30 JUNE 2023 YEAR END PLANNING

The current financial and income tax year ends on Friday 30 June 2023.

This general newsletter might highlight some items that require your attention by 30 June 2023 if you are an individual taxpayer, have a private company or trust, own a business or hold investments.

Please click on the links below for:

As always, we are here to help. If you have any questions, or require any assistance with your year-end tax planning or business matters generally, please do not hesitate to contact us.

KEY SUPERANNUATION ISSUES

Australia’s superannuation rules have become increasingly complicated following significant changes in recent years. This section focuses on the current limits applying to contributions received by your superannuation fund on or before 30 June 2023 and changes applying from 1 July 2023.

Annual Concessional (ie Tax Deductible) Contribution Limits

The contribution caps for tax-deductible superannuation contributions for all eligible individuals are as follows:

Age at Previous
30 June    
2022-23 Year2023-24 Year
Under 67$27,500$27,500
67 to 74 and
satisfy work test 
$27,500$27,500
75 and overMandated
Contributions Only 
Mandated
Contributions Only

 

Notes 
  1. Personal superannuation contributions on your own behalf are only tax deductible in the year in which they are received by the Super Fund and where a notice of the claim is given to your superannuation fund.
  2. Excess concessional contributions above these caps are included in your assessable income – you may, but need not, withdraw the tax thereon from your super fund.
  3. The work test (ages 67 to 74) requires minimum gainful employment of at least 40 hours within 30 consecutive days.
  4. Mandated employer contributions for those aged 75 and over comprise only Superannuation Guarantee Charge (“SGC”) and Industrial Award contributions
  5. Concessional contributions can only be made in relation to a person under 18 if they are an employee or carry on a business.

Removal of the Work test For Voluntary Superannuation Contributions

The work test (age 67 to 74) was abolished on 1 July 2022, meaning an individual under age 75 can make personal non-concessional contributions without needing to satisfy the work test (subject to contribution caps). However, the work test is still required to be met for individuals aged 67 to 74 who wish to claim a personal concessional superannuation contribution tax deduction.

Catch-Up Concessional Contributions

If you make or receive employer concessional contributions of less than the annual concessional contributions cap you may be able to accrue these unused amounts for use in subsequent financial years.

The 2019 tax year was the first financial year you could accrue unused cap amounts and these amounts can be used from 1 July 2019. Unused cap amounts can be carried forward for up to five years before they expire. To be eligible to make catch-up concessional contributions your total superannuation balance must be below $500,000 as at 30 June of the prior financial year.

Personal Concessional Superannuation Contributions By Employees

Employees are able to top up their employer contributions by making tax deductible personal concessional contributions directly to their superannuation account – before doing so they should confirm the “space” available below the concessional contributions cap for the year and understand the consequences should they exceed that cap.
 
Individuals claiming a tax deduction for personal superannuation contributions must complete the Notice of intent to claim a deduction form and give it to their superannuation fund before the earlier of the date of lodging their 2023 income tax return or 30 June 2024. You must also receive an acknowledgement back from the fund before lodging your 2023 income tax return.

Division 293 Tax

Division 293 imposes an extra 15% on concessional superannuation contributions within the individual’s contribution cap (see above) to the extent that the individual’s concessional contributions and adjusted income for surcharge purposes exceeds $250,000. Adjusted income comprises the sum of:

  • taxable income;
  • distributions to the individual subject to Family Trust Distribution Tax;
  • reportable fringe benefits; and
  • net investment losses.

Division 293 increases the tax rate on concessional contributions above the $250,000 threshold and within the concessional contributions cap from 15% to 30%. This higher rate is still 17% below the current maximum marginal personal tax rate including the Medicare Levy.

Non-Concessional Contributions Caps / Limits

In general terms the non-concessional (i.e. after tax) contribution caps to 30 June 2023 for an individual with accrued superannuation entitlements of less than $1.7 million at 30 June 2022 are:

Under Age 67 

  • General limit (maximum – see below)                     $110,000
  • With three year bring forward rule (maximum)        $330,000

Contributions above $110,000 will only be available where total superannuation entitlements were less than $1.48 million at 30 June 2022 (or less than $1.59 million for contributions over $220,000).

Age 67 to 74 and meet the work test (see above) 

  • General limit (maximum – see below)                     $110,000
  • With three year bring forward rule                           Not applicable

The maximum non-concessional contributions will also be reduced if non-concessional contributions exceeded the relevant annual non-concessional contributions cap in the 2022 and/or the 2021 tax year.

