End of Financial Year Guide
Effective planning and preparation are critical for all taxpayers as the end of financial year approaches. This guide sets out various items that should be considered prior to 30 June 2019 in order to ensure that every taxpayer’s tax affairs are in order. This guide is intended to be read in conjunction with the checklist provided below. This document is intended to be used only as a guide and does not contain comprehensive legal advice.
Individual income tax rate thresholds and residency rules
In determining which taxation rates will apply to individual taxpayers, a distinction is made between residents and prescribed non-residents.
A. For the purposes of being taxed as an Australian resident, an individual will be regarded as being an Australian tax resident if:
- The person was a resident of Australia; or
- At any time during the income year, that individual was in receipt of a taxable Australian social security, military rehabilitation or veteran’s entitlement pension, benefit or compensation.
The applicable income tax rates for Australian Residents for the year ended 2019 is as follows:
|Taxable income||Tax on this income|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001-$180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
The applicable income tax rates for non-resident individuals for the year ended 2019 is as follows:
|Taxable income||Tax on this income|
|0-$90,000||32.5c for each $1|
|$90,001-$180,000||$29,250 plus 37c for each $1 over $90,000|
|$180,001 and over||$62,550 plus 45c for each $1 over $180,000|
2. Small Business
From 1 July 2016, the small business turnover threshold increased from $2 million to $10 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.
3. 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 2019.
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 27.5%.
A. Franking Account
It is important to ensure that a company’s dividend payments and franking profile are reviewed prior to the financial year end, in order to determine whether there are sufficient franking credits for any planned dividend.
Generally, the maximum franking credit allocated to a franked distribution is based on the company’s tax rate. Where a company qualifies for the 27.5% company tax rate, the company will also have a 27.5% corporate franking tax rate. This will occur provided the company turnover for 30 June 2018 is less than $50 million and the base rate entity passive income test based on its 30 June 2018 income is satisfied.
B. Top-up Tax
Where there are companies that pay 27.5% franked dividends, the shareholders will be required to pay a higher top-up tax because the franking offset received will be lower than if the dividend was franked at 30%.
4. 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 2019. These two methods are:
- Cash basis – income will be derived in the relevant period that it has been earned and expenses are incurred in the relevant period in which the liability arises (i.e. interest, dividends, rent); and
- Accruals basis – income will be derived in the relevant period that it has been earned and expenses are incurred in the relevant period in which the liability arises (i.e. 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 any income earned (or expenses incurred) are on a cash basis or accruals basis as this will affect whether amounts are assessable (or deductible) in the income year ended 30 June 2019.
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 bad debt before the end of the financial year (i.e. 30 June 2019), 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 can be made for certain business capital expenditure on a straight-line basis over a 5 year period. This deduction only applies to capital costs incurred in relation to a past, present or proposed business that is not otherwise dealt with under income tax law.
C. Gifts and Donations
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 to 30 June 2019. Other specific provisions, such as the provisions allowing a deduction for artwork donated to certain recipients, should be considered where relevant. It is important to retain the proof of the gift or donation in the event documentation is required to substantiate the claiming of a deduction.
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 2019. 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, stock valuation is not required if the difference between the opening and estimated closing value or of trading stock is $5,000 or less.
Obsolete, slow moving or damaged stock should also be identified by 30 June 2019 and disposed of for income purposes in order to receive a deduction.
E. Small Business Write Off
An immediate deduction is available for a low-cost asset in the income year in which it was first used or installed ready for use for a taxable purpose.
In order to qualify for the instant asset write off, if assets were purchased from 7.30pm (AEST) on 12 May 2015 and first used or installed ready for use:
- from 7.30pm (AEST) on 12 May 2015 until 28 January 2019, you can immediately deduct the business portion of most depreciating assets costing less than $20,000; and
- from 29 January 2019 until before 7.30pm (AEDT) 2 April 2019, you can immediately deduct the business portion of most depreciating assets costing less than $25,000.
F. Similar Business Test
A tax loss for an income year (the loss year) can be carried forward and deducted from assessable income in future years if the company passes either:
- The continuity of ownership test, which is failed if the company has undergone a change of more than 50% in ownership or control; or
- If it fails the continuity of ownership test, the same business test.
Amendments have been made in order to supplement the same business test with the “similar business test”.
The similar business test provides that the company can carry forward and utilize its prior year losses if it carries on a business which is “similar” to the business carried on immediately before the failure of the continuity of ownership test.
In assessing whether a business is “similar”, regard must be provided to the following factors:
- the extent to which the asses (including goodwill) that are used in the current business to generate assessable income were also used in the company’s former business to generate assessable income;
- the extent to which the activities and operations from which the current business generates assessable income were also the activities and operations from which the former business generated assessable income;
- the extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services or marketing of the former business.
6. Taxation of Partnerships
A partnership is not a legal entity but rather (typically) a contractual relationship between partners. Partners will be entitled to a share of the partnership assets and profits in accordance with the proportions set out in the applicable partnership agreement. If no partnership agreement exists, the partners will be deemed to be entitled to, or be liable for, an equal share of the profits and losses of the partnership for the applicable income year.
Any income derived by a partnership in the applicable income year will be assessable in the hands of the partners according to their proportional entitlements to the net partnership income.
7. 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 date of lodgement; or
- the due date for lodgement of the company’s tax return for the year; or
- the loan is converted to a formal loan.
The Division 7A rules apply to shareholders and associates and includes relatives of shareholders and trusts, companies and partnerships of the shareholders of their associates.
