ATO has produced an eligibility companion guide and PSLA 2020/1 Commissioner’s discretion to allow further time for an entity to register for an ABN or provide notice to the Commissioner of assessable income or supplies.

Cash flow boost payments are classified as non-assessable, non-exempt income so no tax will be payable. The cash flow boost is not subject to GST and you are still entitled to a deduction for PAYG withholding paid.

If you distribute the cash flow boost from the business to another entity (for example, making a trust distribution or paying a dividend to shareholders) there may be tax consequences for the recipient.

GST adjustments

Businesses may have had contracts cancelled or had to cancel sales or refund purchases due to the impact of COVID-19. As a result, GST adjustments may be required. ATO guidance is available to assist with adjusting business activity statements and holding adjustment notes.

The ATO has worksheets to assist in calculating GST adjustments for sales, purchases, bad debts, creditable purpose and adjustments summary.

PAYG instalment indexation suspended

The government is in the process of passing legislation that suspends the indexation of PAGY and GST instalment amounts for small businesses in 2020–21. Taxpayers may still vary their quarterly instalments. The changes will apply to instalment quarters commencing on or after 1 July 2020 if the Bill receives Royal assent before 21 August 2020, or otherwise on or after 1 October 2020.

Businesses in financial distress

Unfortunately, COVID-19 has left many businesses facing cash flow difficulties or severe financial distress. Government support such as JobKeeper, rent relief, business grants and temporary changes to the insolvency rules may help some to survive the impacts, however there are other businesses who may need to review their business viability and financial options.

It is important to create a budget and seek to improve the financial position of your business. CPA Australia has produced a factsheet on the meaning of insolvency including indicators such as continuing trading losses, cash flow difficulties, difficulties selling stock or collecting debts. There are tax obligations to consider when deregistering a company and the ATO provides information for businesses in financial difficulty. Individuals facing serious financial hardship can apply for release from their tax debts with the ATO’s approach outlined in PS LA 2011/17 Debt relief, waiver and non-pursuit.

If you think your business is in financial difficulty, it is critical to get proper accounting and legal advice as early as possible.

RECORD-KEEPING TIPS

  • Record cash income and expenses
  • Account for personal drawings
  • Record goods for your own use
  • Separate private expenses from business expenses
  • Keep valid tax invoices for creditable acquisitions when registered for GST
  • Keep adequate stock records
  • Keep adequate records to substantiate motor vehicle claims.

BE UP-FRONT AND HONEST WITH YOUR AGENT AND THE ATO

Getting the basics right has never been more important – good record keeping, substantiation, correct account codes, properly accounting for private use and declaring all cash transactions are essential to assure yourself, your tax agent and the ATO that your tax affairs are in order.

The ATO is getting smarter with its data and taxpayers are increasingly being contacted regarding their income and expense claims. With a focus on discrepancies in returns when compared against pre-fill data or business benchmarks, and increased resources to deal with the cash economy, the onus is on business owners to correctly report their income, claim their expenses and have the appropriate records.

Your tax agent is required to take reasonable care when preparing your return which means they may ask you detailed questions about your cashflow, business performance, personal use of assets and records.

The end of the financial year also sees the promotion of investment products that may claim to be tax effective, and COVID-19 has also increased promoter activity in relation to tax and financial services. If you are considering such an investment, seek independent advice before making a decision.

If you are seeking advice, have made errors or need to correct your business records, speak with a CPA Australia-registered tax agent who can work with you and the ATO to get things right.

MAXIMISE DEPRECIATION DEDUCTIONS

A key feature for small business is the instant asset write off which the government recently increased to $150,000 as part of COVID-19 stimulus measures.

The write-off amount will depend on the date the asset is first used or installed ready for use for a taxable purpose. For businesses registered for GST, the threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.

