End of Financial Year Guide 2021

Effective planning and preparation is critical for all taxpayers as the end of financial year approaches and as taxpayers prepare their income tax returns. This guide sets out various items which should be considered in order to ensure that every taxpayer’s tax affairs are in order. This document is intended to be used only as a guide and does not contain legal advice.

1.          INDIVIDUALS

Individual income tax rate thresholds and residency rules:

(a)        In determining which taxation rates will apply to individual taxpayers, a distinction is made between residents and prescribed non-residents. For the purposes of being taxed as an Australian resident, an individual will be regarded as being an Australian tax resident if, at any time during the income year:

• the person was a resident of Australia; or
• the individual was in receipt of a taxable Australian social security, military rehabilitation or veterans’ entitlement pension, benefit or compensation.

The applicable income tax rates for Australian residents for the year ended 2020/21 are as follows:

The applicable income tax rates for non-resident individuals for the year ended 2020/21 are as follows:

2.          SUPERANNUATION

(a)        Quarterly superannuation contributions

The purpose of the superannuation guarantee is to ensure employers provide sufficient superannuation support for their employees. For the quarter 1 April to 30 June 2021, Superannuation Guarantee Contributions (SGC) must be paid by 28 July 2021. To qualify for a tax deduction in the 2020/21 financial year, contributions must be paid by the quarterly due date.

The rate for superannuation contributions by employers on behalf of employees for the year ended 20 June 2021 is 9.5%. As of 1 July 2021, the superannuation contribution rate increases to 10%. This means that any contributions made in relation to any salary or wages paid on or after 1 July 2021, will be subject to the 10% contribution rate.

(b)        Superannuation guarantee and contractors

Employers are required to ensure that they make proper contributions for all eligible employees. Where an employer engages contractors, the contractors duties should be reviewed in order to determine whether the “contractors” are employees for SGC purposes.

(c)        Contribution limits

Superannuation contributions are capped for individuals regardless of whether that contribution is made by them or by their employer. The caps are as follows:

• The concessional contribution cap is $25,000 (which includes superannuation guarantee paid for by an employer, personal contributions and salary sacrificed amounts) but note the ability to make “catch-up” contributions if eligible where contributions were not fully utilised the capacity in earlier years
• The non-concessional contributions cap is $100,000. This threshold will remain available to individuals aged between 65 and 74 years of age if they meet the work test.

3.          DEDUCTIONS

Consider whether any expenses can be prepaid to bring forward deductions (if eligible).

Additionally, in response to COVID-19, work arrangements may have changed for many individuals. If you have been working from home, you may be able to claim some deductions for expenses incurred.

The calculation method used to calculate home office expenses is dependent on each employee’s circumstances. The following can be used as calculation methods:

• shortcut method (only for the 2020/21 income year);
• fixed rate method; and
• actual cost method.

An employee should obtain advice prior to claiming occupancy expenses (e.g. rent, insurance, land tax etc.) because of the potential impact on accessing the full main residence exemption on the sale of the property in the future.

(a)        Shortcut method

The shortcut method allows you to deduct 80 cents for each hour that you have worked from home, provided:

• you are actively working from home (ie fulfilling your employment duties); and
• you have incurred additional running expenses as a result of working from home.

Should you use the shortcut method, it is important to note that you cannot claim any other expenses for working from home for the 1 March 2020 to 30 June 2020 period. It is also necessary that you keep a timesheet or a diary to document the hours you worked each day from home.

(b)        Fixed rate method

The fixed rate method enables you to deduct 52 cents for each hour that you have worked from home. In order to use this deduction method, you must have a dedicated work area/study in your home.

This method covers expenses in relation to:

• the decline in value of home office furniture;
• electricity and gas; and
• the cost of repairs to any home office equipment, furniture or furnishings.

You must ensure that you keep records to document the hours you have spent working from home for the financial year.

You can also claim the work-related portion of your phone expense, internet expense, stationery expense and decline in value of equipment for phones and computers, in addition to the 52 cents per hour.

