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Uncapped immediate write-off for depreciable assets
Businesses with an aggregated turnover below $5B can claim an immediate deduction for the business portion of eligible new depreciating assets. In order to claim the full write off in this income year, the assets acquired must be first used or installed ready for use by 30 June 2022.
For businesses with an aggregated turnover of less than $50M, the immediate deduction is also available for second-hand assets.
Note, motor vehicle purchases are still subject to the depreciation car limit (being $60,733 for the 2022 income year).
Trust distribution resolutions and recent ATO draft guidance
Trust Deeds of most discretionary trusts require the trustee to make a determination on or prior to 30 June each year to determine how the net income of the trust is to be distributed.
In conjunction with your advisor, you should be carefully considering the requirements of the Trust Deed, income of the trust for the year and to which beneficiaries – and in what proportions – the income will be distributed. Planning also needs to be made in the context of the recent ATO draft guidance on Trust distributions and Section 100A as noted in our previous bulletin.
In making distributions going forward we strongly recommend that they are made to family members or other entities in your Group with the clear intention that they will be physically paid at some point and therefore the beneficiary gets to enjoy the economic benefit of the distribution.
The ATO guidance on this area is still developing and further rulings are expected later in the year.
Temporary loss carry back for eligible companies
Companies with a turnover of less than $5B can carry back losses from the 2020, 2021, 2022 income years to offset previously taxed profits made in or after the 2019 income year. This will allow such companies to generate a refundable tax offset in the year in which the loss is made. Therefore, companies expecting to incur a tax loss in the 2022 income year, may be able to carry that loss back against taxes paid in a prior year and effectively obtain a refund of earlier tax paid.
The tax refund cannot exceed the earlier taxed profits and the carry back cannot generate a franking account deficit.
This is available by election for eligible companies when they lodge their 2022 tax returns. Alternatively, you may choose to utilise those losses against profits in subsequent years.
Capital Gains Tax
Shares and real estate held are treated as having been disposed of on the contract date for CGT purposes, rather than when settlement occurs.
Capital losses can only be applied against capital gains. Therefore, if you have already derived a capital gain during the year, review your portfolio to see if there any CGT assets you are thinking to dispose of such that it might trigger a capital loss if you were to dispose of them prior to 30 June.
Note, that the ATO may deny a capital loss where it is part of a wash sale ie. where you dispose of an asset to trigger a capital loss but you (or an associate) acquire the same asset shortly after 1 July.
Unpaid Present Entitlements to Companies & Sub-Trusts
The ATO has proposed a new approach to UPEs and sub-trusts in Draft Tax Determination TD 2022/D1 which will only apply to UPEs arising from 1 July 2022, restricting sub-trust arrangements for UPEs to corporate beneficiaries. A sub-trust arrangement allows the main Trust to retain the funds in the trust for business or income producing purposes without triggering a deemed dividend under Division 7A, provided the trust then pays annual interest to the corporate beneficiary under the sub-trust arrangement for the use of the funds.
The ATO have also officially updated guidance on UPEs and sub-trust arrangements where the UPE arose before 1 July 2022 – see “Practical Compliance Guideline 2017/13”.
The ATO accepts that if a trustee fails to repay the principal at the end of the loan term under the sub-trust arrangement (typically 7 years), another loan on complying Division 7A terms can be put in place, thus providing a further 7 years for the amount to be repaid.
For a UPE arising on 30 June 2022, the funds can be placed on a sub-trust by 15 May 2023, with the liability to pay interest arising on 30 June 2023. If the principal and final interest are not repaid by 14 May 2030, a new 7-year complying loan can be entered into within the year. This means the loan now only needs to be repaid by 2037, but with annual payments of both principal and interest required.
Of course, there may be changes to the Division 7A rules in the near future such that this approach may no longer be available. Division 7A can deem certain loans and payments made by private companies to shareholders (or their associates) as assessable dividend income.
Review and Vary PAYG Instalments
Many taxpayers progressively pay their PAYG instalments throughout the year towards their estimated tax liability for the current year. The amount payable is generally based on the ATO’s assumption that the profit of the business will be an improvement on the last financial year.
Where a business experiences a decrease in profit relative to the prior year, this can result in excess PAYG instalments having been paid throughout the year. Whilst any overpayment of income tax will be reconciled upon lodgement of the tax return, the payment of additional tax can put pressure on the working capital requirements of the business.
June is an opportune time to review the business’ expected tax liability and vary the June instalment to reduce the instalment payable or claim back any excess instalments paid during the year.
Maximising deductions
Although only a timing benefit, these actions may assist with cashflow by bringing forward tax deductions:
- Bad debts – review your trade debtors to determine if they are recoverable. Consider writing off any non-recoverable amounts as a bad debt to claim the tax deduction this income year.
- Superannuation contributions – contributions are not deductible until paid and received by the complying superannuation fund. Look to pay contributions prior to 30 June to enable a tax deduction in the current financial year. Some clearing houses can take more than a week to submit the payment to the super fund, so always check with your specific clearing house for year-end cut off dates to allow suitable time for processing.
- Repairs – attend to any warehouse, factory, office or rental property repairs prior to 30 June to capture the tax deduction in this income year.
- Trading Stock – complete a stocktake at 30 June. Write off any obsolete of damaged stock and where the market selling value is less than the cost of the stock, look to write down the stock to the lower value.
- Staff Bonuses – for accrued staff bonuses to be deductible in the 2022 income year, the decision to pay the bonus and the calculation of the bonus must be made and documented prior to 30 June 2022 or otherwise the employer needs to be contractually obliged to pay such a bonus.
Company Tax Rate and Dividends
For the year ending 30 June 2022, companies with an aggregated turnover of less than $50m – and derive no more than 80% of their income from passive sources – qualify for the lower corporate tax rate of 25% (down from 26% in FY2021). Companies that do not meet these criteria will apply the higher corporate tax rate of 30%.
If paying a dividend prior to 30 June 2022, please be aware of the rate at which the dividend will be franked. If a company qualified for the lower corporate tax rate in the prior year, then dividends paid in the 2022 income year will be franked at 25%. It was worth confirming what franking rate applies as the “top-up tax” can vary significantly. For example, the “top-up tax” on a $100,000 dividend will be approximately $5,000 higher where the dividend is franked at the 25% rate (rather than 30%) and the shareholder in receipt of the dividend is on the top marginal rate.
Cryptocurrency
The tax treatment for Taxpayers that have invested in cryptocurrency will be a target area for the ATO in 2022. Broadly, sale of a cryptocurrency will have tax consequences – taxable as a capital gain for investors or as income for crypto traders. Even converting from once cryptocurrency to another e.g. from Bitcoin to Ethereum will also have tax consequences.
Investors should ensure that they have sufficient records to support their gains and/or losses from cryptocurrency transactions.
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The above summary is intended to be general in nature.