Eligible business’s aggregated turnover Date range for when asset first used or installed ready for useThreshold 
Less than $500 million12 March 2020 to 30 June 2020*$150,000
Less than $50 million7.30pm (AEDT) on 2 April 2019 to 11 March 2020$30,000
Less than $10 million29 January 2019 to 7.30pm (AEDT) on 2 April 2019$25,000
Less than $10 million1 July 2016 to 28 January 2019$20,000
Less than $2 million7.30pm (AEST) on 12 May 2015 to 30 June 2016$20,000

*For eligible businesses with an aggregated turnover from $10 million to less than $500 million, the $150,000 threshold applies for assets purchased from 7.30pm (AEDT) on 2 April 2019 but not first used or installed ready for use until 12 March 2020 to 30 June 2020.

If you purchase a car for your business, the instant asset write-off is limited to the business portion of the car limit of $57,581 for the 2019–20 income tax year. You cannot claim the excess cost of the car under any other depreciation rules.

You can claim a deduction for the balance of your small business pool if it’s less than $150,000 at 30 June 2020 before applying depreciation deductions.

Where the cost of the asset is not available for the instant asset write-off deduction, it will be allocated to the general small business pool and depreciated at the appropriate rate depending on if it is eligible for accelerated depreciation. Where a balancing adjustment occurs during the year, the asset’s termination value must be deducted from the pool.

PAY THE CORRECT COMPANY TAX RATE AND APPLY THE CORRECT RATE FOR IMPUTATION

Most companies with an aggregated annual turnover of less than $50 million will pay tax at 27.5 per cent in 2019–20. However, some companies with a turnover below $50 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income.

To qualify for the lower tax rate:

  • a company must have an aggregated turnover of less than $50 million where aggregated turnover is the sum of the company’s ordinary income and the ordinary income of any connected affiliate or entity, and
  • no more than 80 per cent of their assessable income is base rate entity passive income.

The full company tax rate of 30 per cent applies to all companies that are not eligible for the lower company tax rate. The ATO view is set out in LCR 2019/5 Base rate entities and base rate entity passive income.

As a corollary to the base rate passive entity income rules in determining the tax rate of a company, there have also been changes to the dividend imputation rules that apply to the franking of dividends by a company.

These differential rates create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your CPA Australia-registered tax agent is best placed to assist you with these issues.

SMALL BUSINESS INCOME TAX OFFSET

You will be eligible for the small business income tax offset of up to $1000 for the year ended 30 June 2020 if you carry on business and your aggregated turnover for the 2020 year is less than $5 million. The offset rate is 8 per cent of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.

The ATO will work out the offset based on the net small business income earned as a sole trader and share of net small business income from a partnership or trust, as reported in the income tax return.

SMALL BUSINESS CGT CONCESSIONS

There are significant capital gains tax savings potentially available to small business where an eligible active asset used in a business is sold for a profit and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year.

Additional conditions must now be met when a taxpayer disposes of an active asset being a share in a company or an interest in a trust on or after 8 February 2018.

Given the complexity of the small business CGT concessions, taxpayers should consult their CPA Australia-registered tax agent for advice.

CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING

Small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.

This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

However, caution must be exercised. Business restructuring is complex, so you should first speak to your CPA Australia-registered tax agent.

REVIEW YOUR PRIVATE COMPANY LOANS

The income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:

  • a payment or a loan by a private company to a shareholder or an associate (like a family member)
  • the forgiveness of a shareholder’s or associate’s debt
  • the use of a company asset by a shareholder or their associate, or
  • the transfer of a company asset to a shareholder or their associate.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether the loan is secured.

There are various things a private company can do before its 2019–20 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.

Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.

COVID-19 may have created issues in relation to Division 7A obligations and the rules around private company loans are complex and changing, therefore you should consult your CPA Australia-registered tax agent on this.

INCREASED ACCESS TO COMPANY LOSSES

The ‘same business test’ for losses has been supplemented with the ‘similar business test’ for losses made in income years starting on or after 1 July 2015. The new test will expand access to past year losses when companies enter into new transactions or business activities.

The similar business test allows a company (and certain trusts) to access losses following a change in ownership where its business, while not the same, is similar, having regard to a number of considerations.

