Tax Planning for Businesses – 2021

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Well, it’s that time of year again – tax planning time! As in previous years, we are trying to ensure all our clients take advantage of every strategy to ensure they do not pay more tax than they have to. Only a couple of weeks are left to put your strategies in place. Following are the strategies that you should be looking at before 30 June.

The usual tax planning strategies you need to review by year-end are as follows:

  • Defer income by delaying invoicing. Deferral of income is even more critical this year, with the company tax rate dropping from 26% to 25% on 1 July.
  • Bring forward expenditure by incurring the expense before year-end.
  • Review trading stock for possible write-downs of obsolete or slow-moving lines.
  • Write off bad debts in the accounts before 30 June.
  • Prepay expenses if relevant to the size of your business. You can claim prepaid expenses this year if your turnover is < $50M. Please note this threshold was a turnover of $10M, but, as announced in the recent budget, from 1 July 2020, this threshold has been raised to $50M.
  • Pay superannuation contributions for yourselves, if relevant, and ensure paid, along with employees’ contributions, before 30 June to get the deduction this year.
  • Write off plant and equipment that is not used or has been scrapped.
  • Access to the Instant Asset Write Off (IAWO) concessions is now widely available to all businesses. In fact, by current law, it is available until 30 June 2022. Additionally, in the recent budget, it was announced that once the legislation goes through Parliament, the concession will extend until 30 June 2023. There are different dates applicable for periods during the 2021 financial year, but from now on, for most businesses, there is no threshold on the asset’s cost. Motor vehicles have some special rules we should discuss if you plan to purchase a motor vehicle from now on.
  • Have you made a loss in 2021? Did you pay tax on profits in your company in 2019 or 2020? If so, you should use the Loss Carry Back provisions to receive a refund for previously paid tax if you made a loss this year. Please note these provisions have been announced in the budget as extending until 30 June 2023.
  • With tax rates dropping on 1 July 2021, the franking of dividends declared after that date will also drop. This will mean there will be slightly more in top-up tax payable in the shareholder’s hands for dividends received after 1 July 2021. Review what suits your circumstances before 30 June. Do you pay the dividend before 30 June and pay the tax around May 2022, but it will be less than if delayed until the 2022 financial year (but the top-up tax will be payable a year later)?
  • Ensure loans to shareholders are under control with adequate repayments and loan agreements in place.
  • Any bonuses due to employees should be paid before 30 June to get tax deductions this year, or if committed to this year, but based on a profit calculation that can’t be done until after 30 June, minute in the statutory records that they are to be paid.
  • Any Personal Services Income rules issues must be resolved with the required salary by 30 June.
  • Trustees of trusts need to ensure that the necessary distribution minutes are put in place and signed before 30 June, especially if you intend to stream different types of income to different beneficiaries.  
  • Company directors must ensure that dividend minutes are prepared and signed for any dividends declared during the 2021 financial year.
  • Have you made capital gains this year? Do you have the ability to crystallise capital losses before 30 June to offset them?
  • Can you make any donations before 30 June to get the deduction this year?
  • If you wish to change the structure, 1 July is the easiest and cheapest time to start the new structure.

Another issue we discussed last year is the planned changes to the Division 7A laws. Significant changes are planned, making it more costly to have outstanding loans after the legislation changes. The law is planned to start from the 1st of July after the legislation receives Royal Asset. As we have not even seen a first draft of the legislation, it is implausible to pass through both Houses of Parliament before 30 June. Assuming it happens over the coming months, the legislation will likely change from 1 July 2022.

As a reminder, the changes included replacing the current 7 and 25 years loans with 10-year loans (with transitional measures put in place for existing loans), new higher interest rates on the loans and changes to repayment and loan agreement requirements. If not dealt with by the end of a transitional period, there would also be a catching of existing exempt loans. There will be significant planning before 30 June 2022 for companies with existing debit loans. We will be keeping in mind the changes when we are preparing the 30 June 2021 accounts as well in case remediation work is required over two tax years.

This year’s tax planning is significantly affected by the effect of COVID-19. We have previously gone through the various concessions announced to help businesses to survive COVID. While Jobkeeper has now finished, other concessions are still available, so please review and ensure you claim if you are eligible.

As always, we have contacted all our business clients before year-end to discuss what they need to do.

In the meanwhile, the above lists should remind you of any areas you may have forgotten. Please get in touch with us if you wish to clarify something.

Kreston Stanley Williamson Team

*Correct as of 7 June 2021

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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