(c)        Actual cost method

As an alternative to the fixed rate method, the actual cost method can be used to claim deductions that you directly incur as a result of working from home. In comparison to the fixed rate and shortcut method, the actual cost method is not capped at a cents-per-hour rate. The actual cost method requires detailed records in order to substantiate these deductions.

The Australian Taxation Office (ATO) website provides various detailed ways to document the work-related portion of your expenses. If you are going to use the actual cost method, it is recommended that you review the types of records that the ATO recommends you keep in order to substantiate the deductions.

4.          SMALL BUSINESSES

From 1 July 2020, the small business turnover threshold increased from $10 million to $50 million.

However, it is important to note that the threshold for the small business CGT concessions remains at either a $2 million turnover or a $6 million net asset test.

5.          SMALL BUSINESS COMPANY TAX RATE

The company tax rate remains at 30% for companies that have more than 90% passive income or for companies with a turnover of more than $50 million in 2021.

Smaller taxpayers with a turnover of less than $50 million and less than 80% passive income will qualify for the reduced company tax rate of 26%.

For the 2020/21 year, the reduced company tax rate for small taxpayers will be 26%, where their turnover is less than $50 million and less than 80% passive income. For all other companies, the company tax rate remains at 30%.

(a)        Franking account

It is important to ensure that a company’s dividend payments and franking profile are reviewed prior to financial year end, in order to determine whether there are sufficient franking credits for any planned dividend.

Generally, the maximum franking credit rate allocated to a franked distribution is based on the company’s tax rate. Where a company qualifies for the 26% company tax rate, the company will also have a 26% corporate franking tax rate. This will occur provided the company turnover for 30 June 2021 is less than $50 million and the base rate entity passive income test based on its 30 June 2021 income is satisfied.

(b)        Top-up tax

Where there are companies that pay 26% franked dividends, the shareholders will be required to pay a higher top-up tax on the basis their individual tax rate is higher than 26%.

6.          INCOME AND TIMING

The basis upon which taxpayers account for income and expenses will affect their income tax liabilities for the income year ended 30 June 2021. These two methods for accounting for income and expenses are:

• Cash basis – income will be derived in the relevant period that it has been received and expenses are incurred in the relevant period in which the liability is paid (ie interest, dividends, rent).
• Accruals basis – income and expenses are recognised on issue/receipt of an invoice or bill, although they may not yet be due for payment (ie generally for trading income or other business income that relies on circulating capital, or staff or equipment to produce income).

A taxpayer will need to determine whether they account on a cash basis or accruals basis, because this will affect whether amounts are assessable (or deductible) in the income year ended 30 June 2021 or in the following income year.

7.          DEDUCTIONS

A general deduction can be claimed for expenses incurred in the earning of assessable income or the carrying on of a business for the purpose of earning assessable income. Certain deductions may also be available for certain types of expenses specifically provided for in income tax law.

Deductions are not available for expenses that are:

• unrelated to the earning of assessable income;
• capital in nature;
• private in nature; and
• incurred in earning exempt income.

(a)        Bad debts

A deduction for bad debts is allowable if the debt has been written off as a bad debt before the end of financial year (ie 30 June 2021), and an amount in respect of the bad debt has previously been included in the taxpayer’s assessable income.

(b)        Black-hole expenditure

A deduction may be available for certain business capital expenditure on a straight-line basis over a 5-year period. This deduction only applies to certain capital costs (outside of CGT provisions) incurred in relation to a past, present or proposed business that is not otherwise dealt with under income tax law.

A taxpayer may claim a deduction for a gift or donation made over the value of $2 to Deductible Gift Recipients (DGR). Donations must be made to deductible charities prior 30 June 2021. It is important to retain proof of the gift or donation in the event documentation is required to substantiate the claim.

It is important to note that where a benefit is received by the donor, donations are not deductible unless the contribution was made at an eligible fundraising event for a DGR and the contribution is more than $150.

(d)        Trading stock

A deduction can be made for trading stock either on or before 30 June 2021. It is important to consider an appropriate valuation method when valuing trading stock. A choice can be made between cost, market selling value or replacement price. Where a taxpayer is a small business entity, a stock valuation is not required if the difference between the opening and estimated closing value of trading stock is $5,000 or less.

