There is no doubt it’s been a challenging end to the 2020 financial year and with many businesses dealing with the past, current and future effects of COVID-19, it would be easy to forget that the tax year is drawing to a close. In this newsletter, we would like to take the opportunity to bring to your attention some specific year-end tax matters, and whilst the majority of these matters are COVID-19 related, it is always important to consider the general year tax planning opportunities and matters in the lead-up to 30 June.
The key takeaway from this newsletter is that the substantiation of tax claims will be as important as ever. The Government has rolled out a number of generous stimulus measures, however the ATO has indicated that compliance and integrity are firmly on its radar and it is expected that the ATO will apply considerable resources to policing the integrity of these measures. It is therefore recommended that contemporaneous records are kept supporting any tax position taken.
COVID-19 STIMULUS MEASURES
JobKeeper eligibility? Continue to assess
Many businesses will have already assessed whether they meet the necessary decline in turnover test to access the JobKeeper payment scheme, however, it is important to note that businesses can continue to assess their eligibility for the scheme until September 2020. This may become relevant where a continued market downturn causes business turnover to fall by the necessary percentage relative to the comparable period.
As detailed in our recent JobKeeper newsletters, there are a number of ways in which a business may demonstrate a decline in turnover, and these may depend on the particular circumstances of a business. We also remind you that payment and reporting requirements must be maintained to ensure continued eligibility, and it is especially important that any positions taken in regard to the scheme are well documented and evidenced.
Instant asset write-off significantly increased
Assets purchased and ready for use between 12 March 2020 – 31 December 2020
The instant asset write-off has been increased from $30,000 to $150,000 in response to COVID-19, with eligibility also expanded to businesses with an aggregated turnover of less than $500 million (up from $50 million). The measure, which applies to both new and second-hand depreciating assets, was also recently extended such that qualifying assets that are purchased and are installed ready for use between 12 March 2020 and 31 December 2020 will now qualify for the write off. The limit for cars remains set at $57,581. If you are aiming to obtain a tax deduction by 30 June 2020, it is important the asset is delivered and ready for use by 30 June 2020. Otherwise the deduction will be available in the next financial year.
Where the entity is registered for GST, the threshold for the immediate asset write-off is calculated on a GST exclusive basis, as the entity will claim an input tax credit to the extent it is a creditable acquisition for GST purposes.
Accelerated depreciation new assets by 30 June 2021
For taxpayers not able to access the instant asset write off by 31 December 2020, an extended timeframe has been provided in which qualifying businesses are able to accelerate their depreciation deductions on the purchase (and install) of new (but not second-hand) depreciating assets up to 30 June 2021. The measure allows for an immediate 50% upfront deduction with the remaining 50% being depreciated at existing rates. Unlike the instant asset write-off, there is no cap on the expenditure eligible for this measure.
How to treat your stimulus payments
- JobKeeper payments are treated as assessable income for tax purposes with a deduction available for salary and wages payments, subject to the general requirements for deductibility.
- Wages that are subsidised by the Federal government’s JobKeeper payment are exempt from payroll tax.
- Whilst employers may be entitled to a deduction for the PAYG withholding paid, the cashflow boosts are specifically exempt from income tax and GST.
- Amounts received under the Government’s early release of super will not be subject to tax.
- The receipt of Government grants, for example the WA payroll grant (i.e. the once-off COVID grant of $17,500 given to those WA employers, whose annual Australian taxable wages are between 1-4 million) will likely be assessable. These payments should be taken into consideration when planning your tax instalments for the rest of the year (see below) and your overall FY20 tax liability position.
WA home buyers to receive significant assistance
The introduction of federal and state housing incentives means that some West Australian first homebuyers will receive close to $70,000 in grants.
As part of the Federal Government’s HomeBuilder scheme, a grant of $25,000 will be provided to eligible applicants to build a new home or substantially renovate an existing home.