The ‘same business test’ and the ‘similar business test’ will be collectively known as the ‘business continuity test’ and the ATO has provided its view in LCR 2019/1 The business continuity test – carrying on a similar business.

The rules around losses can be complex and taxpayers should consult their CPA Australia-registered tax agent for advice.

WRITE OFF BAD DEBTS

Businesses can only obtain income tax deductions for bad debts when various conditions are met as set out by the ATO in TR 92/18 Income tax: bad debts.

A deduction will only be available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available.

The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business.

Certain additional requirements must be met where the creditor is either a company or trust.

ISSUES FOR TRUSTS

Make trust resolutions by 30 June

As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2019–20 financial year by 30 June.

If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust’s accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

Document the streaming of trust capital gains and franked dividends to beneficiaries

Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

These streaming rules are complex, and taxpayers should consult their CPA Australia-registered tax agent for advice.

Prevent deemed dividends in respect of unpaid trust distributions

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2016 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the unpaid trust distribution in 2019–20.

However, a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company’s 2019–20 income tax return needs to be lodged.

Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.

Trustees and beneficiaries should consult their CPA Australia-registered tax agent on the full implications of these very complex rules if applicable.

ADDITIONAL TIPS

Claim deductions for professional advice when starting a business

Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over a five-year period as was the case previously.

If you established a business during the year, you should speak to your CPA Australia-registered tax agent about claiming professional advice fees as an expense.

Check if the personal services income rules apply

Personal services income (PSI) is income produced mainly from your personal skills or efforts as an individual. You can receive PSI even if you’re not a sole trader. If you’re producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

If the PSI rules apply, they affect how you report your PSI to the ATO and the deductions you can claim.

Paying employee bonuses

If you pay staff bonuses and you want to bring expenses into the 2019–20 year, ensure they are quantified and documented in a properly authorised resolution (e.g. Board minute) prior to year-end to enable a deduction to be incurred for employee bonuses where such amounts are not paid or credited until the subsequent year.

Pay any outstanding superannuation entitlements

Ensure superannuation guarantee payments for employees are up-to-date, and report and rectify any missed payments to the ATO. From 1 April 2019, there are new powers and offence penalties related to the payment of superannuation guarantee obligations.

Employers can also claim deductions for superannuation contributions made on behalf of their employees in the financial year they are made.

Disaster assistance payments

Most one-off assistance payments are tax-free while emergency assistance in the form of gifts from family and friends is not taxable. Regular Centrelink payments however remain taxable, unless specifically exempted by the government.

Australian Government Disaster Recovery Payments are exempt while Disaster Recovery Allowance and Natural Disaster Relief and Recovery Arrangements are generally taxable. The tax treatment of ex-gratia recovery payments depends on the specific circumstances of the payments.

If you use an assistance payment to purchase items for your business, the normal conditions for deductibility apply. The fact that money from a relief fund is used to purchase an item doesn’t affect the deductibility of that item.

Farm management deposits (FMDs)

One of the best tax planning measures available to primary producers is effectively utilising the farm management deposits scheme, or FMDs. They are an effective business and cash flow planning tool.

Primary producers can deposit up to $800,000 in an FMD account, they can have early access to their FMD account during times of drought, and they may be able to offset the interest costs on primary production business debt.

Income averaging

Tax averaging enables primary producers to even out their income and tax payable over a maximum of five years to allow for good and bad years. This ensures that farmers don’t pay more tax over time than taxpayers on comparable but steady incomes.

Primary producers who opted out of income tax averaging for 2009–10 will be automatically reinstated in 2019–20 but can choose to withdraw from averaging and pay tax at ordinary rates for 10 years.

Other primary producer-specific tax specific concessions

Also, don’t forget to consider:

  • the uncapped immediate write-off for capital expenditure on water facilities and fencing assets
  • the deduction for the full cost of a fodder storage asset if the expense was incurred or it was first used or installed ready for use on or after 19 August 2018
  • the outright deduction for capital expenditure for landcare operations and carbon sink forests, and
  • the accelerated write-off for horticultural plants and grapevines.