Superannuation Co-Contribution

Where your total income for the 2023 year is less than $57,016, you are under age 71 and at least 10% of your total income comes from either employment related activities or carrying on a business, you may be entitled to a Government co-contribution if you make personal superannuation contributions. If your total income is less than $42,016 and you make personal contributions of $1,000 you will receive the maximum co-contribution of $500 which phases out on a progressive basis.

General Reminder on Timing of Superannuation Contributions

In order for superannuation contributions to count against this current year’s contribution caps they must normally be received by the relevant superannuation fund before the end of 30 June. You should be cautious of possible delays through clearing houses and other electronic payment processing systems.

Contributions to your self-managed superannuation fund should be received and credited into the fund’s bank account before the end of 30 June.

Compulsory Superannuation Guarantee Charge (SGC) contributions for the June 2023 quarter must be received by the relevant fund by 28 July 2023 to avoid penalties. SGC Contributions will not be tax deductible until next year if paid in July.

Access to Superannuation Benefits – Preservation Ages

You cannot normally access your superannuation benefits until you reach your preservation age and satisfy a condition of release. Preservation ages are currently as follows:

Date of Birth                Preservation Age            Earliest Release Date
1 July 1961 to                           57                           From 1 July 2018
30 June 1962
1 July 1962 to                           58                           From 1 July 2020
30 June 1963
1 July 1963 to                           59                           From 1 July 2022
30 June 1964
On or after 1 July 1964             60                            From 1 July 2024

Superannuation Pension Drawdown Rates

Where you are receiving an account based superannuation pension you should ensure that you draw down the minimum annual pension by 30 June each year. These amounts for this financial year are calculated by applying the following percentages to your pension account opening balance at 1 July 2022.

Age of Recipient           Current Pension Factor
Under 65                                         2%
65 – 74                                           2.5%
75 – 79                                           3%
80 – 84                                           3.5%
85 – 89                                           4.5%
90 – 94                                           5.5%
95 & over                                        7%

There is no maximum pension drawdown except in relation to transition to retirement income streams where the maximum annual pension is 10% of the opening balance.

The Pension Factors above will double with effect from 1 July 2023, as the concessions due to COVID are wound back.

Superannuation General Transfer Balance Caps for Pensions

The superannuation general transfer balance cap was indexed to $1.7m from 1 July 2021 and will increase to $1.9m on 1 July 2023 for individuals who start their first retirement phase income stream from that date onwards.

Superannuation Guarantee Charge Opt Out for High Income Employees

Individuals with more than one employer can exceed the $27,500 concessional contribution cap merely as a result of combined SGC contributions.  Such individuals can apply for a partial SGC exemption certificate. Please contact us if you require further information.
 

Splitting Concessional (ie Tax Deductible) Superannuation Contributions

A member of a superannuation fund in accumulation phase can elect to “split” part or all of their concessional (ie tax deductible employer and/or personal) superannuation contributions with their spouse where permitted by their superannuation fund. Up to the lesser of 85% of your concessional contributions and the concessional contributions cap, can be split with a spouse under age 55 or who is under age 65 and not retired.

The concessional contributions cap may be increased if you are eligible for “Concessional Catch-up Contributions” (see separate heading above).

This strategy is useful to help equalise superannuation entitlements where only one member has accumulated entitlements above the current $1.7 million (or $1.9 million from 1 July 2023) transfer balance cap. It can also increase the account balance for the older spouse who will reach the age 60 tax exempt status for benefits first.

First Home Super Saver (“FHSS”) Scheme

The FHSS allows voluntary superannuation contributions made from 1 July 2017 to be withdrawn for a first home deposit. The FHSS provides for contributions up to $15,000 per annum and $30,000 in total (both subject to the relevant contribution caps) to be contributed to superannuation. From 1 July 2022, the maximum releasable amount is $50,000 (the annual cap will remain at $15,000). It normally provides a 15% tax saving on money channelled through superannuation for those 18 or over who have never owned real property in Australia and are buying their first home.

Eligible participants must buy or build their first home within 12 months after applying to the ATO for a release authority. Released amounts are taxed at the member’s marginal tax rate less a 30% non-refundable offset.

$300,000 Additional Superannuation Contributions on Downsizing Home Sales

From 1 January 2023, individuals aged 55 and over (Prior to 1 January 2023 the eligible age was 60 years old) are able to make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their home that they have owned for more than 10 years. This current downsizer contributions cap of $300,000 for each spouse in a couple (i.e. up to $600,000 in total) will not count toward the non-concessional contributions cap. It will also be exempt from the contribution rules for people aged over 67 and also from accepting contributions from people with superannuation balances currently over $1.6m. Qualifying individuals should consider making any other non-concessional contributions before making a downsizer contribution.