(e)        Temporary full expensing 

Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. Eligible new assets must be first held and used, or installed ready for use for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to eligible second-hand depreciating assets, so long as they are used in the business.

Note, businesses which have an aggregated turnover of more than $50 million, will be unable to immediately deduct the cost of a second-hand asset.

Businesses can also immediately deduct the business portion of the cost of improvements made to eligible depreciating assets if those costs were incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

Certain assets are excluded from being ‘eligible assets’ and are therefore, unable to be immediately deducted. The following assets are excluded:

• assets allocated to a low-value pool or a software development pool;
• certain primary production assets (i.e. water facilities, fencing, etc);
• buildings and other capital works for which amounts can be deducted in accordance with Division 43 of the Income Tax Assessment Act 1997 (Cth);
• assets that either will never be located in Australia, or will not be used primarily in Australia for the purpose of carrying on a business.

(f)          Instant asset write-off

If temporary full expensing does not apply, or you are ineligible to apply it, you may still claim the instant asset write-off, provided the asset was:

• purchased by 31 December 2020; and
• first used or installed ready for use before 30 June 2021.

(g)          Accelerated depreciation

Businesses with a turnover of less than $500 million will be entitled to the following deductions on eligible assets purchased and first used (or installed ready for use) between 12 March 2020 and 30 June 2021:

• immediate deduction for 50% of the cost of the asset in the year purchased, where the asset is valued at more than $150,000 (where it is valued at less than $150,000, then an immediate deduction for the full cost of the asset); and
• the balance of the depreciated amounts would be claimed under ordinary depreciation rules.

For small businesses that use a general pool, a claim can be made of 57.5% of the value of the equipment in the year purchased.

(h)        Similar Business Test

A company can deduct its tax losses if it maintains the same underlying majority owners. Alternatively, a company that fails to maintain continuity of majority ownership will be able to deduct its losses if it can satisfy the Similar Business Test (SBT). Generally, a company will satisfy the SBT if it carries on the same business in the income year in which it seeks to utilise its loss as it had carried on immediately before the change of ownership. A company will not be able to satisfy the SBT if it meets certain ‘negative tests’.

8.       LOSS CARRY BACK RULES

Eligible entities with an aggregated turnover of less than $5 billion can make an election to carry back income tax losses incurred in 30 June 2021. Eligible entities obtain the offset by choosing to carry back losses to earlier years in which there were income tax liabilities. The offset represents the tax liability the company would save if it was able to deduct the losses in the earlier year, using the loss year tax rate.

The amount of the losses able to be carried back is capped at the lesser of:

• the tax effected tax losses;
• the income tax paid; and
• the franking account balance for the year of the election.

An entity will be an ‘eligible entity’ if it is both a company, corporate limited partnership or a public trading trust throughout:

• the income year that the entity is claiming the offset;
• the income year the entity is choosing to carry the loss back; and
• any income years in between; and

a small business entity in the loss year, or would have been a small business entity if the aggregated turnover threshold was $5 billion.

9.       END OF FINANCIAL YEAR PLANNING POINTS

(a)        Division 7A – Loans from private companies

Directors need to ensure that Division 7A loans are properly documented in line with tax legislation.

Loans made by private companies to their shareholders or associates will be treated as deemed dividends under Division 7A unless the loan is repaid by the earlier of:

• the due date of lodgment of the company’s tax return for the year; or
• the date the loan is converted to a formal loan.

The Division 7A rules apply to shareholders and associates, and include relatives of shareholders and trusts, companies and partnerships of the shareholders or their associates.

Where Division 7A loans are in place, it is important to consider the following issues in relation to the loans:

• ensure there is a complying written loan agreement between the parties on commercial terms;
• ensure the minimum loan repayment amounts are paid in the years after the loan is made;
• ensure the loan provides for a ‘minimum benchmark’ interest rate;
• any shortfall between amounts paid and unpaid will result in a deemed dividend in that year;
• a deemed dividend (as a result of a Division 7A loan) is generally unfranked;
• payments and debt forgiveness to a shareholder or associate can also be characterised as a deemed dividend;
• the private use of company owned assets for less than market value consideration can be a deemed dividend; and
• where non-compliant loans resulted from an honest mistake or inadvertent omission, the Commissioner has the discretion to not characterise benefits as deemed dividends or franked dividends.

