In the final sprint of this financial year, as tax practitioners, we have entered the last phase of the current financial year. By crossing the final bend, we will reach the finish line on June 30th. Therefore, we need to maintain high momentum at the last moment and be well-prepared for clients' end-of-year matters.
This article will summarize the factors and long-term issues that need to be emphasized in the 2022-23 financial year.
Business Clients: Ending of Temporary Full Expensing Measure
Deadline: The temporary full expensing measure is set to end on June 30th, 2023. This is a crucial time point for business clients.
Full expensing provision: According to the soon-to-be-terminated provisions, to fully deduct a depreciating asset, the asset must be first used or installed ready for use by June 30th, 2023. Simply signing a contract, making a deposit, or receiving an invoice is not sufficient.
Asset limitations: If an asset is first used or installed ready for use after June 30th, 2023, it will be subject to the provisions of the 2023-24 financial year:
For small business taxpayers:
If the asset cost is below AUD 20,000 (excluding GST), it can be fully deducted.
If the asset cost is AUD 20,000 or higher, the asset needs to be allocated to general use pool and depreciated according to the pooling rules.
For large business taxpayers (with annual turnover exceeding AUD 10 million):
Asset depreciation should follow the normal asset depreciation rules. However, it is worth noting that the Australian Taxation Office allows assets costing less than AUD 100 (including GST) to be fully deducted in the year of acquisition.
Any fully deducted depreciating asset sold during the 2022-23 period will incur a taxable treatment on the sale proceeds.
Tax Loss Carry back
This temporary measure in the COVID-19 era will also end on June 30th, 2023. Entities with annual total turnover below AUD 5 billion can choose to carry back tax losses incurred in the 2022-23 financial year to offset against the taxed profits from 2018-19 to 2021-22. Refundable income tax offsets can be obtained by submitting the 2023 income tax return.
Boosting Measures for Small and Medium Enterprises
For businesses with annual turnover below AUD 50 million, three boosting measures apply to eligible expenditures:
Business expenses and depreciating asset expenditures supporting digitalization (technology investment boost).
Expenditures on external training courses for employees.
Reasonable depreciating asset costs supporting electricity and efficient energy usage (energy incentive boost).
The first two boosting measures are still included in the bills submitted to the Parliament, while the energy incentive boost has not been submitted yet. However, the technology investment boost will end on June 30th, 2023, so even if this boost is approved, there will only be a maximum of two weeks to enjoy this benefit.
In addition, the maximum limit for the first and third boosting measures per business is AUD 20,000 (or AUD 100,000 for eligible expenditures). The second and third boosting measures will end on June 30th, 2024.
Delaying the legislation of time-sensitive measures aims to encourage businesses to invest in operations and sustainability. However, the deferral of these measures may bring uncertainty to businesses and undermine the intentions of these measures. Therefore, it is essential to pay attention to these long-term issues and take appropriate actions.
Professional Practice Profits
The Australian Taxation Office (ATO) guidelines for the appropriate allocation of profits or income in professional firms came into effect on July 1, 2022. Professional firms need to review their positions and self-assess whether they meet two thresholds: having a reasonable commercial basis for the arrangement and exhibiting "high-risk features" to determine the scope of risk. The scope of risk indicates the likelihood of the ATO reviewing the arrangement, rather than the likelihood of the arrangement violating the law.
Division 7A and Trust Issues
Starting from July 1, 2022, all unpaid present entitlements (UPEs) will be treated as providing financial accommodations, where the corporate beneficiary agrees that the trustee can retain it without requiring immediate payment and continues to use it for trust purposes. No debt will arise if the company does not demand payment of the UPEs. Historical UPEs will continue to be exempt, meaning the company will not provide financial accommodations to the trustee if the company does not require payment of these UPEs.
Furthermore, previously approved sub-trust arrangements for managing UPEs may continue their existence, even in conjunction with new compliant loan arrangements upon expiration, provided the principal amount is not fully repaid before that time.
However, new sub-trust arrangements consistent with the Commissioner's withdrawn guidance will no longer apply for Division 7A purposes. Finally, regarding trust distributions, it is crucial to read the trust deed and ensure that all distributions are made to eligible beneficiaries according to the deed's provisions. The ATO has released a checklist to assist trustees in correctly formulating resolutions.
The Australian Taxation Office (ATO) has explicitly stated through its various media channels that this tax season will focus on the accuracy of work-related expenses, rental properties, and capital gains tax liabilities. The following checklist may be helpful:
Car expense reimbursement rate: The car expense rate for 2022-23 is 78 cents per kilometre. As per the draft administrative approach in "PCG 2023/D1," electric vehicles using the logbook method can claim a subsidy of 4.2 cents per kilometre for 2022-23 for FBT (Fringe Benefits Tax) purposes. You cannot claim both 78 cents per kilometre and an additional 4.2 cents per kilometre.
Allowability of general clothing deductions: This applies to occupation-specific clothing, protective clothing, compulsory work uniforms, and registered non-compulsory work uniforms (and their cleaning). Additionally, the ATO has issued a guide on occupation-specific clothing.
The $250 non-deductible threshold for self-education expenses has been removed from July 1, 2022.
Home office expenses: Both the fixed rate method (52 cents per hour) and the temporary shortcut method for working from home (80 cents per hour) will end on June 30, 2022. From July 1, 2022, according to "PCG 2023/1," if a taxpayer claims WFH (working from home) expenses at a rate of 67 cents per hour, the ATO will not apply compliance resources. From March 1 to June 30, 2023 (and subsequent income years), taxpayers must maintain records of the actual total hours worked remotely. However, from July 1, 2022, to February 28, the ATO allows taxpayers to keep representative records of the total hours worked remotely.
The ATO's occupation and industry-specific guides provide useful tips to clients, reminding them of what can and cannot be claimed.
Ensure clients report all rental income received and not net rental income (instead of gross rental income) and then claim expenses (such as property management fees) based on net rental income.
Ensure interest expenses are correctly allocated to the property for private use, property not genuinely available for rent, or funds borrowed for mixed purposes.
Correctly apportion loan expenses over a period exceeding five years (rather than using the straight-line method) or proportionally when the loan term is less than five years.
Correctly categorize building expenses as deductible repairs, non-deductible initial repairs, or capital improvements.
Travel expenses for residential rental properties and restrictions on claiming second-hand depreciating assets have been applicable since July 1, 2017.
Ensure all capital gains from cryptocurrencies, stocks, and properties (and other CGT (Capital Gains Tax) assets) are correctly calculated and reported. Record-keeping is crucial for this.
As we approach the end of this financial year, it is essential for us as tax practitioners to pay close attention to the long-term issues and provide appropriate advice and services to our clients. Only then can we ensure tax compliance and economic benefits for businesses.
This article is reproduced from Accountants Daily, click the link to view: How to prepare your clients for the end of the financial year | Accountants Daily