Australian Financial Services Licence General Advice Disclaimer
The comments provided above are general in nature and are not personal financial product advice. 

Should we be engaged to provide any personal financial product advice, it will be provided by UHY Haines Norton (ABN 85 140 758 156), who is an authorized representative under AFSL No. 485258 held by Haines Norton Sydney Advisers Pty Ltd. Personal financial product advice will take into account your objectives, financial situation and needs. Before acting on any personal financial product advice you must consider the appropriateness of it having regard to your objectives, financial situation and needs. You should carefully read and consider any Product Disclosure Statement (PDS) that is relevant to any financial product that has been discussed before making any decision about whether to acquire the financial product.

You can contact us on (02) 9256 6600 or by visiting our website at www.uhyhnsydney.com.au.

INDIVIDUAL TAX PLANNING ISSUES OUTSIDE SUPERANNUATION

INDIVIDUALS

No Changes to Personal Tax Rates

There are no changes to the tax rates for the current financial year and through to 30 June 2024.

The current tax rates for Australian tax residents are:

Taxable Income ($)       Tax Rate (%)
0 – $18,200                       Nil
$18,201 – $45,000            19% for each $1 over $18,200
$45,001 – $120,000          $5,092 plus 32.5% for each dollar over $45,000
$120,001 – $180,000        $29,467 plus 37% for each dollar over $120,000
$180,001 and above         $51,667 plus 45% for each dollar over $180,000

The Medicare Levy of 2.0% of taxable income needs to be added to the above rates.

Gifts and Deductions

Gifts or donations of at least $2 to eligible charities made by 30 June 2023 are tax deductible this year. Deductions for larger donations can be spread over up to 5 income years. In all cases you should ensure the charity is endorsed as a tax deductible gift recipient and keep your receipt.

Work Related Car Expenses – Limited Deduction Choices

Individual taxpayers can only claim a deduction for car expenses using one of the following two methods:
  • 78 cents per eligible kilometre travelled (up to a maximum of 5,000 kms)
  • log book method – the business usage percentage established by a log book kept during a representative 12 week period within the current year or the previous four years applied to actual costs of operating the car including lease rentals or depreciation and finance cost
Where an employee’s car has comparatively limited business use it may be tax effective for the employee to “salary package” the car if permitted by their employer. There is a range of service providers in this area offering novated lease salary packaging opportunities which reduce the employer’s administrative burden of providing fringe benefits.

Medicare Levy Surcharge – Inadequate Private Health Insurance

A Medicare levy surcharge applies where your income for surcharge purposes exceeds prescribed thresholds and you do not have adequate private health insurance.

The 1% surcharge commences to apply for individuals with income for surcharge purposes exceeding $90,000 (singles) and $180,000 (couples) plus $1,500 for the second and subsequent dependent children. The maximum surcharge of 1.5% applies for incomes above $140,000 and $280,000 respectively.

Income for surcharge purposes comprises:

  • taxable income of the taxpayer and their spouse;
  • distributions to the above subject to the Family Trust Distribution Tax;
  • reportable fringe benefits;
  • reportable (eg salary sacrifice) superannuation contributions; and
  • total net investment losses.

If you expect your income to rise above the relevant threshold next financial year and you do not currently have qualifying private health insurance you may need to consider taking it out. The cost of the premiums may be less than the surcharge involved.

Private Health Insurance Tax Offset

Where individuals are covered by qualifying private health insurance they may qualify for the private health insurance offset on the associated premiums. This can be accessed as a reduction in the premium or a tax refund.

Singles qualify for a full or partial offset where their income for surcharge purposes (see definition above) is less than $140,000 plus $1,500 for each dependent child after the first. Couples qualify for a full or partial offset where their income for surcharge purposes is less than $280,000 plus $1,500 for each dependent child after the second. In both cases the offset varies between 8.202% and 32.812% of the premiums depending on the contributor’s age and family income.

Lifetime Health Insurance Cover Loading – No Private Health Insurance After Age 30

If you do not have private hospital cover with an Australian registered health fund on your Lifetime Health Cover base day and then decide to take out hospital cover later in life, you will pay a 2% loading on top of your premium for every year you are aged over 30 and do not have cover.

Your Lifetime Health Cover base day is normally the later of 1 July 2000 or the 1st of July following your 31st birthday.

Exotic “Tax Driven” Investments

We discourage investments in “tax driven” investments unless they can be expected to deliver sound commercial returns (assistance may be required from an Australian Financial Services Licence Holder to assess the viability of the project). We are not licensed to comment on the commercial merits of such investments.

