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The tax year-end is an important time to ensure your business and personal tax affairs are in order. Here’s some key things to remember.

One of the most important aspects of tax planning is to ensure all appropriate elections and choices have been made and the correct documentation is in place for transactions that have or are to be finalised before 30 June 2021.

This is even more essential this year given the massive disruption businesses have experienced through the pandemic.

Note: This article is focused on the usual year-end tax planning challenges, rather than any changes that have occurred in the Federal Budget. This article is not meant to be exhaustive and your individual and business circumstances must be considered.

Timing of income derivation
Consider whether the amount is income or capital because income and capital gains have different tax timing rules.

• What is the appropriate method of income recognition for each type of income: cash or accruals?
  • Cash (generally) for income from personal services, rent, interest, dividends and other income from non- business investments.
  • Accruals (generally) for trading income or other business income that relies on circulating capital or staff or equipment to produce income.
• Consider specific rules to determine when income is derived and, if appropriate, whether income can be deferred until after 30 June 2021.
• Alternatively, if your client is in a tax loss position, consider whether they can accelerate income prior to 30 June to recoup such losses.

Income received in advance

• Income received in advance may not be derived (and taxed) until the services are provided. Income received in advance should be credited to an unearned income account.
• This rule will generally not apply if payment is not refundable if services are not provided.
• Income received in advance must be released to profit when services are provided, or if services are not provided, when it is determined the services will not be provided and no refund is claimed by customer.

Timing of expenses

• Expenses are generally deductible if incurred by 30 June 2021. This requires a presently existing liability.
• Provisions are generally not deductible. Some accruals are not deductible.
• There are specific rules that determine when some expenses are deductible (in particular, see the following prepayment rules).

Repairs

Ensure repairs are incurred on or before 30 June 2021 to obtain the deduction in the 2021 income year, but they must not be:

• initial repairs
• substantial replacement of an asset or
• improving an asset.

Gifts

• Donate to deductible charities before 30 June 2021 (assuming you are in a profit position).
• Ensure the payment is to an endorsed deductible gift recipient (DGR).
• Donations are not deductible if a benefit is received by the donor, unless the contribution was made at eligible fundraising event for a DGR and contribution is more than $150:
  • Deduction will be reduced by value of any benefits received at the event.
  • GST inclusive value of benefits received must not exceed lesser of 20% of contribution and $150.

Bad debts

• Review bad debts before 30 June 2021.
• Remember the rules for deducting bad debts. Write-off (and record in board minutes) bad debts before year end to get a deduction in that year (provision for doubtful debts not deductible).
• Bad debts may not be deductible if there has been a change in ownership or control of a company or trust (unless company passes the same business test).

Trading stock

• Consider an appropriate valuation method ­­– you can choose cost, market selling value or replacement price.
• Identify any obsolete stock – special valuation rule. Scrap unwanted stock by 30 June 2021.
• If taxpayer is a small business entity, stock valuation is not required if the difference between opening and estimated closing value of trading stock for the year is $5,000 or less.

Prepayments

• If expenses are not subject to the prepayment rules, prepay deductible expenditure by 30 June 2021.
• The prepayment rules spread a pro-rated deduction over more than one year, where the expenditure provides benefits after end of the current income year.
• The prepayment rules do not apply to excluded expenditure, which includes:
  • salary
  • amounts required to be paid by law or a court and
  • expenditure under $1,000.
• Small business entity taxpayers and non-business individuals are allowed prepayments in the year incurred if the benefit does not extend beyond 12 months.

Audit fees

Audit accruals are not deductible unless the audit contract creates a presently existing liability before 30 June 2021 (subject to the prepayment rules discussed above).

Taxable payments reporting system

Businesses in building and construction are required to record payments to contractors and report these payments to the ATO. From 1 July 2018, businesses engaged in the courier or cleaning industries were also required to make these reports. From 1 July 2019, the rules will extend to businesses engaged in IT, road (freight) transport, and security industries. The annual report is due to be lodged by 21 July 2021.

Superannuation

Some of the following super fund issues require advice from a qualified financial adviser:

• Employee superannuation guarantee quarterly contributions are required by 28 July 2021.
• Ensure at least the minimum pension payments have been made for those in pension phase.
• Before making any contributions prior to year-end, ensure you are aware of your contribution caps.
• Make sure you take into account contributions already made and ensure contributions made for the year do not exceed the concessional and non-concessional contribution limits.
• Ensure that contributions made near the end of the year are actually received by the fund by 30 June to ensure deductibility.
• Review salary sacrifice arrangements, especially if you have more than one employer, to ensure you do not breach your concessional cap in total.

Super guarantee and contractors

Employers need to ensure they make super contributions for all eligible employees, including certain independent contractors for superannuation guarantee charge (SGC) purposes. Under SGC, “employee” includes individuals who are employees in the ordinary sense (PAYG) and independent contractors engaged under a contract primarily for the provision of labour. Where you engage contractors, you should review the contracts to determine whether the individuals are treated as employees for SGC purposes.

Director and employee entitlements

• Conduct shareholders’ meetings before 30 June 2021 to approve directors’ fees and bonuses to receive deductions for the 2020-2021 year.
• Ensure arrangements for employee bonuses based on 2021 results are in place before 30 June 2021, and confirm bonus amounts via Board minutes to receive the deduction for the 2021 year.
• Ensure employee salary packages that include fringe benefits and/or additional employer super contributions are reviewed and in place before the sacrificed salary is earned by the employee.

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