Companies – 2021 Year End Tax Planning Series
As we move towards the end of the 2021 financial year, it is a good idea to start considering what tax planning strategies to put in place now to minimise your tax liability. In the fifth part of this eight-part series, we will outline a number of suggestions that may assist Directors to legitimately minimise or defer the taxation exposure for their company.
Please note these suggestions are of a general nature only and should not be relied upon without seeking specific personal advice. With 30 June fast approaching, you need to act quickly, and we encourage you to contact our office on 1300 620 345 to schedule a meeting as soon as possible to assess your options and discuss the steps you need to take.
Company Carry Back Tax Losses
Eligible companies can elect to ‘carry back’ a tax loss incurred in the 2020, 2021 or 2022 income years and offset it against the income of the 2019 or later years, generating a refundable tax offset in assessments for the 2021 and 2022 income years.
The loss carry back is available in the 2021 and 2022 income years for tax losses incurred in the 2020, 2021 and 2022 income years.
Please note that the loss carry back for the 2020 income year (being last year) can only be claimed in the 2021 income tax return (so the tax return for this current financial year, which won’t be able to be lodged until after 30 June 2021).
Company Tax Rates
For the 2020/21 year, the reduced corporate tax rate has been reduced to 26%, down from 27.5%, eligibility for the reduced corporate tax rate remains unchanged and applies to base rate entity companies with an aggregated turnover of less than $50m. The lower company tax rate for base rate entities will reduce 25% for the 2021/22 income year.
The maximum franking credit that can be allocated to a frankable distribution is determined by the corporate tax rate for imputation purposes. This is determined by whether the entity was a base rate entity in the prior income year. If the company was a base rate entity in the prior year, its imputation rate in the current year will be the base rate in the current year (e.g., a 27.5% tax rate in 2020 income year would mean a 26% maximum imputation rate in the 2021 year).
This may result in some of the franking credits (i.e. 2020 corporate tax paid) being trapped in the franking account and unable to be passed onto the shareholders. To prevent franking credits from being trapped, a company could pay distributions to shareholders by 30 June 2021 franked at the maximum 26 per cent rate.
Review Division 7A loans
Any payments, loans or debts forgiven from private companies to shareholders and their associates could be deemed to be an unfranked dividend.
The deemed dividend rules in Division 7A can also include deemed loans from trusts to shareholders where the company has an unpaid present entitlement (UPE) to income of the trust. Division 7A can also apply to the private use of a company’s assets by a shareholder (limited exceptions apply).
Action can be taken to prevent deemed dividends from occurring. Ensure that such loans are either repaid or documented and made subject to minimum interest and repayment terms before the lodgement day of the company / trust’s tax return. Ensure that interest is charged, and minimum repayments are made before 30 June in relation to prior year loans.
Research & Development
Have you considered whether your company may be eligible for an additional tax concession for R & D expenditure undertaken?
If your company’s turnover is less than $20M, it can access a refundable tax offset equal 43.5% of the R & D expenditure. There is a 38.5% non-refundable tax offset available to companies with turnovers of greater than $20 million.
R & D plans need to be registered with The Department of Industry, Innovation and Science before claiming the concession. Cut off is 10 months after the end of the financial year.