Removal of Capital Gains Tax Main Residence Exemption for Certain Overseas Home Owners

 
From 1 July 2020 foreign tax residents at the time they dispose of their previous residential home in Australia will generally not qualify for an exemption from capital gains tax on any gain.

TAX PLANNING FOR INVESTORS

Deducting Prepaid Expenses

Individual non-business investors and small business taxpayers (currently aggregated turnover under $10 million) are able to claim tax deductions for prepayments of tax deductible expenses this financial year where the period covered by the prepayment does not exceed 12 months and ends by 30 June 2023. These taxpayers may be able to reduce this year’s taxable income by pre-paying up to 12 months of tax deductible interest expense by the end of June 2023 – banks have special loan products in order to facilitate interest in advance payments.  Please check with your bank if you wish to prepay interest as not all loan products qualify.

Note that different rules apply to non-small business taxpayers and to “tax shelter” investments.

Capital Gains Tax (“CGT”) – Timing of Asset Sales

For CGT purposes, the date of acquisition or disposal of an asset is normally the date of exchange of the relevant contract (and not settlement). The difference between a 30 June and a 1 July sale contract date can be effectively a full year difference in the payment due date for any resulting CGT liability.

The long term CGT discount (50% for resident individuals; 0% for non-residents and 33.33% for superannuation funds in accumulation phase) is generally available where assets have been owned for more than 12 months between the dates of the purchase and sales contracts. If you are close to the 12 month ownership period, you should weigh up the ability to access this discount when considering the timing of a sale, along with other commercial considerations such as the asset’s current price and its potential price volatility.

If you have realised taxable capital gains from selling profitable investments during the year you may be able to reduce your CGT liability by selling other assets with unrealised capital losses by 30 June this year. For example, if you have unrealised losses on listed shares you could sell them to unrelated third parties in order to crystallise the loss. “Wash” sales to related parties, such as a family trust, can raise tax avoidance issues as can “parallel” trades in the same asset (eg one taxpayer sells listed shares and a related taxpayer buys shares in the same company).

Capital Loss Record Keeping

Where you have made a capital loss you should keep records of the transactions giving rise to the loss for a further four years after you receive your income tax assessment for the year in which the loss is applied against taxable capital gains.

You can choose the order in which capital losses are applied. In general they should normally be applied first against “short term” capital gains realised on assets held for less than 12 months which do not qualify for the 50% discount.

BUSINESS ISSUES INCLUDING TAX RATES AND THRESHOLDS

Superannuation Guarantee increases to 11%

The Superannuation Guarantee (SGC) rate increases from 10.50% to 11% on 1 July 2023 and will then steadily increase by 0.5% each year until it reaches 12% on 1 July 2025.

For your employees you will need to review their employment agreements to determine if the increase of 0.5% is in addition to their salary package or reduces the cash component of their salary package.

Removing The $450 Per Month Threshold For Superannuation Guarantee Eligibility

Prior to 1 July 2022, employers were not obliged to make superannuation guarantee contributions to employees whose salary was less than $450 per month. From 1 July 2022, employers are required to make superannuation guarantee contributions to their eligible employee’s superannuation fund regardless of how much the employee is paid.

What is Your Company’s Tax Rate?

The 2023 year company tax rate is 30% unless the company qualifies as a “Base Rate” (small) entity which has a 25% tax rate.  The tax rate for Base Rate companies will remain at 25% for future years. For all other companies the rate remains at 30%.

Broadly, a Base Rate entity has an “aggregated” turnover of less than $50m for the 2023 year and has less than 80% “passive income” in its own turnover.  The $50m in aggregated turnover threshold continues to apply for future years.

Aggregated turnover includes the turnover of the company and both its:

  • connected entities – these are entities either controlled by, or which control the entity; and
  • affiliated entities – these are entities that act or could reasonably be expected to act in accordance with the entity’s directions or wishes or in concert with the entity.

Passive income includes:

  • dividends other than non-portfolio dividends;
  • franking credits on such dividends;
  • non-share dividends;
  • interest income;
  • royalties and rent;
  • gains on qualifying securities;
  • net capital gains; and
  • income from trusts and partnerships to the extent that it is referable directly or indirectly to passive income.
Dividend Imputation Issues for “Base Rate” Companies

For dividends paid or credited by 30 June 2023 for Base Rate Companies, they can only be franked at the 25% tax rate and not the higher 30% tax rate.

This results in higher “top up” tax where fully franked dividends are paid to individuals on higher marginal tax rates.

