Further year end tax planning points (many of them less obvious) include: making hardship applications, if Div 7A minimum payments can’t be made, this year; the start of the 25% tax rate and franking rate, for ‘base-rate’ companies, with an aggregate turnover under $50m; JobKeeper derivation; crypto-currencies realisation issues; vendors claiming a credit for any tax withheld under the Foreign resident capital gains withholding provisions; ‘full expensing’ of small business depreciation pools; determining the assessable amount, on the sale of previously fully written-off cost of depreciable items and no deductions for travel costs to inspect rental properties and holding costs of vacant land.
See below for further details.
The Tax Institute’s Senior Advocate: Robyn Jacobson, CTA, made further comments on year-end tax considerations, for taxpayers and their advisers (in the Institute’s weekly newsletter: TaxVine, No.21, 11.6.21).
Year-end considerations — Part 2
This is the second in a series of year-end articles the Tax Policy and Advocacy team will be penning over the coming weeks. Until the end of June, we will be sharing with you our insights and commentary about those issues we consider pertinent to your year-end activities and those of your business and your clients.
This preamble provides a general overview and broadly explains some year-end matters you may wish to consider when advising your clients. This week, we focus on what needs to be done by 30 June 2021.
Division 7A
Let’s start the discussion with a perennial favourite. None of you need reminding that the minimum yearly repayment (MYR) on a complying amalgamated Div 7A loan is due to be made by 30 June 2021. However, with the continuation of the COVID-19 pandemic — particularly in Melbourne at the moment — some borrowers may struggle to make their MYRs by the end of the income year.
In June 2020, the ATO provided guidance on how to seek discretion under s109RD of the Income Tax Assessment Act 1936 (ITAA 1936) to obtain a deferral of time to make the 2019–20 MYR where the shareholder (or associate of the shareholder) was unable to do so due to circumstances beyond their control. The ATO has indicated they will provide some similar guidance again this year for those struggling to make their deferred MYR from 2019–20 which is due to be paid by 30 June 2021 or a 2020–21 MYR.
Making loan repayments by journal entry
Our recent free member-only Webinar: Division 7A – Making loan repayments by journal entry, took a deeper dive into the rules regarding the use of journal entries to make Div 7A loan repayments. If you have not yet watched the recording, I encourage you to do so, to ensure you carefully navigate the various statutory obligations and requirements.
Unpaid present entitlements under sub-trust arrangements
The Tax Institute has advocated for an extension of Practical Compliance Guideline PCG 2017/13 to cover Option 1 (7-year) sub-trust arrangements maturing in the 2020–21 income year, as well as Option 2 (10-year) sub-trust arrangements maturing in the 2020–21 income year for the first time. The PCG currently applies only to sub-trust arrangements maturing in the 2016–17, 2017–18, 2018–19 or 2019–20 income years.
Corporate tax rate — Base rate entities
The corporate tax rate for base rate entities further reduces from 26% in 2020–21 to its final resting place at 25% on 1 July 2021. (It was 27.5% from 2016–17 to 2019–20.) The reduction in the corporate tax rate for base rate entities also means that the ‘corporate tax rate for imputation purposes’, otherwise known as the maximum franking rate, for 2021–22 will also reduce from 26% to 25%, assuming that the company’s:
- aggregated turnover for 2020–21 is less than $50 million; and
- base rate entity passive income (defined in s 23AB of the Income Tax Rates Act 1986 and (Rates Act) explained in Law Companion Ruling LCR 2019/5) for 2020–21 is no more than 80% of the company’s assessable income for 2020–21.
Accordingly, this is the last opportunity for a base rate entity to frank a distribution at the rate of 26%.
When the base rate entity rules were first introduced, I undertook some modelling and determined the extent of trapped franking credits that can arise when a company has paid tax at the rate of 30% but is required to frank distribution at a lower rate. The following table sets out the extent of the trapped franking credits where tax at the rate of 30% was paid on $100 of taxable income in 2013–14 and a $70 dividend is paid out in a later income year.