Under the WA State Government’s Building Bonus package, a further grant of $20,000 is available for eligible applicants who either:
- enter into a contract to build a new home on vacant land; or
- enter into an off-the-plan contract to purchase a new home as part of a single-tier strata scheme.
For both WA grants, the contract must be entered into between 4 June 2020 and 31 December 2020 and construction must commence within six months of entering into the contract.
In addition, there is no means testing for the WA grant (meaning no taxable income limits) and no limits regarding the construction value.
An extension to the existing WA off-the-plan duty rebate scheme has also been announced. The scheme now extends to contracts entered into between 4 June 2020 and 31 December 2020 for the purchase of a new unit or apartment, in a multi-tiered development, that is already under construction.
Multiple grants can be paid to the same applicant on separate transactions that meet the criteria for each grant.
We encourage you to look out for out next newsletter which will cover the housing incentives in greater detail.
COVID-19 IMPACTS ON YEAR-END TAX ISSUES
Given the economic impact of COVID-19, the level of bad debt is expected to increase in coming months. Before writing a debt off as bad in the accounts, care should be taken that all necessary steps required to write off a debt are completed prior to year-end. When considering writing-off debts, it is important to evidence actions taken to recover the debt and written evidence that the debt was written off must be prepared prior to year-end. It is also noted that to claim a deduction for a bad debt, businesses must be able to demonstrate satisfaction of the continuity of ownership or business continuity test.
The COVID-19 environment may lead to more debts being forgiven or treated as forgiven in the coming months. Furthermore, there are a number of circumstances in which a debt may be treated as forgiven for tax purposes, including loan restructuring, debt assignment and debt to equity swaps. Where a forgiveness of debt is being considered, the impact of the commercial debt forgiveness rules (which can reduce a debtor’s tax losses as well as other tax attributes) and Division 7A (which can deem a dividend to have been paid) must be considered and any proposed transactions need to be carefully planned and implemented.
Over the past and coming months, many businesses have or will enter into arrangements in which the payment of business expenses is deferred. Careful consideration of such expenditure is required to ensure that those deferred expenses that have been incurred, are claimed in the FY20.
Non-payment of tax obligations – Directors personally liable
The financial effect of COVID-19 on cash flow coupled with relief measures provided by the ATO (including extension of time to pay) have increased the risk that Directors may fall foul of the Director Penalty Regime and may be personally liable for the unpaid PAYG, GST and superannuation obligations of their businesses. Directors should be aware of the following key considerations:
- Understand the company’s financial capacity to pay ATO debts.
- Ensure lodgement compliance of all BAS, IAS and SGC documents is undertaken by the due dates.
- Be aware of the administrative relief that the ATO is currently providing around payment deferrals and extensions utilising these avenues, where needed.
WFH -a new method for calculating home office expenses
The ATO has provided a new method to calculate home office expenses in response to the change in national work patterns. The new method will cover the period starting 1 March 2020 until 30 June 2020 and allows taxpayers to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses. The requirement to have a dedicated work-from-home area will also be removed, with multiple people in each household allowed to claim the new rate. Consideration should however be given to the other methods of calculating home office expenses as these may result in a better outcome.
With COVID-19 forcing many people to work from home, the area of work-related deductions is likely to continue as an area of increased ATO scrutiny and as such we note that when using the actual method, evidence should be collated and maintained to support any claim.
Rental expenses and losses
As with office expenses, property deductions are also expected to attract increased ATO focus, particularly in the COVID-19 environment, with the ATO likely to scrutinise rental expenses and losses claims. Careful consideration will be required around the circumstances of each rental property and the impact that any rent holidays or reductions have on the landlord’s ability to claim deductions during this period. Other areas to be considered may include:
- The treatment of interest expenses on rental property loans, where banks have provided loan repayment deferrals.
- The treatment of back payment of rent or insurance received for lost rent.
As with all of the matters discussed in this newsletter, substantiating any claims will be a key focus and it is expected that the ATO will be looking for evidence that landlords were genuinely required to reduce, defer or waiver rent.