For individual shareholders with ongoing taxable incomes above $180,000, the top up tax rate on dividends franked at 30% will be 24.29% of the cash component of the dividends.

For individual shareholders with ongoing taxable incomes above $180,000, the top up tax rate on dividends franked at 25% will be 29.33% of the cash component of the dividends.

Small Business Entity (SBE) Tax Concessions – $10 Million Turnover Test

The SBE rules apply to a sole trader, partnership, company or trust which carries on a business for all or part of the year and has an “aggregated” (group) turnover of less than $10m per annum.

The current tax benefits of qualifying as an SBE include:

  • simplified capital allowance (depreciation) concessions;
  • simplified trading stock concessions;
  • potential access to CGT small business concessions (see below);
  • immediate tax deduction for business start-up costs;
  • immediate tax deduction for prepaid expenses where the goods or services will be provided within 12 months of the prepayment;
  • option to use GST adjusted notional tax method to work out PAYG instalments;
  • Fringe Benefits Tax exemption for certain on site car parking; and
  • ability to account for GST on a cash basis.

The turnover threshold for the small business CGT concessions remains at $2 million where the alternative $6 million net asset value test is failed.

The aggregated turnover for the CGT small business restructure rollover is also $10 million.

Medium businesses (Annual Turnover between $10m to $50m)

From 1 July 2021, businesses that are not SBE because their turnover is $10m or more but less than $50m can also access the following small business concessions:

  • simplified trading stock concessions – ie if the estimated value of your trading stock changed by less than $5,000 in the year, then you are not required to conduct a formal stocktake and you are not required to account for changes in your trading stock’s value;
  • PAYG instalments concession – ie. using the instalment amount calculated by the ATO; and
  • a two-year amendment period – ie you have two years from the date of notice of assessment to submit an amendment tax return.

 Tax Depreciation and Write-Off Incentives for all Businesses

The Government has confirmed that there is no extension to the temporary full expensing concessions which will end on 30 June 2023. Currently, under the temporary full expensing rules, all businesses with an annual aggregated turnover of less than $5 billion will be able to deduct the full cost of “eligible” depreciable assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023.

Temporary Loss Carry-Back Provisions for Companies

Companies with an annual aggregated turnover of less than $5 billion can carry-back losses from the 2019-20, 2020-21, 2021-22 and 2022-23 years against their taxable incomes from the 2018-19, 2019-20, 2020-21 or 2021-22 years. Capital losses and losses from the conversion of excess franking credits cannot be carried back. It is important to note that 2022-23 will be the last year a company can carry back their tax losses.

The loss carried back against a taxed income from a previous year will generate a refundable tax offset in the year in which the loss is made. The offset effectively represents the tax the company would have saved if it was able to deduct the loss in the earlier year using the loss year tax rate.

The tax refund is limited in two ways:

  • The amount of the loss carried back must not be more than the earlier taxed net income; and
  • The carry-back must not cause a franking account deficit.

Eligible companies can elect to claim the tax offset in their 2021, 2022 or 2023 year tax returns. Eligible companies that do not elect to carry-back their loss can still carry forward their loss to a later year subject to the usual loss recoupment provisions.

Deferring Business Income Generally

Income received in advance of the provision of the relevant goods or services may be able to be deferred until the next tax year. The Tax Office has ruled that income which is subject to a “contingency of repayment” can also be deferred.

Trading Stock Valuation Rules

Trading stock on hand at year end can be valued at (full absorption) cost, market selling value or replacement cost. Normally the lowest value is chosen to minimise taxable income. However, if your business has incurred losses or you expect your marginal tax rate to rise in future, a higher year end value may be preferred.

Obsolete Stock or Plant and Equipment

Obsolete stock and obsolete plant and equipment should be physically scrapped by 30 June 2023 in order to claim a full tax deduction this year. However, where obsolete stock is not scrapped it may still be possible to justify a lower value for tax purposes.

Deductions for Employee Bonuses

Deductions can be claimed this year by business taxpayers for bonuses to be paid after year end to unrelated employees where the business has definitely committed to pay the bonus by 30 June 2023. This requires that the amount of the bonus (or its method of calculation) has been finally determined and, preferably, notified to the relevant employees by this date.

Bad Debt Deductions

In order to claim a bad debt tax deduction this financial year the debt must have been included in the taxpayer’s assessable income and be physically written off in the business’ accounting records on or before 30 June. Businesses may then also be able to recover any GST remitted on these debts.

Moneylenders can also claim bad debt deductions for normal business loans.

