This could be the final opportunity for your business to take advantage of Temporary Full Expensing (TFE) but get in before 1 July!

To recap, TFE encourages and supports businesses by allowing an immediate deduction for the business portion of the cost of a depreciating asset. There is an unlimited cost threshold – the whole cost of the asset can be written off, with limited exceptions such as motor vehicles (which can only be claimed up to the motor vehicle cost limit). TFE assists cash flow by allowing upfront deductions rather than those deductions being spread out over many years. Cash flow is a real business challenge, particularly in the current environment.

Until 30 June 2023, under TFE, businesses can claim new and second-hand depreciating assets where those assets are used or installed ready for use for a taxable purpose. From a timing standpoint, this means you will not be eligible for TFE in this financial year if you merely order or pay for the asset before 1 July 2023 – instead, the asset must be used or installed and ready for use in your business before this date.

Most business assets are eligible, including machinery, tools, furniture, and equipment. There are, however, some ineligible assets, as follows:

• buildings and other capital works for which a deduction can be claimed under the capital works provisions in division 43 of the Income Tax Assessment Act (ITAA) (1997)
• trading stock
• CGT assets
• assets not used or located in Australia
• where a balancing adjustment event occurs to the asset in the year of purchase (e.g. the asset is sold, lost or destroyed)
• assets not used for the principal purpose of carrying on a business
• assets that sit within a low-value pool or software development pool, and
• certain primary production assets under the primary production depreciation rules (facilities used to conserve or convey water, fencing assets, fodder storage assets, and horticultural plants (including grapevines)).

Provided these exclusions do not apply, the asset will be eligible where the business has an aggregated turnover of less than $5 billion for the relevant year and no balancing adjustment event happens to the asset in that year.

Contact us if you have any questions leading up to the end of the financial year.

Make early SG contributions

Some employers look to improve their current year tax position by bringing forward June quarter superannuation guarantee (SG) contributions before 1 July (not due until 28 July). From a technical standpoint, the income tax rules allow an employer to claim income tax deductions for contributions made to a super fund or retirement savings account (RSA) on behalf of employees, subject to certain conditions being met. The income tax deduction, however, is only available in the income year the contribution is made. Super contributions are deemed to be made when the fund receives the payment or RSA – as distinct from when it is paid.

While this is clear-cut where an employer pays SG directly to an employee-nominated fund or the employer’s default fund, what of the common case where SG contributions are made to a superannuation clearing house? Employer payments made to an approved clearing house are taken to be contributions made on the day they are accepted by the approved clearing house. Importantly, however, this is only to determine whether an employer is liable for the SG Charge…it does not extend to determining the timing of the employer tax deduction.

To recap, ATO’s free Small Business Superannuation Clearing House (SBSCH) is the only ‘approved’ clearing house – none of the many commercial clearing houses have this status. The SBSCH is a free service that small businesses with 19 or fewer employees or an annual aggregated turnover of less than $10 million may use to make super contributions to employees. The SBSCH aims to reduce compliance costs for small business employers by simplifying and streamlining employee super contributions by allowing employers to make a single lump payment of their contributions to the SBSCH each quarter. That lump sum payment is broken into individual payments by the SBSCH and then contributed to each employee’s respective super fund or RSA.

The ATO itself concedes that there may be a period of time between an employer’s payment to the SBSCH and the trustee of a complying super fund receiving the contribution. Further, the SBSCH may be unavailable over a weekend close to the end of the financial year for scheduled system maintenance. This means that payments made towards the end of an income year may not be received by the trustee of a complying super fund or an RSA in the same income year. This may impact when an employer is entitled to an income tax deduction for the super contributions.

For its part, the ATO’s position is that it will not apply compliance resources to consider whether the contribution an employer made was received by the trustee of the super fund or RSA in the same income year in which you made the payment to the SBSCH, provided the employer made the payment to the SBSCH before the close of business on the last business day on or before 30 June.

For those employers who do not use the SBSCH but instead use commercial clearing houses, for the contributions to be deductible this financial year (in 2022/23), it is recommended that it be made up to 21 days before the end of the financial year.

For employers who make contributions directly to employee super funds, the contributions should be made a few days before the end of the financial year to ensure they are received before 1 July and, therefore, deductible in the current financial year.

