The end of another financial year is approaching and what an interesting end to the 2020 financial year it is proving to be – with a virus called COVID-19 creating not only a health crisis but a financial one too! Who would have predicted the closure/hibernation of thousands of businesses, the stopping of footy matches, the self-isolation rules that have change the way we live, work and play or the shortage of toilet paper roles from our supermarket shelves!
This is obviously an unprecedented time and while there is no instruction manual to navigate business owners through this story, by having a plan and actively reviewing your financial position you will have a clearer picture of where you are and where you will land come 30 June 2020. By working with your accountant now you will be able to implement tax planning strategies and ensure you maximise your tax savings for the year.
So, what is tax planning?
It is review process that is designed to identify the optimal tax planning strategies to suit your circumstances and ensure they are implemented before 30 June – you may actually end up paying more tax as a result of not seeking tax planning advice from your accountant! In addition, it allows you plan for the upcoming tax payments over the next 12 months – as no one likes nasty surprises!
Small Business Tips
Here are our favorite tips and tricks to help your business out this tax season:
- Immediate Asset Write Off – if cash flow allows and it is in-line with your business goals then take advantage of the one-time increase to $150,000 (excl-GST) of the instant asset write-off. This applies on a per asset basis, so eligible businesses can immediately write off multiple assets. Remember this may cause a tax bill in future years when you sell the asset as you will have claimed the full deduction this financial year. You also need to make sure you take into account your cashflow not just the tax deduction in your decision making.
- Tax Consequence of Cash Flow Boost – for all entities the cash flow boost payment received as part of the COVID-19 relief package should be recorded in a new income account. Here is a link to our blog with further explanation https://www.mjjaccountants.com.au/items-of-interest/cashflow-boost-have-you-received-a-refund-with-the-lodgement-of-your-bas/. It will be ‘non-assessable non-exempt’ income for tax purposes and not reportable on the BAS. If the recipient was a company, and there were no changes to the 2019 income tax return, such amounts will be required to be disclosed at item “7Q Other income not included in assessable income”. However, the 2020 company income tax return has not yet been released and it may have a separate item where Coronavirus stimulus payments are required to be disclosed. Companies should also note that the cash flow boost will create retained earnings that may need to be declared as an unfranked dividend at some time in the future (as no franking credits will arise in relation to the receipt of the cash flow boost).
- JobKeeper Payments – remember these payments are assessable income of the business that receives them. If your business receives say $3,000 x 13 JobKeeper fortnight payments you will have additional taxable income of $39,000. If your effective tax rate is 30%, your business will pay tax of $11,700 on the JobKeeper payments. The normal rules for deductibility apply in respect of the amounts the business pays to its employees where those amounts are subsidised by the JobKeeper payment. The JobKeeper payment is not subject to GST. We would suggest JobKeeper receipts be recorded in a new income account in your accounting software.
- Trust Minutes– as always, trustees of discretionary (or family) trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the financial year by 30 June. Failure to do so will result in the trustee being taxed at the highest marginal tax rate (48%).
- Timing of superannuation payments – this year it is key to consider if your business should pay the June quarter superannuation before 30 June or after (but by the due date of 28 July to ensure it remains tax deductible). Which year does your business need the tax deduction? If you want a tax deduction in the 2019/20 financial year, the superannuation fund must receive the funds by 30 June 2020. The tax office doesn’t consider a contribution to be made until the amount is actually credited to a super fund’s bank account so an electronic transfer to another bank account on 30 June is not necessarily considered paid. We strongly recommend you make the payment a week or so before 30 June.
- Perform a stocktake – review your stock valuation and write off any stock that is damaged or obsolete. Complete a stocktake on or before 30 June, and remember that stock can be valued at the lower of cost or net realisable value.
- Write off bad debts– businesses can only obtain income tax deductions for bad debts when various conditions are met. Review your debtors and write off any unrecoverable debts. These debts will come off your income in the year in which you write them off, regardless of the year you invoiced them.
- Logbooks for motor vehicle – updating your logbooks ensure you’re claiming the most accurate amounts for your motor vehicle expenses. If your log book is more than 5 years old (or you can’t put your hands on it) we suggest you start a new log book for a 12-week continuous period. For more information on keeping a log book refer to the ATO website https://www.ato.gov.au/uploadedFiles/Content/MEI/Downloads/TaxTimeToolkit_SB_motor-vehicle.pdf
- Timing of expenses – expenses are only deductible when incurred, i.e. there must be a presently existing liability to pay the expense. Many accruals and provisions are not deductible as they represent an estimate of expenses and do not relate to a presently existing liability. We suggest following up contractors and suppliers for all invoices to ensure they are recorded in your accounting software and you obtain the tax deduction in the correct tax year.
