2020 has been a difficult year for Australian businesses across all sectors when you consider that we started with a drought, then experienced extreme bush fires and topped it off with the COVID-19 pandemic. With all this going on throughout the year and the focus on survival, it is still important to plan and assess the financial position of the business. At this time of year our focus turns to tax efficiency. 2020 should be no different. In fact, it may be more important than before to ensure that you have done all things necessary to ensure that you know what your likely tax position is for the year and whether there is anything that you can do to minimise the tax payable.
In preparing for the end of the 2020 financial year we set out below the areas that you should consider when looking to assess whether you wish to minimise your tax liability for the 2020 tax year or maximise a loss in this year in anticipation of recovering revenue and profits in future years. These can be broken down into items that require no further cash outlay and items that require you to spend money before the end of the financial year.
1.Tax Planning matters that require no further cash outlay
Inventory & Stock
For many businesses inventory/stock is a major asset. The investment in stock requires you to devote sufficient time to managing your stock. As we approach year end you should be:
- reviewing stock for obsolescence and damage
- planning for stocktakes at 30 June
- considering how you are going to value your stock at year end
A business can value its stock for tax purposes at either cost, market selling value or replacement value. By far the most common method of valuing stock is cost. When valuing stock at year end you should remember that:
- you are not required to use the same valuation method each year. Your closing stock figure from the previous year will always be your opening stock value on the current year but the method of valuing the current year’s closing stock can be different to the valuation method used last year. This can allow you to be tax efficient when selecting the most appropriate stock valuation method for your stock on hand at year end. Whichever method is chosen, maintain detailed records to substantiate the closing stock valuation.
- where you stock multiple product lines, you can select a different valuation method for each line. That is, not all stock items have to be valued using just a single valuation method. Some items could be valued at cost while others could be valued using the market selling method due to obsolescence, damage or approaching or past used by dates
The value placed on stock/inventory impacts on the business’ taxable income. Where the value of trading stock on hand at 30 June is greater than the value of the trading stock on hand at the beginning of the financial year the excess is assessable and will increase your taxable income (or reduce a loss). If the closing value of trading stock is less than the value of trading stock on hand at the beginning of the financial year then the difference will be deductible and will reduce your taxable income (or increase a loss).
Bad debts are a complete loss. You have either provided services or goods for which a third party has not paid and is unlikely to now pay. In some cases the third party has experienced financial hardship and simply cannot pay while others simply refuse to pay knowing that the cost to chase the debt is too high.
A debt does not become a bad debt until you have done everything within reason to chase payment of the debt. Once you have fulfilled this requirement and the debt is still outstanding you may then write the debt off as a bad debt. A tax deduction is allowed for the bad debt written off provided that:
- the debt was previously included in the business’ assessable income;
- you have formally written off the debt. As a matter of good practice you should have a file note on debtor setting out what actions were taken to try to secure payment and details of who authorised the debt to be written off and when.
- the debt is written off on or before 30 June.
Also, if you are writing off a bad debt, remember to claim back any GST that you may have previously remitted to the ATO as part of a previous Business Activity Statement
Salary, Wages & Bonuses
This year, 30 June falls on a Tuesday. For many employers who pay on a weekly or fortnightly basis the pay cycle will finish on a Wednesday with the salary or wage being paid to the employee of the Thursday. As the 30 June is a Tuesday, it means that your business may have accrued salaries and wages for possibly 4 business days if paying weekly or 9 business days if paying fortnightly. Because the business has incurred this expense (even though you may not have made payment) you are able to accrue the expense and claim a tax deduction for the amount accrued to 30 June.
While there is unlikely to be many bonuses being paid in the current environment, some businesses have experienced growth and for these businesses they may be looking to pay bonuses based on performance. In order to be entitled to claim a tax deduction for a bonus the employer must, before the end of the tax year, be definitively committed to the payment of a quantified amount. The amount of the bonus being accrued must be capable of being quantified without being subject to any adjustment or confirmation. Therefore, if you wish to claim a tax deduction for an accrued bonus it would be good practice to have on file a note detailing how the bonus was calculated and when it was calculated. Further, it would also be helpful to advise the staff/employees in writing on or before the end of the tax year of the amount of the bonus to be paid in the new tax year.