TABLE 1: Impact on franking account of reduction in corporate tax rate
| Income year | Dividend paid | Franking rate | Franking credit | Trapped franking credit | % of company tax paid |
| 2014–15 | $70 | 30% | $30.00 | — | 0% |
| 2016–17 | $70 | 27.5% | $26.55 | $3.45 | 11.50% |
| 2020–21 | $70 | 26% | $24.59 | $5.41
($1.96 incremental) |
18.03% |
| 2021–22 | $70 | 25% | $23.33 | $6.67
($1.26 incremental) |
22.23% |
More than 22% of franking credits generated by a tax payment at the rate of 30% will be trapped in the franking account once the rate falls to 25%. The distribution of cash flow boost amounts (treated as non-assessable non-exempt income) may provide an opportunity to access some of these trapped franking credits.
Income and gains
While on the subject of economic stimulus measures, a reminder that JobKeeper payments need to be included in the entity’s assessable income. Accruals-based taxpayers will assess JobKeeper payments in the income year in which they are derived, that is, when a validly completed business monthly declaration is provided to the ATO. Cash-based taxpayers will assess JobKeeper payments in the income year in which they are received.
Separately, taxpayers who have realised cryptocurrency during 2020–21 will need to account for the capital gain or loss (it is unlikely to be a revenue gain or loss in most cases). A taxing point does not arise solely when cryptocurrency is converted back into fiat currency. The disposal of one cryptocurrency to acquire another cryptocurrency constitutes the disposal of one CGT asset and the acquisition of another CGT asset. Property is received instead of money in return for the cryptocurrency, so the market value of the cryptocurrency received needs to be accounted for in Australian dollars.
Tips for capital gains include the following:
- Remember to utilise any carried forward capital losses when calculating a taxable capital gain.
- Consider whether a capital gain can be disregarded or reduced by applying the CGT discount, the small business CGT concessions, an exemption or a CGT rollover.
- Remember that vendors can claim a credit for any tax withheld under the Foreign resident capital gains withholding rules from the sale of property in Australia worth $750,000 or more.
Deductions
Some familiar tips for deductions include the following:
- Carefully determine whether deductions are allowable for work-related expense, particularly for those working from home during 2020–21, and ensure these can be substantiated.
- Write off any bad debts — the debt must be bad, not merely doubtful, and the taxpayer must have determined that the debt is unlikely to be recovered through any reasonable and commercial attempts.
- Write off slow-moving or obsolete stock and determine the basis on which trading stock will be valued at the end of the income year.
- Determine whether an immediate deduction for a prepayment is available to businesses with an aggregated turnover of less than $50 million as well as individual non-business taxpayers.
- Remember that travel costs related to residential rental properties are non-deductible under s 26-31 of the ITAA 1997, and the costs of holding vacant land are non-deductible under s 26-102 of the ITAA 1997.
- Ensure that initial repairs or expenditure that is capital in nature in relation to residential rental properties is not claimed as a repair.
Capital allowances
Some useful tips include the following:
- Small business entities (aggregated turnover less than $10 million) are required to fully expense their general small business pool balances on 30 June 2021. While they may choose to exit the simplified depreciation rules during 2020–21, the pool remains subject to Subdiv 328-D of the Income Tax Assessment Act 1997 (ITAA 1997) and is required to be written off under s328-181(5) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A). [This is under the ‘temporary full expensing’ of depreciable items, announced in the 2020 Federal Budget.]
- Do not forget that small business entities will need to assess the termination value from the sale of depreciating assets during 2020–21 that previously qualified for the instant asset write-off under s 328-180 of the ITAA 1997. Larger businesses will also need to include the termination value of assets expensed in full under s 40-82 of the ITAA 1997 or Subdiv 40-BB of the IT(TP)A in their assessable income due to the operation of s 40-285(1) and s 40-85 which reduce the adjustable value of the asset to nil where it is fully expensed.
- Deductions for depreciation may not be available under s 40-27 of the ITAA 1997 for existing assets or second-hand assets acquired during 2020–21 that are used in residential rental properties.
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