Article by Craig Lane
As featured in the Farm Weekly Special Feature 01 June 2023
The end of financial year is coming round again, and on the back of two above average seasons for most of rural WA, Byfields is seeing some significant potential tax bills as we make our way through our update and tax estimate season.
Before committing to tax planning strategies, it is vital that you know what your tax is likely to be for the year. Byfields’ has a very rigorous process, where we combine your year-to-date actuals with your budget to 30 June and calculate your expected business profit.
This figure can then be combined with personal income from other sources, giving you an accurate estimate of tax payable.
We feel this an absolute must, before considering the following options:
Grain Sale Deferrals
As 30 June draws closer, and if you hold unsold grain, consider deferring any grain sales until July. However, and it is a significant however, you should do this only in conjunction with your view of grain prices between now and July, and in consultation with your grain marketing adviser if you have one.
There is no point deferring grain to defer tax, and then finding the price has dropped significantly in July.
Prepay Products/Pre-Buying Inputs
Merchandise businesses offer ‘Prepay Accounts’ that are backed by ATO Product Rulings. A payment of funds into these accounts before 30 June 2023 will be tax- deductible in the 2023 FY. The payment is then applied to the purchase of products beyond 30 June.
These prepay accounts typically pay a ‘reward’ of 4 to 5%, to be spent at the business. Ensure you reach each product’s terms and conditions before deciding if it suits your business.
Pre buying inputs achieves the same result as Prepay products. For example, if you know before the end of June what post emergent chemicals you will need for July and beyond, you can purchase these in June and claim a tax deduction.
Instant Asset Write Off (IAWO)
The ability to fully deduct any asset purchased, be it a $20,000 secondhand vehicle or a $1,200,000 harvester, has been one of the most significant tax breaks in memory. However, all good things come to an end eventually, and as per the recent budget, this break will cease on 30 June 2023, and be replaced by a write-off of assets costing up to only $20,000, and ordinary depreciation rules thereafter.
The key for a tax deduction in the 2023 financial year is that the asset must be “installed ready for use” in your business. Unfortunately, if it’s still sitting in the dealer’s yard, or even further away, a tax deduction is not available. If you are concerned you will be in this category, ensure you have other strategies as a back up.
Family Trust Distributions
Family trusts are widely used in WA farm businesses, and for good reason. They provide excellent flexibility when it comes to tax planning, as well as significant asset protection.
As has always been the case, tax law requires the trustee to consider how the trust will distribute its income and document this decision before 30 June each year. Typically, this process involves the client signing off on a trust distribution minute or resolution in late June. This is very important, as failure to do so may lead to the trust distribution being invalid and the income being taxed in the hands of the trustee at 47cents in the dollar!
While the need for a year end distribution minute has not changed, the Tax Office’s view on trust distributions to adults not involved in the business certainly has.
In the past, large allocations to university students with low average rates of tax have been a go-to strategy in primary production businesses. This may be an issue this year depending on your circumstances, so it is absolutely crucial that you discuss this with your accountant prior to finalising the allocation minute in June.
Profit Distributions to Companies
The company tax rate is now just 25%, which is significantly lower than a lot of personal average rates. If your business structure includes a discretionary family trust, it could make profit distribution to a company, and potentially save a significant amount of tax.
To most effectively use this strategy and avoid the payment of taxable dividends in the short term, the income allocation must be “paid” to the company, usually by the time the tax return is lodged. There are several options to achieve this “payment”, including buying land, farm machinery, or even off farm investments in the name of the company.
Estate planning should be carefully considered when using this strategy, and if land, plant and off farm investments are being considered, Byfields recommends separate companies and shareholder trusts for each.
Maximise Superannuation Contributions
The annual concessional contribution cap is again $27,500 for the 2023 financial year. However, if you have less than $500,000 in superannuation, and have
not used your full caps in the last 4 years, you will be eligible to claim a higher deduction if you wish.
Contributions are generally done by transferring cash to the fund, but this is not your only option. You could also consider transferring listed shares or even farm land to superannuation to generate the deduction, although this should be discussed with your financial adviser as well as your accountant.
Most importantly, ensure your contribution is processed by your fund prior to 30 June, as this is the only way to claim a deduction. If for example you make a BPay contribution on 30 June that is processed by the fund on 1 July, you will not be eligible to claim a tax deduction this year.
Farm Management Deposits (FMD’s)
FMD’s, essentially tax-deductible term deposits, can be a tool to avoid higher tax rates in good seasons. Keep in mind that FMD’s are a ‘timing strategy’ only, meaning that the income will be taxable at some stage in the future, and there is also likely to be an interest costs associated with holding them.
It is therefore vital to have an exit strategy when contributing the FMD.
Wages to Family members
Genuine wages paid to family members, even if they are underage, are taxed at normal rates rather than the penalty rates that are imposed on trust distributions to children. The key word is “genuine”, as unrealistic wages will be disallowed as deduction to the business by the Tax Office.
Wages of up to $20,000 may be tax-free due to the tax-free threshold and rebates.
Capital Gains and Losses
If you have sold assets and recorded capital gains throughout the year, it would be worth reviewing your current holdings to identify any assets that have incurred
a loss. Consideration should be given to selling these assets prior to 30 June, as losses can only be offset against capital gains.
The most obvious example of these types of assets are shares, but as always, it should be about overall returns as much as tax, so discuss any sale with your broker before committing to a strategy.
Family Tax Benefit (FTB)
It may be that due to the above strategies (particularly the instant asset write off on large assets) that your business generated a taxable loss in 2022. If this is the case and you had very little other income, you may be eligible for Family Tax Benefit if you have children.
The deadline for claiming a lump sum for 2022 is 30 June 2023, so log on to your myGov well before then to ensure you don’t miss out on what could be thousands of dollars.
Single Touch Payroll (STP) Phase 2
While not being a tax planning issue as such, new reporting requirements under STP Phase 2 were introduced on 1 January 2023, with some software providers having an exemption until 30 June 2023, and even 30 September.
Having said that, the bottom line is that Phase 2 reporting will be required eventually, so if your current software is not set up to deal with it, it would be more efficient to make a switch on July 1, so that you have only one reporting system for the 2023/24 financial year.
The bottom line is that comprehensive tax planning is a must for any business. The peace of mind, and the tens or even hundreds of thousands saved will far outweigh the relatively small cost of the advice.
Please contact your local Byfields accountant to discuss further - Contact Us
Disclaimer: This advice has been prepared by Byfields Business Advisers, and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.