Businesses should be considering the impact of the rapidly approaching end of the 2021 financial year (FY21) on their tax settings and positions.
We discuss below important developments that relate to new tax measures introduced in the last year as well as perennial tax considerations for this time of year.
Company tax rate changes
The tax rate for “Base Rate Entities” has been reduced from 27.5% in 2020 to 26% in 2021.
A Base Rate Entity is a company with aggregated turnover (that is basically group turnover) of less than $50m for the year, and which derives less than 80% of its income in the form of dividends, interest, royalties, rent and net capital gains.
If your company is sitting on the threshold of this, consider whether the realisation of certain amounts should be accelerated or delayed until the following year.
Dividends paid are franked at the company tax rate applicable to the prior income year, so a dividend frankable at 27.5% before 30 June will only be frankable at 26% from July, even if sufficient 27.5% (or even 30%) franking credits are available. This may encourage the payment of dividends prior to year-end, but you should also be aware of the cash and solvency position of the company and tax positions of the shareholders for the year before committing to this.
Paying dividends out might also reduce the franking balance which could reduce the ability of the company to carry back losses (see below).
Company tax rate changes will also mean that any tax planning that is usually of a timing nature only – for example, accelerating deductions, will have a permanent advantage as the associated deferred tax liabilities are restated on 1 July, with the movement going to P&L in the 2021 year.
Carry back of losses
2021 is the first year of the new loss carry-back measures. Companies with aggregated turnover of less than $5 billion can carry back losses incurred in 2020 and in 2021 against tax paid in 2019 or 2020, respectively.
This is limited to the lesser of the tax paid previously or the surplus of the franking account at 30 June 2021. Be aware of this if planning dividends prior to year-end. Even if paying dividends after year-end, be aware of the franking debit that will arise upon receipt of the refund and whether this could throw the company into franking deficit by 30 June 2022.
To claim the IAWO (instant asset write-off) in FY21 for depreciable assets or for the balance of the depreciation pool, the asset must be first used or installed ready for use by 30 June 2021. For any depreciable assets being acquired prior to year-end, you should ensure suppliers can deliver in time for installation ready for use before year-end. Similarly, ensure such assets being constructed can be completed ready for use in time.
Also be aware that the acceleration of deductions the IAWO creates can leave a company short of franking credits for payment of dividends next year.
In order to receive a deduction for superannuation contributions in FY21 year, the amount must be received into the fund’s bank account by the end of 30 June 2021. Do not leave it until 30 June to make a bank transfer.
The non-concessional superannuation contributions limit increases to $110,000 from 1 July 2021, meaning that a maximum of $330,000 (instead of $300,000) can be made under the bring forward rules from that date.
Usual year-end tax planning measures
Year-end tax planning generally involves ensuring that the maximum timing advantage is taken for any payments. The change in tax rate for Base Rate Entities, makes this even more important and creates a permanent advantage.
Ensure maximum deductibility for FY21 by:
- Ensuring employee superannuation contributions are made by 30 June 2021 (instead of the compulsory date of 28 July 2021)
- Resolving discretionary bonuses and directors fees and notifying participants by 30 June 2021
- Reviewing debtors balances and writing off bad debts by 30 June 2021. This does not compromise your ability to chase them, but does recognise that you consider it commercially unrealistic that they will be recovered. This also will create a GST refund in the July BAS.
Taxable Payments Annual Reports
Businesses providing any of the following services: Building and construction; cleaning; courier or road freight; information technology; security, investigation or surveillance; and all government entities will need to provide a Taxable Payments Report to the ATO by 28 August 2021.
This report will need to disclose the name, address, ABN and gross amount paid (including GST) for each contractor.
To have your questions answered, please call Chris or Don