Where Division 7A loans are in place, it is important to consider the following issues in relation to the loans:
- ensure the minimum loan repayment amounts are paid in years after the loan is made;
- any shortfall between amounts paid an 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
Distributions made by trusts to associated private companies which remain unpaid at the end of the following financial year may be deemed to be a loan to the trust and become subject to Division 7A.
For the 2019 financial year, unpaid trust distributions that arose in the 2018 financial year may be a deemed dividend to the trust unless the trustee:
- has put the amount in a sub-trust for the exclusive benefit of the private company by the earlier of the lodgement date or due date for lodgement of the trust’s 2018 tax return;
- converts the amount to a Division 7A complying loan by the earlier of the lodgement date or the due date or lodgement for the 2019 company tax return; or
- pays the amount to the company by the earlier of the lodgement date or due date for lodgement for the company’s 2019 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 2019.
8. 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. With regard to a private company comprising less than 50 shareholders, a loan arrangement or financial accommodation provided to a shareholder may also be deemed to be a dividend under Division 7A (refer to section 7).
If a dividend is paid by a company, that company should comply with the relevant dividend statement requirements for time and form.
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 any beneficiaries are made presently entitled to the income of a trust estate to reduce the tax payable on trust distributions before the end of the 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 not prevent the trustee from streaming these amounts 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 must be recorded by the required dates:
- Franked dividend streaming – 20 June 2019;
- Capital gain streaming – 31 August 2019.
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 2019.
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.
The Australian Taxation Office (“the ATO”) expect evidence, preferably written, of the trustees making determinations in accordance with their trust deeds by the date specified in the trust deed.
A. Quarterly Superannuation Contributions
The concept of superannuation guarantee requires employers to provide sufficient superannuation support for their employees. For the quarterly period of 1 April to 30 June 2019, Superannuation Guarantee Contributions (“SGC”) must be paid by 28 July 2019. To qualify for a tax deduction in the 2019/20 financial year, contributions must be paid by the quarterly due date.
B. Superannuation Guarantee and Contractors
Employers are required to ensure that they make proper contributions for all eligible employees, including independent contractors for SGC purposes. Where an employer engages contractors, their contracts should be reviewed in order to determine whether the individuals are treated as employees for SGC purposes.
C. Contribution Limits
Contributions to superannuation are capped for individuals regardless of whether that contribution is made by them or someone else. 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) for individuals aged up to 75 years;
- the non-concessional contributions cap is $100,000 (or with the current bring-forward rules a total of $300,000 ($100,000 for the current year and $100,000 for each of the previous two years)) for those aged under 65 prior to 30 June 2019.
From 1 July 2018, individuals aged 65 years or older, will be encouraged to make non-concessional contributions of up to $300,000 to their superannuation fund after selling their family home. The sale must be of a principal place of residence that has been owned for the past 10 or more years, which will limit the effectiveness of this measure. Where a couple jointly owns the family home, they will each be able to contribute up to $300,000.
E. Pension Payments
Self-Managed Superannuation Funds (“SMSF’s”) that are paying pensions will be required to review their pension arrangements to determine the required pension payments for the year and ensure that any PAYG Withholding obligations have been met.
F. Event Based Reporting for SMSF’s
As of 1 July 2018, SMSF’s are required to adhere to new reporting obligations. The new obligations require the SMSF’s to report events affecting a member’s transfer balance to the ATO.
11. International Tax
A. Thin Capitalisation
The thin capitalisation rules provide that certain large interest payments 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 2018/19 IDS as there have been changes made to the types of information which is required to be disclosed.
12. Cryptocurrency Crackdown
It has been announced that the ATO will begin collecting records from Australian cryptocurrency designated service providers on an ongoing basis, to ensure people trading in cryptocurrency are paying the correct amount of tax.
Bitcoin and other cryptocurrencies are considered to be property for tax purposes in Australia. This means that individuals who make profits from participating in trade may be liable to pay capital gains tax.
A CGT event occurs when you have disposed of your cryptocurrency. A disposal can occur when you:
- sell or gift cryptocurrency;
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency);
- convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars; or
- use cryptocurrency to obtain goods or services.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded.
If the disposal is part of a business you carry on, the profits you make on the disposal will be assessable as ordinary income and not as a capital gain.
It is important to note that while a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.
It is important to note that where an Australian resident invests in cryptocurrency (not in the capacity of carrying on a business) and holds that property for at least 12 months, that taxpayer may be eligible for the 50% CGT discount.
13. ATO Audit List
The ATO recently claimed that there was an $8.7 billion shortfall between the tax individuals were meant to pay and the tax they were actually paying. As a result, the ATO will be paying close attention to the following deductions:
- claims for work-related clothing, dry cleaning and laundry expenses;
- home office use (including claiming for ‘occupation’ costs like rent and rates);
- overtime meal claims;
- union fees and subscriptions;
- mobile phone and internet costs, with a particular focus on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related;
- motor vehicle claims where taxpayers take advantage of the 68 cents per kilometer flat rate available for journeys up to 5,000kms;
- incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts;
- property related deductions (ie excessive interest expense claims, incorrect apportionment of rental income and expenses between owners and rental homes that are not genuinely available for rent)
The ATO will further be focussing cryptocurrency and sharing economy. Examples quoted by the ATO in relation to sharing economy include ride-sourcing, renting out a room or house for accommodation (ie AirBnb hosts), renting out parking spaces, providing skilled services (ie Airtasker), supplying equipment or tools, completing odd jobs and renting out equipment.
Michael Kohn and Ellen Karakoussis
For further information please contact a member of our Tax team
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.