Year-end tax tips

Reduce your tax bill

If you are a sole trader or a partner in a partnership, or your business is carried on through a trust and you are a beneficiary, here are some key amounts:

  • $37,501 – the low income tax offset (maximum $700) starts to phase out;
  • $45,001 – the 19% tax rate increases to 32.5%;
  • $90,001 – the maximum low and middle income tax offset ($1,080) starts to phase out;
  • $120,001 – the 32.5% tax rate increases to 37%;
  • $180,001 – the 37% tax rate increases to 45%.

$90,001 (singles) and $180,001 (families) are also relevant if working out if you qualify for the private health insurance tax offset (or insurance premium reduction) or are liable for the Medicare levy surcharge – but add $1,500 for each dependent child after the first one.

Defer assessable income

If your taxable income for the income year is approaching any of those thresholds, you might want to consider deferring assessable income so your taxable income for the year will remain below the relevant threshold.

For example, you could delay issuing an invoice so you won’t be paid until after 30 June – that way, the income will be taxed next year. This won’t work if you account for income on an accruals basis – in that case, delay issuing the invoice. Of course, cash flow issues might mean you want to be paid asap.

If you are in the process of selling property and the profit will be taxable as a capital gain, you could defer the sale until the next income year – but remember that the liability to pay CGT arises when you exchange contracts and not on settlement.

Increase deductions

Another way to keep taxable income below a relevant threshold is to increase deductions. For example, you could bring forward the purchase of one or more depreciating assets (new assets are deductible outright under temporary full expensing). An immediate deduction is also available for start-up costs and certain prepaid expenses.

Charitable donations are a good way to increase your deductions. If you are not sure if a donation will be deductible, you can check the deductibility status of charities. In certain circumstances, you can claim a deduction if you donate trading stock. Don’t forget to ask for a receipt.

Private company loans

Shareholders of private companies operating businesses may dip into the company’s coffers to fund their lifestyle or other business interests. If you have done this, or are contemplating doing it, you need to be aware of what is known as a “Division 7A deemed dividend”.

Division 7A of the Income Tax Assessment Act 1936 contains the rules dealing with loans and and other payments by private companies to shareholders.

Under the rules in Division 7A, a cash advance to a shareholder will be treated as a taxable dividend in the hands of the shareholder, unless it is documented by a written loan agreement specifying certain matters, including the maximum term (e.g. 7 years if the loan is unsecured) and the minimum interest rate, which cannot be less than the benchmark rate. The benchmark rate for the current tax year (2020–21) is 4.52%.

Division 7A may also apply where a private company forgives a debt owed by a shareholder or certain benefits are provided to shareholders from trusts where a private company has an unpaid present entitlement (UPE) to the profits of the trust.

Payments, etc, to an associate of a shareholder (e.g. their spouse, child, sibling or parent) are treated the same as payments, etc, to the shareholder.

Division 7A does not apply to payments made to a shareholder (or an associate) in their capacity as an employee. FBT may apply instead.

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Thompsons Australia Newsletters and articles are distributed by professional tax practitioners to provide information of general interest to our clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.

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