The end of financial year is fast approaching, so it's time to start ensuring you are in the best possible position to efficiently manage your taxes and respond to any issues raised by the Australian Taxation Office (ATO).
As you review your affairs and prepare to lodge your tax return for FY 2021-22, we recommend considering the following general issues to ensure compliance and to strengthen your position in the event of an ATO audit or engagement.
ATO rulings on trust distributions
The ATO has released draft rulings which potentially displace longstanding practices regarding the manner in which trust distributions may be made to family members, especially adult children beneficiaries, and the way in which unpaid distributions must be treated. If you have a family trust, particularly if that trust operates a business, review your distributions and consider seeking tax advice.
The ATO most recently updated its trust distribution products on its website on 20 June 2022. Additional guidance on the ATO rulings can be found here.
Appointment of trust income to beneficiaries – check your trust deed
A failure to appoint trust income prior to 30 June may also (depending on the Trust Deed) result in the net income of the Trust being assessed to default beneficiaries. Beneficiaries who may not be aware of their entitlements or the need to disclose their share of the net income of the trust in their tax returns could see significant penalties and interest charges accruing.
To ensure validity of your trustee resolutions, it is imperative for you to review your trust deed and ensure that it has been complied with. Additionally, it will be critical to ensure that the distributions are compliant with the ATO position regarding family members and adult beneficiaries.
As people begin to return to their workplace environments, or continue to work from home, the ATO are scrutinising deductions for work related expenses. Everyone's work-related expenses will be unique to their circumstances, so it will be critical to consider the amounts you are claiming and what the claims are for.
For rental properties, deductions can only be claimed for expenses relating to the income producing use of the property.
When considering if an expense is deductible, think about the following questions:
- was it related to your work or an income-generating activity? If partly personal, how much?
- did you spend the money?
- do you have a record (eg. a receipt)?
Consider pre-paying expenses
A prepaid expense is an expense incurred under an agreement for something to be done (partially or fully) in a later income year.
If you are a small business entity (aggregate turnover of less than $50 million) or an individual incurring deductible non-business expenditure, you can claim an immediate deduction for certain prepaid expenses for the next financial year (the good or service must be provided within 12 months of payment).
Retaining records to demonstrate both the expense being incurred and the service being provided within 12 months is essential for these items.
Cryptocurrency has mixed treatment from the ATO. Where it is held with a view to sell for a profit, it is considered to be a capital asset and therefore subject to capital gains tax (CGT). Conversely, where cryptocurrency is used to pay for personal use of goods or services, it may not be subject to CGT (but the transaction may attract scrutiny from the ATO). CGT may also apply to transactions involving swapping one cryptocurrency for another. Events outside of your control, such as hard forks, could also have impacted your tax liabilities on crypto-assets.
The ATO collects data on cryptocurrency transactions and has robust data matching capabilities. It is critical to ensure all cryptocurrency profits are declared on your tax return in the same manner as other capital gains, such as from property or shares. If you have more than one wallet, it is also important to ensure that the ATO data-matching has not picked up transfers between your wallets as disposals.
R&D payments to associates
30 June is the time by which R&D expenditure incurred between associates must be documented and paid to be claimed for the R&D tax offset. If actual payment is not possible (as is the case for many startups), some taxpayers rely on loans or set-off.
The ATO has dedicated significant resources to review loan/set-off arrangements to determine whether they qualify as 'payment' of intercompany debt. If you or your clients are relying on a set-off or loan arrangement, ensure that the terms of the arrangement are documented. Critically, any contingencies connected to repayment, uncertainty about repayment date or otherwise uncommercial terms could lead to the ATO determining that expenditure has not been incurred.
Individual taxpayers can make concessional superannuation contributions up to $27,500 per year, including amounts contributed by employers under their superannuation guarantee obligations. If your employer contribution payments are less than the threshold amount, you may be able to enter into a salary sacrifice arrangement with your employer to contribute an amount up to the difference. Amounts salary sacrificed are not taxed in your hands, but are subject to superannuation contribution tax when contributed to your superannuation fund at the rate of 15per cent. You may need to pay extra tax if you exceed the concessional contributions cap.
You are also able to make after tax superannuation contributions (non-concessional contributions) up to to $110,000 per year and taxpayers under 65 years old may be able to make a non-concessional contribution of up to three times the annual cap in a single year. Non-concessional contributions are not taxed once received by your super fund.
But beware of the caps. Contributions that exceed the caps result in additional tax becoming payable with limited review rights. Also be aware of timing and don't leave it to 30 June to make the payments. The payments must actually be received into your superfund on or before 30 June to be included in this year's caps.
Record keeping: Be prepared to substantiate claims
As Australia continues to seek normality after 2020 and 2021, the ATO has increased its emphasis on compliance. As always, it is critical for taxpayers to ensure that they have records to substantiate their tax returns in the event of an audit or inquiry from the ATO. Failure to provide sufficient evidence of a position taken in a tax return could lead to significant penalties and interest charges being applied.
Our tax team is well placed to assist you with advice regarding compliance with your tax obligations, application for rulings, and managing audits and engagements with the ATO.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.