(b)        Division 7A – Unpaid trust distributions

Trust distributions made to associated private companies which remain unpaid, may be deemed to be a loan to the trust and become subject to Division 7A.

For the 2021 financial year, unpaid distributions to a private company that occurred in the 2021 financial year, may be a deemed dividend to the trust for the current year, except where the trustee:

• has put the amount in a sub-trust for the exclusive benefit of the private company by the earlier of the lodgment date or due date for lodgment of the trust’s 2021 tax return;
• converts the amount to a Division 7A complying loan by the earlier of the lodgment date or the due date for lodgment of the 2021 company tax return; or
• pays the amount to the company by the earlier of the lodgment date or the due date for lodgment of the company’s 2021 tax return.

For unpaid distributions that have been placed into a sub-trust, the annual return on the sub-trust investment must be paid to the private company by 30 June 2021.

10.       PAYMENT OF DIVIDENDS – COMPANIES

Company distributions to shareholders will be regarded as dividends, so long as they do not arise from the share capital of the company.

If a dividend is paid by a company, the company must provide a dividend statement to the shareholder. If the company is a private company, the dividend statement must be provided to the shareholder within four months of the end of the income year (by 31 October 2021). Where the company is a public company, the dividend statement must be provided on or before the date that the dividend is paid.

11.       TRUSTS

(a)        Tax on trust distributions

As a general rule, the trustee of a trust is liable for tax on amounts of income from a trust estate to which no beneficiary is presently entitled. It is important to ensure that individual or corporate beneficiaries are made presently entitled to the income of a trust estate to reduce the tax payable on trust distributions before the end of financial year.

(b)        Trust streaming

Trust streaming rules allow the trustees to stream franked dividends and capital gains to specific beneficiaries, rather than distributing these amounts as part of the general distribution to beneficiaries.

In order to stream franked dividends and capital gains, the trust deed must specifically allow the trustee to stream particular classes of income to specific beneficiaries.

Beneficiaries who are to receive these amounts must be specifically entitled to them. Further, the trustee must record the streamed distributions in the records of the trust.

The trustee’s distribution resolution in favour of the specifically entitled beneficiary would generally be sufficient for this purpose.

The trustee must ensure that the following are recorded by the required dates:

• franked dividend streaming – 30 June 2021;
• capital gain streaming – 31 August 2021.

However, where capital gains are included in the income of the trust, the trust deed generally requires the trustee’s distribution determination to be made either on or before 30 June 2021.

(c)        Trust distributions and resolutions

Most trust deeds for discretionary trusts require trustees to make their distribution determination for the year ended either on or before 30 June 2021.

The ATO expects evidence, preferably written, of the trustees making determinations in accordance with their trust deeds by the date specified in the trust deed.

12.       INTERNATIONAL TAX

(a)        Thin capitalisation

The thin capitalisation rules provide that payments of large sums of interest to overseas companies for financial accommodation provided to their Australian subsidiaries are not allowable deductions in the hands of the Australian subsidiary. The rules apply to Australian entities investing overseas, their associate entities, foreign controlled Australian entities and foreign entities investing directly into Australia.

Taxpayers should examine their debt to equity ratios with reference to the ‘safe harbour’ ratio and consider whether it is appropriate to implement strategies to alter their current ratio (eg capital injection, asset revaluation) to fall within the ‘safe harbour’ levels. Taxpayers must consider whether any strategy to alter their debt to equity ratios would contravene the relevant integrity provisions.

(b)        International Dealings Schedule

If your business is engaged in international dealings with related parties, and has more than $2 million of related-party dealings, you are required to complete an International Dealings Schedule (IDS) and lodge it with your tax return for the financial year. It is important to review the 2020/21 IDS as there have been changes made to the types of information which are required to be disclosed.

Queries

If you have any questions about this article, please get in touch with the author or any member of our Tax team(s).

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.