- Entertainment expenses – the provision of entertainment by way of food and drink is generally not tax deductible, except in limited circumstances (for example, where you pay fringe benefits tax on the entertainment). Call it marketing, call it a business meeting (or whatever), but really if it smells and feels like entertainment of a client then it is unlikely to be a business deduction. However, if you have a cup of coffee or a light refreshment with a client, then it is likely to be ok and tax deductible, especially if you have a home-based business or don’t have an office to have client meetings. So how do we determine whether it is entertainment or a meeting expense? There are 4 simple questions to answer: (i) Why – what is the reason for the meeting? Is it for refreshment or social? (ii) What was included? A simple light refreshment or a big meal with alcohol (the later less likely to be deductible)? (iii) Where did you go? (iv) When did you hold the meeting, was it during business hours or in the evening after hours? This is certainly a tricky area and we suggest you chat with your Accountant to obtain further guidance on your situation. We have some more information on our website https://www.mjjaccountants.com.au/tax/tax-deduction-taking-staff-or-clients-out-to-lunch/
Here are our favorite tips and tricks to help employees out this tax season:
- Don’t delay – lodge your tax return earlier if you have had a part of the year without income as you may be entitled to a greater refund of the tax you have paid / had withheld on your wages/income.
- JobSeeker/JobKeeper Payments you have received – if you are in receipt of either JobSeeker (from Centrelink) or JobKeeper (from your employer) make sure it has the withholding tax taken out for you, otherwise you are going to be left with a nasty tax bill when you lodge your personal income tax return! Both these payments are considered taxable income and will need to be declared on your tax return.
- Home Office and working from home expenses– to make it easier for people to claim deductions for working from home during COVID-19 (for hours work between 1 March 2020 to 30 June 2020), the ATO have introduced a new ‘shortcut method’ which will allow taxpayers to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses. Claims for working from home expenses prior to 1 March 2020 cannot be calculated using the shortcut method, and must use the pre-existing working from home approach and requirements. The ATO will review the special arrangement for the next financial year as the COVID-19 situation progresses. For more information refer to the ATO website https://www.ato.gov.au/general/covid-19/support-for-individuals-and-employees/employees-working-from-home/
- Study and self-education – if you are doing some extra study during this period of hibernation just be aware that you can can only claim a tax deduction for the portion of these expenses that are directly related to improving your skills in your current employment. You can not claim a deduction for self-education expenses if the course only generally relates to your job or if the course will enable you to get new employment. For further information refer to this guide from the ATO https://www.ato.gov.au/uploadedFiles/Content/IND/Downloads/self-education-expenses.pdf
- Uniform – many of us have a ‘work wardrobe’ but that doesn’t necessarily mean you can claim a tax deduction for the cost of buying the clothes you usually wear to work. Essentially, unless the clothing bears a business logo or is occupation specific (such as a chef’s checked pants) or is protective (such as hi-vis safety wear or steel-capped boots) you cannot claim a deduction for the cost of buying or cleaning the clothing. For more information refer to this ATO guide https://www.ato.gov.au/uploadedFiles/Content/IND/Downloads/clothing-and-laundry.pdf
- Claiming mobile phone, internet and home phone expenses – to claim a deduction of more than $50 you need to keep a 4-week diary of your usage (that is reflective of your entire year – i.e. if you are working from home because of COVID-19 then keeping a diary during this period would not be reflective of your entire year if you don’t normally work from home). For further details on how to calculate your deduction we suggest you refer to the ATO website https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Other-work-related-deductions/Claiming-mobile-phone,-internet-and-home-phone-expenses/
- ATO Guidance for certain industries – did you know the ATO have published occupation specific guides to assist you in claiming tax deductions for the work-related expenses you are entitled to? Here is a link to over 30+ industry guides https://www.ato.gov.au/Individuals/Income-and-deductions/Occupation-and-industry-specific-guides/
- Motor Vehicle– if you use your motor vehicle for work-related travel, there are two choices of how you can claim your tax deduction. If the annual travel claim does not exceed 5,000 kilometres, you can claim a deduction for your vehicle expenses on the cents-per-kilometre basis. Just remember this isn’t a ‘standard’ deduction and you must actually use and be required to use your car for work (travel to and from your home to the office is considered private in nature and cannot be included). This figure includes all your vehicle running expenses, including depreciation. If your business travel exceeds 5,000 kilometres, you must use the log book method to claim a deduction for your total car-running expenses. We have some further information in this blog https://www.mjjaccountants.com.au/tax/motor-vehicle-tax-deductions-to-be-scrutinised-by-the-ato/
- Personal superannuation contributions – to claim a deduction for personal superannuation contributions you must have lodged a notice of intent with your superannuation fund and received a letter back confirming the tax-deductible amount. You will need to provide a copy of this letter to your tax agent so they can claim the deduction.
- Keep good records – there is no such thing as a ‘standard’ deduction that you or your tax agent can include in your tax return. The better tax records you keep, the more deductions you can substantiate, and the less tax you’ll pay. Keeping good records also ensures you can accurately deal with the ATO should they enquire about your tax returns.
The key is to act now! To achieve tax savings and minimise the tax you will pay is to implement relevant tax strategies as soon as possible before 30 June 2020.
MJJ Accounting and Business Solutions are a small business accounting service located on the beautiful Sunshine Coast and would appreciate the opportunity to help you, your friends, family and colleagues. Contact us on 07 5451 1118 for an obligation-free confidential discussion today.
Disclaimer – This article contains general information only. This article is not designed to be a substitute for professional advice and does not take into account your individual circumstances.