Bring forward the purchase of assets
If there are large assets your business needs to buy (or upgrade), you have until 30 June 2023 to use the temporary full expensing rules. These rules enable businesses with an aggregated turnover of up to $5bn to fully deduct the asset’s cost upfront rather than being claimed over the asset’s life, regardless of the asset’s cost.
The temporary full expensing rules are of benefit if your business would like to reduce the tax it pays in 2022-23, and the purchase of the asset will not strain cash flow. If the business does not have tax to pay and you utilise the rules, this will often give rise to a tax loss that can be carried forward to future years, although companies have access to some loss carry-back rules for the 2022-23 year.
Timing is important. The asset needs to be “first held and ready for use” by the 30 June 2023 deadline to qualify for an immediate deduction in the 2023 tax return. Just having a contract in place won’t qualify if you have not taken possession of the asset.
If you are buying a work vehicle which is classified as a car and is mainly designed to carry passengers, then remember that there are rules which limit the deductions that can be claimed if the cost of the car is above the car limit ($64,741 in 2022-23).
From 1 July 2023 until 30 June 2024, small businesses with an aggregated turnover below $10m can immediately deduct assets costing less than $20,000 in the year of purchase using the instant asset write-off. Assets will be depreciated for other businesses using the general depreciation rules over time.
Declare dividends to pay any outstanding shareholder loan accounts
Suppose your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company. In that case, this can be treated as a taxable dividend. The regulators expect shareholders to pay top-up tax (if any applies) at their marginal tax rate once they can access these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years placed under complying loan agreements, the minimum loan repayments for the 2022-23 income year must be made by 30 June 2023. It may be necessary for the company to declare dividends before 30 June 2023 to make these loan repayments.
Commit to directors’ fees and employee bonuses
Any expected directors’ fees and employee bonuses may be deductible for the 2022-23 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2023, even if the fee or bonus is paid to the employee or director after 30 June 2023 (within a reasonable time). You would generally be definitely committed to the payment by year-end if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end.
Write-off bad debts
You can claim a bad debt as a deduction if the income is brought to account as assessable income and you have given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
Review your asset register and scrap any obsolete plant
Check if obsolete plant and equipment are on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.
Bring forward repairs, consumables, trade gifts or donations
To claim a deduction for the 2022-23 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.
Pay June quarter employee super contributions now
Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2023. However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.
Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes.
Raise management fees between entities by June 30
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, ensure they are commercially reasonable, and documentation is in place to support the transactions. If any transactions are undertaken with international related parties, the transfer pricing rules must be considered, and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.
Protecting against risk: Is it a business expense? Really?
For a few years now, very generous provisions have been in place that allow businesses to claim the cost of assets used in the business in the year of purchase instead of having to deduct them over time. But, this has led to some serious problems where some products have been promoted as tax-deductible without proper consideration being given to how the tax rules operate.
Artwork is one example.
Suppose your business buys an artwork to display in areas of your office where clients would view it, assuming it is used in connection with your business and is likely to decline in value. In that case, the business can generally claim depreciation deductions for tax purposes. It might be possible to claim an immediate deduction depending on the situation. If, however, the artwork is displayed in a home office, then the risk of the ATO querying this is much higher.
Suppose the artwork is an investment piece, and you expect it to appreciate in value. In that case, it’s unlikely to be a depreciating asset and would not normally qualify for an immediate deduction.
Another scenario is a boat used for “marketing purposes.” If your business buys a boat, claims the cost of the boat and the expenses, the ATO will expect to see the benefit to your business of this and will be checking to see if the boat has been used privately by employees or shareholders (yes, they do look at your social media). If there is private usage of the boat, then this can give rise to a range of complex tax issues. For example, this could trigger an FBT liability or a deemed unfranked dividend under the rules in Division 7A. It gets very messy.
In general, the ATO is likely to review any expense where the cost outweighs the likely value to the business of acquiring it, particularly for assets people are likely to want for their own pleasure.