2022 Year End Tax Planning

With less than two weeks to go until the end of the financial year, there is still time for individuals and businesses to get their financial and tax affairs in order. Our top tax planning tips for individuals and businesses are set out below.

For Businesses

Temporary Full Expensing (TFE)

Temporary Full Expensing allows eligible businesses to claim an immediate deduction for depreciating assets acquired and first used or installed ready for use by 30 June 2023. An eligible business includes those with an aggregated turnover of less than $5 billion or a corporate tax entity which satisfies the alternative income test.

To be eligible for TFE, the depreciating assets must be:

(a) new or second hand (if second hand the aggregated turnover must be below $50 million);

(b) first held after 7.30pm AEDT 6 October 2020; and

(c) first used or installed ready for use for a taxable purpose between 7.30pm AEDT 6 October 2020 and 30 June 2023.

Loss carry back tax offset

The loss carry back tax offset allows corporate tax entities with an aggregate turnover of less than $5 billion in the relevant loss year to carry back losses (made in the 2020 – 2023 income years) to offset profits taxed as far back as 2019.

As it is a refundable tax offset, the losses carried forward must not be greater than profits taxed in an earlier income year and must not result in a franking account deficit.

Superannuation Guarantee (SG) payments

To be eligible for a tax deduction, June quarter (or June month) superannuation payments must be received by your employee’s superannuation fund before 30 June 2022.

SG rate changes

From 1 July 2022, the compulsory employer superannuation rate is increasing by 0.5% to 10.5%. Therefore, salary and wages paid post 30 June 2022 will attract superannuation at the higher rate.

The SG rate is set to increase to 12% by 1 July 2025, with incremental increases of 0.5% each financial year up until 2025.

Employers should consider whether the change in superannuation guarantee rates for current employees will be treated as an additional payroll cost or a change in the allocation of employment packages.

SG $450 de minimus threshold

Also, from 1 July 2022, the $450 de minimus threshold for superannuation guarantee contributions to employees will be removed. This means employers will be required to pay superannuation guarantee to all eligible employees over the age of 18 years regardless of their monthly pay.

This will be an important cash flow implication for businesses that employ a high level of casual staff.

Trust distributions

Prior to 30 June of each financial year, discretionary trusts (and some fixed trusts) are required to prepare and execute distribution minutes. The purpose of these minutes is to set out in detail how the income of the trust will be distributed to beneficiaries for the 2022 financial year and detail any use of income streaming. These minutes must be prepared in accordance with the relevant trust deed. In order for the distribution minutes to be effective, they must be prepared and executed prior to 30 June 2022.

When preparing the trust distribution minutes, it may be beneficial to retain a nominal amount in the trust for the 30 June 2022 income year. This will assist with generating a notice of assessment for the trust, effectively limiting the amendment period to 4 years (or 2 years for trusts that are considered a small business entity) from the date of that notice.

It is important to note that recent ATO rulings on trust distributions have muddied the waters around trust distributions in some scenarios and trustees should consider the ATO’s draft guidance on section 100A when preparing 2022 year end minutes (click here). It is recommended that trustees document the intention of the distributions and how they interact with Draft Taxation Ruling (TR 2022/D1). The ATO have also released a draft practical compliance guide which outlines their views on when section 100A may apply (click here).

Unpaid present entitlements

The ATO has recently revised their position regarding unpaid present entitlements (UPEs) for Division 7A¹ purposes (click here). For UPEs which arise on or after 1 July 2022, previous tax rulings (TR 2010/3) and PS LA 2010/4 will be withdrawn. The revised view will not impact arrangements in the current 30 June 2022 financial year.

There are two circumstances when a beneficiary will be deemed to provide financial accommodation to a trust:

1. Distributions that are unpaid and retained in the trust

Where a private company beneficiary has knowledge of a UPE but fails to demand payment, they are considered to consent or acquiesce to the trustee retaining those funds for trust purposes, thereby constituting the provision of a financial accommodation. This means distributions made to a corporate beneficiary on or after 1 July 2022 will be treated as Division 7A loans if they are left unpaid.

2. Sub-trusts – funds set aside on a separate trust

Where a trustee sets aside funds on a separate trust which represents the beneficiary’s entitlement, a sub-trust is created. If these funds are used exclusively for the benefit of the private company, the payment will not amount to the provision of financial accommodation. However, if these funds are used for the benefit of another entity, this will constitute the provision of a financial accommodation to that entity and accordingly, a Division 7A loan.

For individuals

During the COVID-19 pandemic, the ATO introduced a temporary ‘short cut method’ for specific running expenses incurred while working from home.

The short cut method (which provides an 80c per hour work from home tax deduction) was extended until 30 June 2022. As this method covers all eligible home office expenses, a separate claim cannot be made for expenses such as mobile phone or internet costs concurrently.

In circumstances where the 80 per hour method does not accurately reflect an individual’s home office expenses, the 52c per hour fixed rate method can be applied, whilst still being able to claim other home office expenses such as phone, internet expenses and the decline in value of computers and laptops.

Where any claims are made, workers should keep appropriate records of the hours worked from home and the office expenses incurred.

SG rate changes

From 1 July 2022, the compulsory employer superannuation rate is increasing by 0.5% to 10.5%.

Employees should consider how this rate increase will impact their take-home pay.

Personal superannuation contributions

A tax deduction is available for the year ended 30 June 2022 for individuals that make personal superannuation contributions from their after-tax income. To be eligible for the tax deduction, individuals must ensure that the superannuation fund receives the contribution and the notice of intention to claim by 30 June 2022. The concessional contribution cap for the 2021/22 financial year is $27,500 (note: individuals can bring forward their previously unused concessional contribution cap from up to five previous financial years).

Downsizer superannuation contributions

If you have reached the eligible age of 65 years (note from 1 July 2022 the eligible age is 60+), you have the ability to contribute up to $300,000 from the proceeds of the sale (or part sale) of your home into your super fund, subject to satisfying the eligibility requirements. Some of the eligibility criteria includes:

1. the home must be in Australia, have been owned by you or your spouse for at least 10 years and the disposal must be exempt or partially exempt from capital gains tax;
2. a downsizer contribution has not been previously made to your super fund from the sale or part sale of another home; and
3. prior to (or at the same time) as making the contribution, you provide your super fund with a “Downsizer contributions into super form”.

For more information on tax planning, please contact Anushka De Alwis at anushka.dealwis@hamiltonlocke.com.au or +61422 137 139.