If the business has a substantial amount invested in plant and equipment and/or office equipment and furniture, it is worthwhile conducting an audit of the items listed in the depreciation schedules to ensure that they are still in use and held by the business. Where items are no longer held installed ready for use (due to obsolescence, damage, theft, disposal) you should look to write off these items. Typically this will relate to depreciable items that are not included in any low value depreciable pools.
In reviewing the depreciation schedule it is also worth re-assessing the effective life and depreciation rates being applied to various depreciable assets. Where the effective life of a depreciable asset reduces (because of obsolescence or wear and tear), the rate of depreciation being applied to that asset will increase.
2. Tax Planning matters that require a cash outlay/investment
Employer Superannuation Payments
Superannuation is only deductible where the superannuation is paid on or before the end of the financial year. Unlike salary and wages, the fact that the business is definitively committed to the expense at a particular point of time will not create the tax deduction. In the case of superannuation, the deduction will only be available once the superannuation expense has been paid. As such, if looking for a tax deduction prior to 30 June we would recommend that you pay employees’ superannuation. Given that employers are required to pay the June quarterly superannuation guarantee charge on or before 28 July, it would make sense to bring forward that payment by a month in order to be able to claim the deduction in the current tax year. This is, of course, subject to cash flow available at the time.
Instant Asset Write Off
In March 2020 the Federal Government announced that it would provide an instant asset write off of up to $149,999.99 per asset for businesses with an aggregated turnover of less than $500m for the 2020 tax year. To be eligible for the instant asset write off in the 2020 tax year:
- your aggregated turnover must be less than $500m
- you must have purchased the asset on or after 12 March but on or before 30 June 2020
- the asset was first used or installed ready for use between 12 March and 30 June 2020
- the cost of the asset must be less than the threshold amount (being $150,000)
NOTE: If your business’ aggregated turnover is between $10m and $500m the $150,000 threshold applies for assets purchased from 7.30pm on 2 April 2019 but not first used or installed ready for use until between 12 March 2020 and 30 June 2020.
If you have acquired a motor vehicle or you are looking to acquire a motor vehicle during eligible period, please note that the instant asset write off for motor vehicles is limited to the depreciation cost limit of $57,581.
Assets that are excluded from the instant write off regime are:
- assets that are leased out or expected to be leased out for more than 50% of the time on a depreciating asset lease
- assets allocated to a low value asset pool
- horticultural plants
- software allocated to a software development pool
- capital works deductions
Finally, the instant asset write off applies to new and second-hand assets acquired and used or installed ready for use.
Prepayment of Expenses
If your business is a small business entity (i.e. a business whose aggregated turnover is less than $10.0M) you are able to prepay expenses and claim an immediate tax deduction for the full amount provided that period ends before 30 June of the subsequent tax year. Examples of expenses that could be prepaid are:
- interest (but not interest in a loan to acquire real property or share/equity based investments)
- lease payments
- accounting fees
Note: Where you own the business premises in a separate entity (being a related party) and you prepay the rent, the prepayment of rent will be fully assessable income of the related party in the year in which the prepayment is made.
3. Other Year End Matters
Other things to keep in mind coming to the end of the 2020 tax year include:
The JobKeeper Payments received by a business form part of the business’ assessable income. As such, you need to take these payments into consideration when planning for the end of the financial year
Interest on Bank Loans
Where you have applied to your bank for relief on loan repayments for the duration of the 2020 tax year and this has been granted by the banks, you should understand that the bank is still charging you interest on the loan. The bank is capitalising the interest to the loan effectively increasing the balance of the outstanding loan. Despite not paying the interest, because the interest expense has been incurred, you are entitled to a tax deduction for the interest that the bank has capitalised. Hence, do not understate the interest deduction merely because the interest is being capitalised.
Business Victoria Support Fund Grant
For businesses that are successful in receiving the $10,000 Business Support Fund grant from the Victorian Government we advise that this grant is assessable in the year in which you receive the grant. As such, you will need to include the $10,000 payment as part of your 2020 assessable income.
If you would like to discuss any of these matters please do not hesitate to contact either our office on 03 96291433 to discuss.