Reportable Fringe Benefits and Employee Share Scheme Income on PAYG Payment Summaries

Where the grossed up value of fringe benefits provided to an employee during an FBT year exceeds $2,000 this total must be reported on the employee’s annual payment summary. Certain benefits are excluded principally:

  • meal entertainment unless salary packaged;
  • car parking; and
  • certain “pooled” cars.

Employees of Not for Profit Organisations are subject to a $5,000 annual cap on salary sacrifice meal entertainment.

Where corporate employers provide company shares or share options to employees or their associates the relevant taxable income, if any, must also be reported to the Tax Office.

Research & Development (R&D) Tax Incentive

The R&D Tax Incentive was introduced to encourage companies to engage in research and development by providing a tax offset for eligible R&D activities.

R&D tax incentive changes

Legislation has been enacted to implement measures to amend the Research and Development (R&D) tax incentive offset, generally for income years commencing on or after 1 July 2021.

Companies with aggregated annual turnover greater than $20m
From 1 July 2021, the rates of the non-refundable R&D tax offset are the incremental intensity of R&D expenditure as a proportion of an entity’s total expenditure for the year. The marginal R&D premium is the company tax rate plus a premium based on the level of incremental R&D intensity for their expenditure:

R&D expenditure as a proportion

of total annual expenditure

R&D premium (calculated as relevant % plus claimant’s company tax rate)
0 to 2%8.5%
Greater than 2%16.5%

Companies with aggregated annual turnover less than $20m
From 1 July 2021, the refundable R&D offset is set at a premium of 18.5 percentage points above an entity’s company tax rate.

From 1 July 2021, the cap on expenditure for which R&D incentive rates can be claimed is set at $150m per annum.

For eligible R&D entities entitled to the refundable R&D Tax Offset, a cash refund for the entire eligible R&D expenditure is possible, depending on the tax losses available.

For eligible R&D entities entitled to the non-refundable R&D Tax Offset, to the extent that tax payable is reduced to $nil, the remaining portion can be carried forward for use in future income years to offset future tax payable. To claim these offsets in future years, the usual loss recoupment rules must be satisfied.

For eligible R&D expenditure exceeding $150 million, a Tax Offset is only available at the applicable corporate tax rate, resulting in a $nil R&D benefit.

R&D related expenses incurred to an associate should be physically paid before 1 July 2023 to qualify for the current year’s offset.

Lastly, qualifying companies should be registered with AusIndustry on behalf of Innovation Australia within 10 months after year end (i.e. by 30 April 2024 for a 2023 claim by a company with a 30 June year-end).

Individuals with “Non-Commercial” Business Losses

Individuals with annual adjusted taxable incomes (the sum of taxable income, reportable fringe benefits, reportable (i.e. salary sacrifice) superannuation contributions and net investment losses) exceeding $250,000 are not able to deduct any business losses against their other taxable income.

Other individuals incurring business losses cannot deduct those losses against their other taxable income unless that business satisfies one or more of the following tests:

  • a farmer whose non-primary production income is less than $40,000;
  • the assessable income from the activity is at least $20,000 (full year equivalent);
  • the activity has been profitable in at least three of the last five income years;
  • the value of real estate used in the business is at least $500,000; or
  • the value of other business assets is at least $100,000.

Thin Capitalisation – Deductibility of Interest Expense and Other Finance Costs

The thin capitalisation rules can reduce debt deductions (i.e. interest) for taxpayers which:

  • have significant foreign investments (10% or more of total assets); or
  • are foreign owned; or
  • are foreign investors

The measures apply where annual debt deductions exceed $2 million.

Debt deductions are not denied to the extent that the taxpayer satisfies certain debt to equity ratios. For most taxpayers the “safe harbour” tax deductible debt cannot exceed 60% of total assets (ie $10 of gross assets supporting $6 of debt for every $4 of equity). Higher gearing ratios may be permitted under the alternative “arm’s length” debt test. This looks to the hypothetical amount the relevant taxpayer could have borrowed from an unrelated financier without related party guarantees.

The transfer pricing rules may also reduce interest deductions where a taxpayer borrows from offshore related parties on uncommercial terms in relation to the interest rate, the gearing ratio or both.

In October 2022 Federal Budget, the government proposed to replace the safe harbour test and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s activities (profits). This new measure is proposed to start from income years commencing on or after 1 July 2023. We will provide more updates as soon as further information become available.

Taxable Payments Annual Report (TPAR)

If you operate in particular industries, or are a government entity and make payments to contractors principally for labour, you must prepare and lodge a “Taxable Payments Annual Report” (TPAR) with the ATO showing the payments that you have made to each contractor during the year. Contractors can include subcontractors, consultants and independent contractors, whether operating as sole traders, or through companies, partnerships or trusts.