Director bonuses

It’s not an uncommon strategy for companies to resolve to pay director fees or director/employee bonuses in the current financial year but not physically pay them until the following financial year. The aim of this is a degree of tax deferral, whereby a company commits itself to pay director fees or bonuses in the current financial year and accordingly claims a tax deduction. However, it does not pay the amount in that year but the following year. A deduction is claimed, but the company incurs no expense.

For the recipient director/employee’s part, the law is settled. The bonus, fee, salary, wages, and other similar types of income are derived for income tax purposes when the income is paid or otherwise made available to the director/ employee. This is so notwithstanding that the services giving rise to the income may have been rendered in a previous year. Therefore, although the director/employee is entitled to the payment (because the company has made a resolution to pay it), they only need to declare the income in the year it is received.

What of the ATO’s position? To claim a deduction in the current 2022/23 financial year, there must be a definite liability to pay the amount in question, which must arise on or before 30 June. This can be achieved by the company passing a properly authorised resolution by this date. Those amounts must be paid in the following months and at least by the end of the following year. When those amounts are paid, the standard PAYG rules must be complied with for a deduction to be claimed.

Trust distributions

If you have a discretionary trust, you need to complete trust distribution resolutions by 30 June to avoid paying extra tax of up to 47% on undistributed amounts (i.e. the top marginal tax rate, plus Medicare levy). This deadline has not always been such, and the Commissioner previously allowed a two-month window until the end of August. That window now, however, only applies to trust capital gain distributions that have not already been dealt with by 30 June.

Although 30 June is the deadline, there are a couple of caveats:

• It’s important to note that the Commissioner will accept records created after this date as evidence of making a resolution by that date. For example, assume an individual trustee writes a note on 25 June resolving to distribute trust income in a certain way. Then in early July, they type a note reflecting the 25 June resolution and provide a copy to the beneficiaries. In this scenario, the Commissioner will accept the handwritten or typed note as evidence of the resolution made by the 30 June cut-off.
• Likewise, trust accounts need not be prepared by 30 June to make beneficiaries entitled to trust income. Resolutions do not need to specify dollar amounts for the resolution to be effective in making a beneficiary presently entitled – this is unless the trust deed specifically requires it. Provided there is a clear methodology for calculating a beneficiary’s entitlement (for example, a percentage of the trust income, whatever that turns out to be), the resolution will generally be effective.

Resolutions made after 30 June will not be effective.

Regarding what needs to be done by 30 June, resolutions must meet all the trust deed requirements. Distributions of income and capital must be consistent with the deed. There is no standard format for a resolution – there is a wide variety of trust deeds with differing requirements for resolutions. Most importantly, the resolution makes one or more of the trust’s beneficiaries entitled to the trust income by 30 June.

If the deed allows for it, resolutions can be made orally. Therefore, it is conceivable to make an oral resolution to distribute trust income in a particular way. The problem is that the Commissioner, should enquiries be made, will look for objective evidence that a resolution was made. This may take the form of, for example:

• A diary entry
• Meeting minutes
• Correspondence, such as emails
• Memos
• Draft minutes.

This can be a complex area. Contact us if you are in any doubt about distributions before 1 July.

Write off bad debts

If a business accounts for income on an accruals (non-cash) basis, it should review its debtors to write off bad debts before 1 July (and, in doing so, claim a deduction this financial year).

If it is determined there is no or little likelihood that an amount included in your assessable income will be recovered from the debtor, you may claim that amount as a tax deduction.

You need to write off the unpaid amount as a bad debt to claim a deduction for the assessable income that cannot be recovered.

This means you must have decided to write off the debt and recorded that decision in writing before the end of the income year in which you claim a deduction. For example, you may have removed the debt from the customer’s account and recognised it as a bad debt expense.

The debt must still exist and not be otherwise dealt with when you write it off and claim a deduction. For example, you must not have waived or forgiven the debt, extinguished the liability in another way, or sold the debt.

If you subsequently recover an amount you wrote off as a bad debt and claim it as a tax deduction, the amount you recover must be included in your assessable income when you receive it.

Crystalise capital losses

It has been a tough year for investors.

CoreLogic’s capital city index declined 8.8% from its May 2022 peak to December, down 7.1% in calendar year terms, being the worst calendar year results in 42 years. The share market, too, has struggled.

Suppose you have already sold assets and made capital gains during the year and are contemplating selling other capital assets that would result in a capital loss. In that case, you may wish to consider doing so before 1 July.

You can deduct allowable capital losses from your capital gains to reduce or eliminate your 2022/23 CGT liability.

