Companies have some specific rules that only apply to them – both commercially and from a tax point of view. This article focuses on changes and tips that apply only to companies. For more general commentary, have a look at:
- Our EOY article on changes and tips for businesses (regardless of what structure that business is in);
- Our EOY article on changes and tips for individuals; and
- Our EOY Tax Tips brochure.
COMPANY TAX RATE REDUCTION
The company tax rate that applies for small businesses will reduce to 25% for the 2022 financial year (currently 26%).
We note that the following types of companies do not qualify for this rate:
- Larger businesses; and
- Companies where 80% or more of their income is from passive investments (e.g. rental properties, share investments, etc).
The lower tax rate for next year presents the opportunity to lower your total tax, while at the same time deferring your tax. Many tax tips revolve around deferring income until next year, doing this gives you an extra 12 months to pay for the tax. Lowering the tax rate also means you pay less tax next year compared to what you would have paid if you paid tax on it this year – a double win!!
You don’t need to do anything to claim this lower tax rate, you just have to qualify (and your tax return has to be filled out appropriately).
When planning, you need to consider the impact of the lower tax rate on dividends. Franked dividends come with a tax credit attached to them that the shareholder claims back on their tax return (to prevent double-taxation on the dividend). In the past that credit has been 30% of the gross dividend, now it will be 25%.
The result is that more tax will be payable by shareholders that receive dividends (because the company has paid less tax).
LOSS CARRY BACK RULES
If you are having de-ja-vu when hearing about loss carry back rules, that’s because we had these during the GFC.
Normally when a company makes a loss, it can’t get the tax benefit from that loss until the company makes a profit in the future. The loss carry back rules allow you to effectively claim this loss against income earned in a prior year.
If your company paid tax in the 2019 or 2020 tax year, and makes a loss in 2021, then your company may be eligible to get refunded some or all of the tax you paid in 2019 and 2020.
The rules are a little more complicated than this, but that’s the general premise.
For our clients – you won’t need to do anything extra, we will take care of this for you when we do your tax return.
DIRECTOR ID NUMBERS
This change isn’t quite here, but we are getting in early. Soon, every company director will need to do a full ID check and apply for a Director ID Number.
At the moment, it is possible for a single person to have numerous records on the official ASIC database. One with your full name, one excluding your middle name, one with only an initial for a middle name, one with your first name spelt differently (e.g. Joseph & Joe), and so on.
This causes issues when something goes wrong in the company and the ATO and/or ASIC need to chase people down and prevent them from becoming a director in the future.
With an ID number being the primary identifier, these problems are all solved.
Early information is that existing directors will have a period of time (say 6 months) to do their ID check, which will involve taking ID plus a completed form to the post office. New directors will need to do this before they can become a director.
As we get more information, we will share it.