As the financial year draws to a close, it is time to start thinking about whether your year-end tax planning is in order. This bulletin sets out a number of key considerations for this 30 June.
However, tax planning requires consideration of income and deductions for the year as well as whether compliance requirements have been met (e.g. appropriate elections have been made on a timely basis and other appropriate documentation prepared).
The thin capitalisation provisions may permanently deny deductions for interest and other debt deductions of Australian entities that have foreign operations or controlled foreign entities (outbound investors) and of foreign entities that have Australian operations or foreign-controlled Australian entities (inbound investors). For 2022-23, the provisions broadly limit deductions by applying a safe harbour debt-to-equity ratio. Gearing ratios should be reviewed before 30 June and consideration given to strategies to minimise the extent of the denied deduction.
From 1 July 2023, the way the thin capitalisation provisions operate for most taxpayers will significantly change. Instead of a debt-to-equity ratio, the new thin capitalisation provisions will limit interest and other debt deductions to a percentage (30% being the default percentage) of earnings before interest, tax, depreciation and amortisation (“EBITDA”) calculated on a tax basis. The draft proposed rules were the subject of our April client webinar a recording of which can be accessed here.
In addition to ensuring the requirements of the trust deed and the constitution of the corporate trustee, where relevant, are satisfied, trustees need to consider the implications of the Owies decision and the ATO guidance in relation to reimbursement agreements. Readers should refer to our earlier bulletin (link) for a fuller discussion on these matters.
Division 7A matters
Transactions involving a company and any associated entity (individual, trust or partnership) to which Division 7A might apply (e.g. a payment, a loan, forgiveness of a debt or use of the company’s assets) should be carefully considered to determine whether a deemed dividend arises and, if so, what action could be taken to avoid that consequence.
Ensure that minimum yearly repayments (“MYRs”) are made before 30 June in respect of Division 7A loans made in prior years. Where dividends need to be declared by 30 June to enable MYRs to be made, ensure necessary resolutions are made and offset agreements are entered into before year end. For prior year unpaid trust entitlements that have been placed on investment agreements, ensure that appropriate amounts of interest have been recorded and that the interest has been paid in cash.
Concessions coming to an end
Temporary full expensing
The immediate deduction for the cost of eligible depreciating assets available under the Temporary Full Expensing concession ends this 30 June. In order to access the concession, the depreciating asset must be used or installed ready for use by 30 June 2023. The government announced in its May Budget that, from 1 July, an immediate deduction will only be available to small business entities (i.e. those with aggregated turnover less than $10 million) and be limited to assets costing less than $20,000.
Loss carry-back for corporate tax entities
Subject to certain eligibility criteria and integrity rules being satisfied, corporate tax entities may be entitled to claim a refundable tax offset, by carrying back a tax loss arising in the 2022-23 income year to one or more of the four prior income years (i.e. as far back as the 2018-19 income year).
Rental properties and Holiday homes
The ATO has flagged rental properties and holiday homes as an area of particular focus for this 30 June (link).
Include all income
The ATO receives information from a number of sources (e.g. sharing economy platforms, rental bond agencies and state and territory revenue authorities) that enables it to detect under reporting of income.
Interest on loans
Interest on loans may not fully be deductible if the property is not genuinely available for rent, is used for private purposes for part of the year or family or friends are charged a below market rent. Additionally, interest on the loan secured against the property will need to be apportioned if part of the amount borrowed is used for private expenses such as holidays or a new car.
Where the rental property was acquired after 8 May 2017, no deduction will be available in respect of depreciating assets installed in a rental property at the time of acquisition unless the property was a “new residential premises” within the meaning of the GST Act or the taxpayer’s rental activities amount to the carrying on of a business. Where the rental property was acquired before 9 May 2017, no deduction will be available in respect of depreciating assets installed in the property as at 30 June 2017 if no depreciation deduction was available in the year ended 30 June 2017 because, for example, the property was not available for rent at any time during that year.
These rules do not apply to limit depreciation deductions for companies, superannuation entities (other than self-managed superannuation funds) and certain other entities.
No deduction is available for travel expenses related to inspecting, maintaining or collecting rent for a rental property unless the expenses were incurred in carrying on a business of providing residential accommodation or were incurred by a company, self-managed superannuation fund or certain other trusts or partnerships. There are exceptions where the taxpayer’s rental activities amount to the carrying on of a business, or the taxpayer is a company, superannuation entity (other than self-managed superannuation funds) or managed investment trust.
Working from home deductions
The ATO has updated guidance on an accepted method that individuals may use in calculating deductions for working from home expenses as an alternative to the actual expenses method (i.e. calculating the additional expenses actually incurred in working from home).
From 1 July 2022, taxpayers will be able to claim deductions using the revised fixed rate of 67 cents per hour (up from 52 cents per hour) provided they satisfy three conditions: a) the work performed must involve carrying on substantive employment duties or in carrying on business, b) the taxpayer must have incurred deductible additional running expenses and c) the taxpayer meets the record keeping requirement. Details of these conditions are set out in our earlier bulletin (link).
deductions for Superannuation contributions
For an employer to be entitled to a deduction for superannuation contributions, the contribution must be received by the fund on or before 30 June. The SG contribution rate increased to 10.50% of an employee’s ordinary time earnings from 1 July 2022.
Individuals wishing to claim a deduction for personal contributions must provide the fund with a notice of intention to claim a deduction and have that acknowledged by the fund before the earlier of the day the individual’s tax return is lodged and 30 June of the next income tax year.
What are the next steps?
A fuller list of year-end tax planning considerations is set out in our Year-end Tax Planning Toolkit accessible here. Once clients have worked through the Toolkit they should contact their Pitcher Partners representative to review their existing arrangements and determine what action is required.