Capital losses must be used at the first opportunity.

If you have any capital losses in the current year or unused capital losses from previous years, you must:

• use these losses to reduce any capital gains in the current year, and
• use the earliest losses first.

Example

For 2022/23, a taxpayer has:

• capital gains of $20,000
• capital losses of $12,000.

The taxpayer also has prior year net capital losses of $6,000 from 2021/22 and $4,000 from 2020/21.

How are the capital losses applied?

The 2022/23 net capital gain of $8,000 is reduced to zero by applying the net capital losses in the order in which they arose. The 2021/22 capital loss of $6,000 is applied.

The remaining $2,000 gain is reduced by the 2020/21 loss of $4.000. This leaves a net capital loss of $2,000 to be carried forward.

Prepay business expenditure

In certain circumstances, an SBE taxpayer (Small Business Entity with an aggregated annual turnover of less than $50 million) can claim an immediate deduction for prepaid business expenses where the payment is for a period of service that is 12 months or less and ends in the following income year.

You are permitted to claim expenditure straight away under this rule unless the expenses are excluded expenses such as:

• amounts of less than $1,000
• amounts required to be incurred by a court order or law of the Commonwealth, state or territory (such as fines or penalties)
• payments of salary or wages (under a contract of service) » amounts that are capital, private or domestic in nature (except certain research and development amounts), and
• certain amounts incurred by a general insurance company in connection with the issue of policies or the payment of reinsurance premiums.

Examples of prepaid expenses include but are not limited to:

• Rent
• Airfares and accommodation
• Subscriptions
• Contract payments
• Insurance
• Advertising
• Service agreements for IT
• Bookings for conferences, major events etc.

EXAMPLE

Bradshaw Pty Ltd is a small business taxpayer. On 1 June 2023, Bradshaw prepays $15 000 for its next 12 months’ rent. The expenses cover the period from 15 June 2023 to 1 June 2024. Bradshaw can take advantage of the prepayment rules because:

• the period covering the prepayment does not exceed 12 months (i.e. 15 June 2023 – 1 June 2024)
• the period for which the prepayment was made ends before the last day of the income year following the prepayment (i.e. it ends before 30 June 2024).

Federal Budget

Moving away from tax planning, it’s less than a fortnight until the Federal Budget.

In the days following, please get in touch with us if you have any questions about how the Budget may impact your business, investments, or as an individual. Some of the things to look out this year include:

Temporary full expensing

Under current legislative settings, TFE is set to cease on 1 July 2023, with the write-off set to revert to just $1,000 from that date. Suppose no action is taken in the Budget to extend TFE. In that case, this will impact businesses’ cash flow because depreciation deductions will be spread out over many years rather than being claimed upfront.

Stage three tax cuts

The fate of these tax cuts is also expected to be revealed. If they are to proceed, they will abolish the current 37% tax bracket, lower the existing 32.5% bracket to 30%, and raise the threshold for the top tax bracket from $180,001 to $200,001. The following table illustrates how the rates and thresholds will change if the tax cuts proceed:

Tax RateThresholds in 2022-23Tax RateNew thresholds in 2024-25NilUp to $18,200NilUp to $18,20019%$18,201-$45,00019%$18,201-$45,00032.5%$45,001-$120,00030%$45,001-$200,00037%$120,001-$180,00045%$180,001 and over45%$200,001 and over

On the face of it, lowering the 32.5% to 30% and removing the 37% tax bracket altogether seems like a big win for middle and upper-middle-income earners. Nevertheless, it will be a much bigger win for higher-income earners in dollar terms.

Low and middle-income tax offset (LMITO) replacement?

This $1,500 tax offset ceased on 1 July 2022. The LMITO was introduced by the former Coalition government in 2018, and it was only meant to be paid out once but was twice extended due to the pandemic. We will wait until Budget night to see what, if any, alternative tax relief is offered to low and middle-income earners, or indeed whether the LMITO is reinstated. If not, low-income earners may face an increased tax liability of up to $1,500 when upcoming 2022/23 tax returns are lodged.

Were CGT concessions trimmed?

While it is unlikely the CGT main residence concession on the family home will be reduced, the 50% CGT discount for other investments held more than a year could be partially on the chopping block for some people. It is possible to imagine a reduction in the discount for capital gains over a certain threshold – say $3 million, in line with the threshold for the recent increase to superannuation earnings – limiting the impacts to a smaller, wealthier cohort of individuals.