This report should be submitted by 28 August 2023.

For the year ended 30 June 2023, this covers the following industries:

  • building & construction services
  • cleaning services
  • courier services
  • security providers and investigation or surveillance services
  • road freight transport
  • information technology services; and
  • government entities

Lodgement of a “Not Required to Lodge” report may be available for the above entities where the total payments an entity receives for the above services as part of their business are less than 10% of the entity’s current or projected GST turnover (all above, except building & construction services) or you haven’t paid contractors for the relevant industry service.

Skills and Training Boost and Technology Investment Boost

In 2022/23 Federal Budget, the Government announced two new measures to support small businesses:

  1. Skills and Training Boost
  2. Technology Investment Boost
Under the Skills and Training Boost, small businesses with an aggregated annual turnover of less than $50 million can claim additional 20% deduction for eligible expenditure incurred on external training for employees. To be eligible for the additional 20% deduction:
  • the expenditure must be incurred for training employees, either in-person in Australia, or online;
  • the expenditure must be charged by a registered training provider and be for training within the scope of the provider’s registration;
  • the registered training provider must not be the small business or an associate of the small business;
  • the expenditure must be must already be deductible under the taxation law;
  • the expenditure must be must be incurred between 29 March 2022 and 30 June 2024; and
  • the expenditure must be must be for the provision of training.
Under the Technology Investment Boost, small businesses with an aggregated annual turnover of less than $50 million can claim an additional 20% of eligible expenditure incurred for the purposes of their digital operations or digitising their operations. To be eligible for the additional 20% deduction, the expenditure must be deductible under other provisions of the taxation law, and it must be incurred between 29 March 2022 and 30 June 2023. If it is a depreciating asset, the asset must be first used or installed ready for use by 30 June 2023. Eligible expenditure such as:
  • Computer hardware and software, internet costs;
  • Telecommunication hardware equipment;
  • Cyber security systems;
  • E-Commerce;
  • Digital media and marketing.
This bill is currently with the Parliament and is not law yet, the final form may change.

PRIVATE COMPANY LOAN ISSUES

Loans to Shareholders and Debt Forgiveness

Loans or payments made by private companies to their shareholders or associates can give rise to “deemed dividends” for income tax purposes under “Division 7A” of the Tax Act 1936. Deemed dividends are taxable to the recipient as an unfranked dividend.

No action is required before 30 June 2023 for new loans made since 1 July 2022.

No deemed dividends arise for outstanding loans made in the 2022 and prior years where:

  • the loan was repaid in full by the earlier of the due date for lodging the company’s tax return for the year it was made or the actual date the return was lodged (“the lodgement date”); or
  • the loan is covered by a written loan agreement for either 7 years (as an unsecured loan) or 25 years (where secured over real estate) made before the lodgement date and the required minimum interest charges and principal repayments are made by 30 June each year commencing with the year after the year in which the loan was made; or
  • the company had accumulated accounting losses and did not have a “distributable surplus” as defined in the Tax Act 1936 in the year the loan was made (but note that a deemed dividend can arise when loans are forgiven in a subsequent year if there is a distributable surplus at the end of that year).

Proposed significant changes to Division 7A have been deferred to income years commencing on or after the date of Royal Assent of the enabling legislation. The changes are not yet legislated and we await further announcements by the government on them.

Proposed significant changes to Division 7A have been deferred to income years commencing on or after the date of Royal Assent of the enabling legislation. The changes are not yet legislated and we await further announcements by the government on them.

Deemed Dividends and Provision of Company Property

The private company loan rules extend to situations where a private company’s property (boats, holiday houses etc) is available for the private use of shareholders or their associates and less than a market rental is charged. Where these rules apply, we recommend that a register is kept of the dates company property was either used for private purposes or was available for private use by the shareholders.

DISCRETIONARY TRUST DISTRIBUTION ISSUES

ATO Concerns – 100A Reimbursement Agreement

The ATO has recently finalised the Section 100A Reimbursement Agreement Tax Ruling TR 2022/4 and the Practical Compliance Guideline PCG 2022/2 setting out the Commissioner’s view on the application of section 100A of the Tax Act – “Reimbursement Agreement”. Section 100A is an anti-avoidance provision targeting arrangements where a taxable trust distribution is made to one beneficiary while the economic benefit is enjoyed by someone other than that beneficiary and a tax saving resulted.
 
