Top 5 Tax Planning Strategies 2020

Tax planning before the financial year-end is a crucial time for businesses. During this time businesses can adopt certain strategies and plan methodologies available in the tax legislation to legitimately reduce tax. Dinesh Aggarwal, the Managing Director and Founder of The Fortuna Advisory Group will take you through the top five tax planning strategies.

Strategy 1 - Instant Asset Write-Off of $150,000

Here's strategy one that's about the Instant Asset Write-Off of $150,000 and Accelerated Depreciation.

Currently, this is the most talked about recent strategy due to the concessions allowed. This is a concession available for the purchase of multiple assets (e.g. plant, equipment, vehicle etc) and you can make a claim for each asset, both new and second hand. There are certain categories of asset that are exempt, explained in this webinar.

The various Eligibility Criteria discussed include assets that are purchased, first used and/or installed between 12 March to 30 June. However, the Treasury has announced the extension of the write off until 31 December 2020, which covers another 6 additional month. For assets purchased before 12 March, you can claim under an earlier threshold of up to $30,000 (1 July 2019 to 12 March 2020). Other examples discussed include the luxury car limit and what happens if you purchase an asset above $150,000 or if the asset was delivered after 30 June 2020.

Strategy 2 - Contribution into your Superannuation Fund

Strategy 2: Contribution to the SuperFund So how do you use your contributions to your superannuation fund to get the best tax outcome?

Firstly, we need to distinguish between:

- Concessional contribution: this is when an employee contributes to the Superfund on a PRE-TAX income (above the mandatory Superfund Employer Contribution of 9.5%).

- Non concessional contribution: this is when you make a a POST TAX contribution to your Superfund.

The additional concessional contribution is voluntary from the Employer or Employee of up to a cap of $25,000 and must be made and received by 30 June 2020.

Now, an employee can make a lump sum contribution to the superfund directly and there is no need to go through the employer. This is useful if you have a sudden gain in received dividends, a bonus, a capital gain on a sale of an asset etc.

In addition to that, any unused Super cap fund of $25,000 can be carried forward for 5 years provided that the super balance is less than $500,000.

Another exciting new change is that there is no longer a 10% Income Test Applicable. For those earning between $38,000 to $53,564, you can make an after-tax contribution where the government will make a 50% co-contribution of up to $500.

Strategy 3 - Prepay your expenses and move incomes between financial years legitimately

If there is an interest payment on your business loan or investment property, you can prepay your interest loan this year and make a claim in this Financial Year. However, it is highly recommended that you speak to your bank in advance to allow them enough time by providing them notice of your intention. You may even get a discount on the prepayment of interest loan but this is not applicable for fixed rate loans unless it is converted to a variable loan where break-fee and other financial costs should be considered.

Some popular expenses include prepayment of rent for commercial tenants and insurances. This will also bear into consideration when the best time is for issuing invoice for goods or deposits. Dividends are taxed when they are received not on paid dividends so can defer your income if this affects your tax margins.

In addition, it is important to time the sale of a profitable asset with a loss bearing asset. It is advisable to conduct the transaction, either in the same FY or sell the asset making losses in the current FY (in order to carry forward the loss) and utilise the loss for the following year to offset any future asset gains.

An interesting discussion in this webinar is on the cashflow boost for the COVID economic stimulus.

Strategy 4 - Bad debts and trading stock

Strategy 4: Bad Debts and Trading Stock Strategy 4 is about how you can look at your bad debts and trading stock, or your accounts receivable and trading stock and see how you can utilise some of the deductions this financial year-end.

As there are various stock valuation methods such as cost or market value, you can utilise the appropriate value method for the best outcome.

The treatment of Stock in Transit, is also discussed. It is also advisable to review the account receivable list and if there are debtors who are unlikely to pay, they should be written off as a bad debt. You can then claim the deduction and the GST on it.

If the debt is recovered later on, it may be added back as a taxable income in the applicable year.

Strategy 5 - Optimise your tax rate while operation under different structures

Strategy 5: How to Optimise Your Tax Rate while Operating Under Different Business Structures - Companies, Trusts and Partnerships.

This strategy evaluates how you can optimize your lowest possible margin tax rate while under different structures for example companies, trusts, and partnerships.

In Scenario 1, Companies.

Generally, since a company pays a normal tax rate of 27.5% for small-medium businesses (and 30% for larger businesses or companies where their income source is a non-business source such as investments) on its profit on the year that it earns income, that income can remain in the company as retained profits and drawn out any time after. Therefore, it is good to draw out only what you need to remain in a lower personal income tax bracket. Or you can consider a temporary director or shareholder loan instead of drawing cash out as an allocated wage or dividend. There are certain rules and conditions that need to be met under the loan arrangement.

In Scenario 2, if you are Operating as a Trust, the profits must be distributed by the end of the year though this does not mean that you actually need to distribute cash.

A common strategy is to distribute to eligible non-working adult children or consider trading companies under your control. The distribution needs to be signed by a Trustee, beneficiaries appointed and minutes prepared accordingly. The accounting profit vs distribution profits may differ due to depreciation or payment of Super.

In Scenario 3, where there is a partnership, the profit is distributed according to the ratio of the partnership. An interesting case is when the partnership is owned both by a husband and wife. Here a partner salary can be provided and the distribution of the profit thereafter can be decided based on the spouse's marginal tax rate.