For those commercial landlords that have been required to offer lease incentives and / or rent reductions or waivers to attract and maintain tenants, careful consideration of the GST and income tax consequences of such incentives and rent reductions should be considered as part of the negotiation process.
YEAR END PLANNING
As a result of COVID-19, the ATO is allowing taxpayers to vary the remainder of their FY20 tax instalments to nil, as well as request refunds of FY20 instalments already paid.
While the ATO has committed to not penalising taxpayers who have varied their instalments, cash-flow management will be important to ensure you are able to pay your full FY20 tax liability in due course.
Superannuation amnesty coming to an end
The last day by which a business can apply the Superannuation Guarantee (SG) amnesty and pay the amounts required under the amnesty is 7 September 2020. Given that no extensions have been flagged, it is recommended that employers consider their historical superannuation guarantee positions to identify any potential exposure.
We note that under this amnesty, employers have a once-off opportunity to disclose, lodge and pay historically unpaid SG amounts for their employees for the period starting 1 July 1992 until 31 March 2018. Importantly, employers can claim deductions and will not incur administration charges or penalties during this amnesty.
It is noted that in order to be eligible to claim a deduction for any SG payments made under the SG amnesty, the payments must be made before 7 September 2020, as payments made after this date will not be deductible.
Those companies that are experiencing cash flow difficulties as a result of COVID-19 are encouraged to engage early with the ATO to establish a payment plan. Where payment obligations cannot be met, the ATO is required by law to disqualify the effects of amnesty, however the application of penalties may be negotiated if the circumstances warrant it.
Company tax rates to decrease
From 1 July 2020, those companies with an aggregated turnover below $50 million and whose income is comprised of less than 80% passive income will be subject a tax rate of 26%. All other companies are subject to the 30% rate.
Companies wishing to declare and frank dividends should do so prior to 30 June 2020 in order to utilise the higher franking rate of 27.5%.
Division 7A loan agreements and minimum repayments
Where individuals and/or trusts have borrowed money from a private company in the year ended 30 June 2019, the loans must be fully repaid or be documented in a Division 7A-complying loan agreement before the (deferred) due date of the company’s 2019 income tax return.
Many companies have had the due date of their 2019 income tax returns deferred as a result of COVID-19, thereby potentially providing more time to repay such loans or enter into a Division 7A-complying loan agreement.
For complying loans put in place before the deferred lodgement date, the borrower will likely need to make their first minimum yearly repayment by 30 June 2020.
Unpaid entitlements created in the 2018–19 income year will also need to be placed on sub-trust arrangements by 5 June 2020, or any later lodgement date allowed by the Commissioner.
In relation to Division 7A loans from FY18 and prior years where a minimum payment is required in FY20, it must be made (via cash or dividend) before 30 June 2020.
For those unpaid present entitlements loan arrangements maturing in 2020, for which the principal sum has not been repaid, the Commissioner will accept that the existing arrangement can be converted to a complying 7-year loan if it is done so prior to the company’s lodgement day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest. Where such a loan is not put in place, a deemed dividend will arise at the end of the income year in which the loan matures.
Proposed Division 7A amendments – Still awaiting further guidance
Despite announcing last year that the start date for amendments to Division 7A would be 1 July 2020, the government is yet to provide any further details or guidance. Given this, uncertainty continues to exist as to if and when changes to Division 7A will be made.
Company minutes will need to be signed by the chair where that person is physically located. An electronic signature on the minute is acceptable. Circulating resolutions may be appropriate where all directors cannot meet electronically. Keep in mind they are effective once the last director has signed.
Trust distribution minutes should be prepared and signed before 30 June. Distribution planning may be required if you are planning on distributing capital gains and/or franked dividends to different beneficiaries than those who receive distributions of other income.
If you would like to discuss any matters in this newsletter in further detail, please do not hesitate to contact your Cooper Partners Engagement Team.
This newsletter is current as of 23 June 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve. Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.