The end of the financial year is fast approaching, so it’s time for businesses to asses and ensure that companies are operating tax effectively and ensure business finances are in order for the upcoming financial year.

  1. Check eligibility for small business tax regime

Small business entities (SBEs), consistent of individuals, partnerships, companies, and trusts with a turnover of under $2 million might be eligible for a number of tax benefits. Whilst you may meet the $2 million turnover test and are entitled to specific concessions – additional testing will apply in order to qualify and claim things such as small business CGT concessions.

  1. Review salary sacrifice arrangements

Employees may consider entering into tax-effective salary sacrifice arrangements under which gross salary is foregone to obtain either a packaged car for fringe benefits tax purposes or to make additional contributions to superannuation. Dictated to complex transitional rules, a 20% flat rate applies to calculate a car fringe benefit under the statutory formula method despite how many kilometres the vehicle actually travels annually. There might still be some tax savings in packaging a car under the rules in comparison to the cost of funding your car expenses out your net salary. Employees who primarily use the vehicle for work-related travel may be entitled to obtain tax savings associated in packaging a car, through the calculation of FBT paid on the car under the operating cost method rather than funding their car expenses through after-tax salary. You should always seek the advice of your friendly Marsh Tincknell accountant to discover whether such salary sacrifice arrangements would be tax effective.  

  1. Make trust resolutions by 30 June

Trustees of discretionary trusts are required to make and document resolutions on how trust income for the 2018-19 year is to be distributed by June 30 at the latest. When a valid resolution is not executed by June 30, default beneficiaries under deed will become entitled to trust income and subjected to tax (regardless of receiving any cash distribution), or the trustee will be assessed at the highest marginal rate of 46.5% regardless of circumstance.   Evidence of an effective resolution must be provided by a trustee, in the form of either of the following – draft minutes, file notes or an exchange of correspondence that has been documented. However, the trust’s accounts are not required to be prepared by June 30. A corporate trustee would need substantial time to notify its directors of a meeting to pass and minute a resolution, therefore notice should be sent out well ahead of the June 30 deadline.

  1. Stream trust capital gains and franked dividends

Trustees of discretionary trusts can stream capital gains and franked dividends to differing beneficiaries where the deed allows the trustee the ability to make a beneficiary ‘specifically entitled’ entitled to those amounts, and the beneficiary is entitled or receives an amount in equal value to the net financial benefit of the gain or dividend. The balance of a trust’s taxable income with the exclusion of gains and dividends will proportionally be assessed to beneficiaries to the extent of which the trustee has made the beneficiaries are currently entitled to a share of trust income. Therefore, a trustee will only be assessed on trust’s taxable income at a rate of 46.5% to the extent to which beneficiaries are neither currently entitled to trust income or specifically entitled to a capital gain or franked dividend. Streaming rules are complex and therefore you should contact Marsh Tincknell to understand how these rules work.

  1. Private company rules

The ATO has the ability to treat a payment or loan by a private company to a shareholder or an associate (e.g. family member) as an unfranked dividend under a Division 7A – unless there is an exemption that applies or if a formal loan agreement is in place requiring minimum interest and principal repayments. A private company can do a variety of things before the due date of lodgement for the 2018-19-year income tax return to minimise the risk of a shareholder or an associate deriving dividend. Contingent upon the circumstances, these strategies may include the repayment of a loan, declaration of a dividend or the entering of a complying loan agreement before the return’s due date of lodgement.   You should always consult your Marsh Tincknell accountant if you think a deemed dividend has arisen for the year-end.

  1. Prevent deemed dividends in respect of unpaid trust distributions

If an unpaid distribution is owed by a trust to a related private company beneficiary arises on or after 1 July 2018, it will be treated as a loan by the company where the company is controlled by the same family group. The associated trust might be taken to have derived a deemed dividend for the amount of the unpaid trust distribution for the tax year of 2018-19. A deemed dividend may be prevented if the unpaid distribution is paid or complying loan agreement is entered into before the lodgement due date. The amount of a deemed dividend will not rise if it is held in an eligible sub-trust arrangement for the sole benefit of the private company and other conditions are satisfied. If applicable trustees and beneficiaries should seek advice from their Marsh Tincknell accountant regarding the full implications of these complex rules.

  1. Write off bad debts

Businesses may only obtain income tax deductions for bad debts when a variety of conditions are met. A deduction will only be available when the debt still exists at the time of the write-off. Therefore, if a debt is forgiven or compromised before it is written-off there will be no deduction available. The debt must be irrecoverable and be written-off as bad in the year in which the deduction is claimed. The amount representing the bad debts must have also been previously brought to the account as assessable income or lent in the ordinary course of carrying on a money lending business. Specific additional requirements must also be met when the creditor is either a company or trust.

  1. Maximise depreciation deductions

A taxpayer who is classified as an eligible small business entity (SBE) may choose to claim tax depreciation deductions for most depreciating assets on a more concessional and simpler basis. An SBE can claim an immediate deduction on a depreciating asset whose GST-exclusive cost is less than $20,000 in the 2018-19 provided it’s used or installed ready for use for an income-production purpose by 28 January 2019 or less than $25,000 if installed before 2 April 2019 – 7:30pm (AEDT). After this time the Federal Government has deemed that an SBE will only be allowed to claim an immediate deduction for a depreciating asset whose GST exclusive cost is less than $30,000 under the provision it is used or installed from 2 April 2019 – 7:30pm (AEDT). Businesses who are impacted by the changes should consult their Marsh Tincknell accountant on the application of the immediate deductibility rules that are applicable to depreciating assets that are installed ready for use on or after 2 April 2019 – 7:30pm (AEDT).