Were you happy with last years’ tax result? Or it may be that your business has expanded since last year. Either way the time to act is now, well before the 30th June to review and plan for this years’ tax bill.Ideally, we will look for ways to either reduce our income or increase our deductions to reduce our “taxable income” and tax payable and so preserve some cash in the business.
However, this will only serve to defer tax payable to next year and might be appropriate if:
- We believe our cash position will be healthier and enable to pay the resultant tax.
- We anticipate tax rates coming down next year.
- We anticipate earning less in the new year due to anticipated economic down turn, so by prepaying expenses and deferring income we are pushing some of this year’s income into next year.
- We are winding the business down and expect our income to drop.
If on the other hand we anticipate the opposite of the above then we might consider doing the reverse strategies where appropriate or it may be that we take advantage of the impact on our cash flow by delaying and reducing the amount of tax we pay. Business tax planning strategies will differ depending on whether the business is a “small business entity” (SBE) with less than $2m in sales per year or not.
MAJOR CONCESSIONS available to a SME business
Immediate write off, of assets costing less than $1000 GST exclusive ($5000 from 1st July 2012) irrespective of when acquired. Items above $1000 added to pool of other assets and claimed at 15% for the year irrespective of when acquired.
Prepayment of expenses for services that will be used up in the next 12 months such as Rent, interest, insurance , business travel, business subscriptions and stationary etc.
Ability to apply small business capital gains tax concessions without having to satisfy the $6m net asset value test.
No need to do a stock count or account for changes in value of trading stock where the difference between the value of opening stock and a reasonable estimate of closing stock is $5000 or less.
TAX PLANNING FOR SBE AND NON-SBE BUSINESSES
PREPAYING EXPENSES
Generally, strict rules apply to most forms of prepayment meaning that the expense has to be spread over the period to which the expense relates up to a maximum of 10years. However some expenses can be prepaid irrespective of the above and the 12 month rule above and irrespective of whether your business is a SBE or not. For example:
- Items less than $1000 GST exclusive
- Payments subject to statutory requirement such as Work cover, Motor vehicle registration and compulsory insurance and statutory licenses etc.
- Employment related expenses such as prepaying wages, commissions etc.
- In addition to the above some other prepayments can be:
- Rent for the next 12 months provided the landlord agrees.
- Consumables (not stock) such as stationary and other office supplies that will be used up over the next 12 months.
- Lease of equipment for the next 12 months and other similar commitments that will be used up over the next 12 months
- Interest on Investment/Business loans Negotiate with your bank to prepay interest but take care to ensure the bank correctly allocates the payment as interest not principal.
DEFERRING INCOME
Businesses that return income on a “cash” basis are assessed on income as it is received. Therefore, the simple delay of receipt can effectively defer this income to the next year.
Businesses that return income on a non-cash basis “accruals system” are generally assessed on income as it is invoiced. Therefore, the simple delaying of the issue of an invoice into the new year will effectively defer that income to the next year.
Capital Gains implications maybe be altered simply by realising a capital gain in the next year. Not only will it defer tax on the capital gain by 12 months but may also qualify for the 50% discount concession that requires an asset be held for at least 12 months. However, caution here as any artificial arrangement might be scrutinised by the ATO.
Interest Bearing Investments can be rolled over so that they mature in the next year so effectively deferring the crediting of interest into the next year.
Warning ! The deferral of income and prepayment of expenses will impact on your cash flow and this must be taken into consideration when deciding on which option to take.
OTHER THINGS TO CONSIDER
Depreciable Assets : Are there any items that have become “obsolete” that can be scrapped and so give rise to a balancing adjustment deduction?
Bad Debts: Debts considered “bad” after all reasonable recovery attempts have been exhausted must be written off and documented (e.g. board minute) so as to give rise to a deduction.
Trading Stock: For tax purposes, trading stock can be valued at the lower of cost, market selling value or replacement value. Since the value of closing stock effectively forms part of assessable income then any reduction in the value at year-end will give rise to a deduction by the amount of the reduction. So for example, where the market selling price of stock at year end is below the actual cost price, you can generate a tax deduction by simply valuing the stock at market value. Any obsolete stock can be valued even lower to any recoverable amount provided some special tax office requirements are met. The valuation method can be different for each line of stock and can be altered from one year to the next.
Repairs and Maintenance: Repairs to income producing assets to “maintain and restore to former condition” will give rise to an allowable deduction. Therefore, any foreseeable maintenance should be brought forward and undertaken before the 30th June to bring such expense in this year even though you may not pay until next year. This may even extend to bringing forward any other scheduled servicing or maintenance arrangements.
Staff Bonuses: A deduction for bonuses accrued but not yet paid can still be deductible provided the business can show a definite commitment or present obligation to pay. However, you must be able to show:
- A legal obligation to pay as documented in either a minute, employment agreement etc.
- Bonus is binding and no further action required by either party to qualify for entitlement.
- Amount of bonus has been determined or is determinable by independent means.
- Respective employees have been notified of amount or basis of calculation.
Directors Fees: Provided an appropriate resolution has been passed approving the payment, a company can claim a deduction for directors’ fees that it has committed to paying. The director will not be assessed on the bonus until it is actually received in the next year. Keep in mind that PAYG obligations will be incurred with both Bonuses and Directors fees and this amount will need to be remitted with the June period BAS
Superannuation: Superannuation deductions however differ from both Bonuses and directors fees in that they must be paid and actually received by the recipient superannuation fund prior to the 30th June for the deduction to be available this year. Therefore, whilst you may have til the 28th day of the following month to satisfy the payment obligation, this will not satisfy deductibility for the 30th June.
Realistically the most important strategy in any tax planning strategy is to consider whether you are operating with the most appropriate tax effective Business structure for your operation. Different structures will have different tax implications in addition to other implications for your business. No matter how clever or diligent you may be with your tax planning if you have the wrong business structure for tax purposes all your good tax planning will be in vain. We will cover the advantages and disadvantages of the available different structure in our next article.
If you would like to discuss your end of year tax strategy please contact us.
For more information or to schedule an appointment, please contact us below or call us on 1300 627 829
Please note: The above is only a guide and by no means an exhaustive list of all the possible strategies available. It has been prepared in good faith for the benefit of clients and associates of MAS TAX ACCOUNTANTS and does not represent legal or professional services and should not be relied on as advice in any manner or used for decision making without seeking appropriate professional advice. No responsibility will be accepted arising from errors or omissions in the material herein.
