As the end of the financial year approaches, middle-sized family businesses in Perth need to prepare for what lies ahead. Engaging in strategic tax planning with your Perth tax accountant can help these businesses maximise their potential for growth while minimising their tax liability. Key considerations include the use of Division 7a, temporary full expensing, trust resolutions and s 100A, superannuation contribution strategies, the 2023 tax loss carry-back and franking credit strategies.
The importance of planning now:
Tax planning for many is keeping the long term strategy on track. However that includes a series of steps and considerations somebody needs to do before 30 June 2023 so it is implemented.
Importantly your tax accountant around Perth can only record transactions occurring when they come to prepare your income tax return. So, getting superannuation contributions made on time, properly issuing dividends and attending to trust resolutions now is a must. Further, items like purchasing equipment to take advantage of temporary full expensing must be done and installed before 30 June.
So, if you wait to do your tax planning after the event you might miss opportunities – or create significant problems. In many ways, great tax planning goes hand in hand with understanding the importance of tax law compliance.
Private Company Loans:
Division 7A of the Income Tax Assessment Act 1936 is designed to prevent private companies from making tax-free distributions to shareholders or their associates. Under Division 7A, these distributions are treated as dividends unless they are structured as Division 7A-compliant loans.
Before the end of the financial year, businesses should review all transactions between the company and its shareholders or associates to identify any potential Division 7A implications. If required, formal loan agreements can be established to ensure compliance with Division 7A, which will need to include minimum interest rates and maximum loan terms as per the ATO’s guidelines. These loan agreements are technical and should be prepared by your lawyer under the instruction of your Perth tax accountant.
If you fail to make repayments on time as part of your tax planning there are strategies to fix tax mistakes with your private company loans.
Utilising Temporary Full Expensing:
The Temporary Full Expensing measure, introduced as a response to the COVID-19 pandemic, allows businesses to write off the full cost of eligible depreciable assets which has caused almost all of our clients to now run a fixed asset register and a tax register. This can lead to significant tax savings for businesses that have invested or are planning to invest in such assets.
Businesses should consider bringing forward their investment plans to take advantage of this measure before the end of the financial year. It’s essential to ensure that assets meet the eligibility criteria – they must be new or second-hand and first held by you when you first used or installed them ready for use, from 6 October 2020 until 30 June 2023.
Trust Resolutions and the Application of Section 100A:
Trustees of discretionary trusts typically make trust distribution resolutions before the end of the financial year to determine who will receive the trust income and capital gains. However, the ATO’s recent focus on section 100A and attacking family trusts means that certain trust distributions can be treated as “reimbursement agreements” and subject to tax at the top marginal rate.
Businesses should carefully review their trust resolutions to ensure they don’t inadvertently fall foul of section 100A. If a trustee intends to distribute to a related party, the transaction should be structured in a way that does not create a risk under section 100A.
Superannuation Contribution Strategies:
Superannuation strategies, such as carry forward concessional catch-up contributions, allow individuals to contribute more to their super and claim a tax deduction. Individuals can carry forward unused concessional contribution cap amounts accrued from 1 July 2018, but only if their total super balance is less than $500,000.
To utilise this strategy, business owners should review their total super balance and previous years’ concessional contributions. Making additional super contributions can not only help save for retirement but also reduce taxable income.
If a small business owner combines strategies like carry forward contribution combined with dividends paid from the trading business that might create a generous tax refund at a personal level. If you are unsure about the level of concessional catch up contributions remaining for you – your Perth tax accountant can look up the details on the ATO website.
2023 Tax Loss Carry Back:
The tax loss carry back provision provides cash flow support to businesses that have been affected by economic downturns. Businesses can carry back tax losses from the 2022-23 income year to offset previously taxed profits as far back as the 2019-20 income year.
If your business expects to make a tax loss in 2023, consider whether you can utilise the tax loss carry back provision to receive a tax refund when lodging your 2023 tax return.
Franking Credit Strategies Between 30% Tax Rates and 25% Base Rate Entities:
With the tax rate for base rate entities reduced to 25% from the 2021-22 income year onwards, careful planning is required to maximise the benefits of franking credits.
If your company is a base rate entity, it can only frank dividends up to the 25% company tax rate. However, for businesses with corporate beneficiaries taxed at 30%, the franking rate differential can result in ‘top-up tax’ being payable on franked dividends received.
In contrast, the 25% tax rate could offer potential tax savings for shareholders who are individuals, trusts, or superannuation funds, as the franking credits might cover a more significant proportion of their tax liability on the dividends.
To navigate these complexities, consider the timing and amount of dividends, the composition of your shareholder base, and the potential impact of the franking rate differential on their tax position.
Small business technology boost
If your business is turning over less than AUD $50m you will get a 20% extra tax deduction for investing into laptops, cyber security systems or cloud based services.
This is not yet law – but looking at other similar tax incentives they will flow through a trading trust as compared to a company.
The boost is limited to $100k of expenditure (so a $20k free tax kick)
Superannuation pensions
If your Perth tax accountant has structured the tax profile of your superannuation fund in a pension phase it will be enjoying its income tax free. However to continue to enjoy that tax free status of your superannuation fund you will need to make sure that the minimum pension for 2023 is paid before 30 June 2023 – as in the pension leaves your bank account.
Importantly from 1 July 2023 the pension rates are reverting back to the ordinary rates. The 2023 pension rates were based on the 50% reduction due to Covid.
Capitalizing on Lower Tax Rates for Small Business Entities:
If your business is a small business entity with an aggregated turnover of less than $50 million, it can benefit from lower tax rates, which have been reduced to 25% for the 2021-22 financial year onwards. This offers potential tax savings and more retained profits for reinvestment or distribution.
Before the end of the financial year, review your eligibility for small business entity status and, if applicable, plan your business strategies to make the most of the reduced tax rate.
There are tests for companies that generate both business income and investment income so check with your Perth tax accountant to make sure you enjoy the 25% tax rate and consider strategies now to ensure that you do.
Streamlining Payroll Tax Processes:
Payroll tax, a state-based tax on the wages paid by employers, can be a significant cost for businesses. In Western Australia, businesses with Australia-wide annual taxable wages exceeding $1 million need to pay payroll tax.
Review your payroll processes to ensure that you’re accurately reporting all taxable wages, including wages, fringe benefits, and superannuation contributions. Consider whether you can access any available exemptions, such as the payroll tax exemption for trainees in Western Australia.
Conclusion:
Strategic tax planning is essential for Perth’s middle-sized family businesses as the end of the financial year approaches. By understanding and applying tax measures like Division 7A, temporary full expensing, trust resolutions, and the implications of s 100A, as well as optimising superannuation contribution strategies, utilising tax loss carry back provisions, and implementing franking credit strategies, these businesses can enhance their growth potential while minimising tax liabilities. Seeking the advice of a professional Perth tax accountant can be invaluable in navigating these complexities and ensuring compliance with all tax obligations.