The basic conditions for section 100A to apply are:

  1. There is a reimbursement agreement (this can simply be a payment of money, transfer of property, or provision of services or other benefits); and
  2. A beneficiary is presently entitled to trust income and taxed thereon while the economic benefits are provided to someone other than the beneficiary; and
  3. The purpose of the arrangement is to reduce tax liability.

Unless the arrangement is “an ordinary family or commercial dealing”, section 100A would apply and deem the beneficiary not to be taxed to the income distributed, rather the trustee is assessed on that income at the top marginal tax rate. The ATO draft ruling takes a very limited view of what constitutes an ordinary family or commercial dealing for that exception to apply.

It is important to note that section 100A is an anti-avoidance provision, and the Commissioner is not bound by any amendment time limits when giving effect to section 100A. However, the Commissioner has indicated in the ruling that the ATO will not apply compliance resources for arrangements entered into prior to 1 July 2014.

Section 100A is expected to be a compliance area that the ATO will be focusing on.

Discretionary Trust Distributions

Trustees of discretionary (i.e. non-fixed) trusts must resolve and document their decision on how to distribute the current year’s trust income including any realised capital gains by 30 June 2023 or such earlier default distribution date as is specified in the trust deed. The tax laws allow trustees to “stream” capital gains and/or franked dividend income to particular beneficiaries where permitted by the terms of the trust deed. Other classes of income such as interest are blended and cannot be streamed.

In order for distribution resolutions to be as tax effective as possible, trustees should have a clear understanding of the trust’s likely accounting and taxable income (including capital gains) and expenses of the trust and of potential beneficiaries for this current financial year.

Where we are aware that you control a discretionary trust we will be contacting you before 30 June about any proposed distributions.

Beneficiary Tax File Numbers

Where current year trust distributions are contemplated to adult taxpayers who have not previously provided their Tax File Numbers (“TFNs”) to the trustee, those TFN’s must be provided to the trustees by 30 June 2023 and reported by Trustees to the Australian Taxation Office (“ATO”) by 31 July 2023.  Where a trustee does not have the TFN of an adult beneficiary, the trustee must withhold 47% of any trust distribution to that adult for the current year and remit that amount to the ATO by 30 September 2023.

Trust Losses/Family Trust Elections

Where a discretionary trust or other trust that does not qualify as a “fixed” trust incurs an income tax loss or bad debt it may need to make a Family Trust Election or satisfy an alternative test in order to preserve the benefit of those deductions into future years. A Family Trust Election restricts the class of potential beneficiaries that can receive trust distributions without the trust being subject to the 47% Family Trust Distribution Tax.

Family trust elections may also be required where a discretionary trust has substantial franked dividend income or where it has a significant interest in a private company that has tax loss and/or bad debt deductions.

Family trust elections raise a number of complex issues that are best discussed with us.

Unpaid 30 June 2022 Trust Distributions to Private Companies

Any outstanding (i.e. unpaid) trust distributions made to corporate beneficiaries during the 30 June 2022 tax year will need to be addressed at the latest before the due date for lodging the company’s 30 June 2022 income tax return (normally 15 May 2023 or actual lodgement date if earlier).

Making a cash payment to the company is the most straightforward way to clear the unpaid distributions.

Other options are available to manage the unpaid amount over a period of time. The most common involves documenting the transaction by way of a written Division 7A private company loan agreement repaid over 7 years on a principal and interest basis for unsecured loans (or 25 years when secured over real estate) with interest commencing from 1 July 2023. More complex strategies involving sub-trusts are possible.

Tax Determination TD 2022/11 Unpaid Present Entitlement to Private Companies

On 12 July 2022, the ATO finalised the tax determination on Unpaid Present Entitlements to Private Companies TD 2022/11.  The TD sets out the Commissioner’s views on when a UPE becomes the provision of financial accommodation and subject to Division 7A. Broadly, if a private company beneficiary is made presently entitled to trust income, and it has knowledge of an amount that it can demand immediate payment of from the trustee but it does not demand for it, then this will constitute a provision of financial accommodation and a Division 7A loan will arise at the time when the company beneficiary has the knowledge of the trust entitlement.

The ATO considers that the Division 7A loan arises when the corporate beneficiary has knowledge of an amount that it can demand immediate payment and it does not demand for it. This usually happens at the time when the accounts are finalised after year end, whether it is a fixed amount or as a percentage of trust income.

TD 2022/11 applies to present entitlements arising on or after 1 July 2022 (i.e. 30 June 2023 income year).

Disclaimer
The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.

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UHY Haines Norton · Level 11, 1 York Street · Sydney NSW 2000 · Australia
Telephone: 02 9256 6600 · Website www.uhyhnsydney.com.au