SmartCompany, Wednesday, June 15 2016
It’s that time of the year when the minds of small business owners and operators turn to getting their tax affairs in order.
Whether its taking advantage of the federal government’s $20,000 instant asset write-off, reviewing depreciables or writing off bad debts, SMEs have a number of tools at their disposable to maximise tax savings come June 30.
SmartCompany has once again asked a number of tax experts for their top EOFY tips and how to get off on a good foot at the start of the next financial year.
So settle in: here’s SmartCompany’s top 21 end of financial year tax tips for SMEs.
- $20,000 instant asset write-off
The federal government’s $20,000 instant asset write-off scheme is once again one of the top tools at the disposal of SMEs looking to minimise their tax bill before the end of the financial year.
Included in the 2015 federal budget and running until the end of June 2017, the accelerated depreciation measure currently applies to all asset purchases up to the value of $20,000 for businesses that have annual turnover of up to $2 million. The scheme allows businesses to immediately write-off the full value of the asset and can be used multiple times, effectively reducing the amount of tax a business will pay on an asset faster.
In May, the government announced plans to extend eligibility for the scheme to businesses with up to $10 million in annual turnover, although whether this change is implemented will likely depend on the outcome of the upcoming federal election.
For this reason, Greg Nielsen, tax partner at Pitcher Partners, told SmartCompany it may pay for SMEs with turnover between $2 million and $10 million to hold off on any large purchases.
“It’s not so much what to do, as what not to do,” he says.
Grant Field, director of MGI South Queensland, told SmartCompany it’s important to remember businesses can only immediately write off assets up to the value of $20,000.
“It’s got to be less than $20,000,” Field says, adding that the $20,000 limit applies to each individual asset and not an overall total.
“You could buy an unlimited number, as long as each item is less than $20,000.”
To qualify, the asset must also be installed and ready to use by June 30, says Field.
Finally, Field reminds all SMEs to use some common sense when it comes to purchasing assets.
“Don’t waste your money if you don’t need to item,” he says.
“You may get an immediate tax deduction on the item but only at the marginal tax rate.”
- Company tax rate changes
The federal government also used this year’s budget to outline plans to phase in a lower company tax rate over the space of 10 years, starting with a cut from 30% to 27.5% for some SMEs.
Last year the government introduced a 1.5% tax cut for small businesses turning over less than $2 million annually, bringing the corporate tax rate down to 28.5% for those businesses, and in May said it would drop the corporate tax rate to 27.5% for SMEs turning over up to $10 million.
But while the Labor Party says it supports cutting the rate of company tax further for small businesses turning over less than $2 million, it will not support corporate tax cuts for businesses with turnover above this threshold.
Nielsen says a potential future tax cut may lead some SMEs to consider delaying the recording of income until next financial year, for example in circumstances where it is possible to wait to sign a new contract.
“There may be advantages from waiting until next year to bring income into the company,” he says.
Small business operators should make use of all the deductions available to them at the end of the financial year.
Deductible expenses could include the costs associated with running and occupying a home office or expenses such as repairs and maintenance.
Some business owners will also choose to pre-pay monthly costs such as rent, electricity, wages and utilities.
If you have travelled throughout the year, check if any of the expenses occurred during these trips are deductible and meet the relevant requirements.
- ATO taskforce
Nielsen recommends SMEs also consider another measure from the 2016 federal budget: the $679 million allocated to a Tax Avoidance Taskforce, to be run by the Australian Tax Office.
While the taskforce will have the role of cracking down on tax avoidance by multinational corporations, the tax activities of private companies and high-wealth individuals are also within its remit.
If it goes ahead, the taskforce will be made up of 1,300 ATO officials, including 390 new specialised officers, and is projected to raise more than $3.7 billion in tax liabilities by July 2010.
“It’s an important reminder that when taxpayers are doing their planning, they need to be careful to ensure whatever action they take out of that planning, it’s well-considered and the tax treatment is reasonable,” Nielsen says.
“Importantly, they must evidence whatever treatment it is they are applying.”
Maximising deductions for superannuation contributions at the end of the financial year is “an oldie but a goodie”, says Field.
“It’s really a no brainer,” he says.
For those under the age of 50, the superannuation concessional contribution limit this year is $30,000. The limit is $35,000 for those aged 50 and older.
If you are over the age of 65 and wanting to make super contributions, the “work test” must be met, which is 40 hours work over a period of 30 days.
Contributions into your super fund are currently taxed at 15%, rather than closer to 50% if you are paying the top personal income marginal tax rate on those earnings.
Individuals with self-managed super funds (SMSFs) can also benefit at tax time by transferring surplus wealth into their superannuation.
The standard cap on non-concessional or after-tax super contributions is $180,000, although it is possible to bring forward up to three years’ worth of contributions, to a total of $540,000.
However, these rules may change following the July 2 election, with the Coalition revealing plans to tighten superannuation concessions for high-income earners.
Field says some individuals may also be able to receive a double tax deduction for contributions to their SMSF during the month of June if they adopt what’s called a reserving strategy.
“What this means is once a contribution is made to the SMSF, you’ve got 28 days to allocate it to a member; in the interim, you’re reserving it until the allocation,” Field says.
“The ATO has recognised this as a legitimate strategy. However, you really need to dot the I’s and cross the T’s and ensure you comply with all the requirements.”
- Superannuation for employees, including SuperStream
Employers should also make sure superannuation contributions for employees are in order and investigate if there are any opportunities to make savings.
For example, a business could choose to bring forward its June quarter Superannuation Guarantee Charge payments by one month, instead of making the payment in July.
This year, employers must also consider their obligations under the ATO’s SuperStream program, which requires super contributions to be made electronically in a standard data set.
Business must be compliant with the SuperStream system before the end of this financial year.
While the ATO has previously admitted “teething issues” have occurred with the implementation of SuperSteam, small businesses will be expected to be using it by June 30.
This means many businesses have just weeks to get organised, with only 65% of small businesses onboard with SuperStream as of June 1, according to the ATO.
- Check your logbook is in order
According to Field, the ATO appears to be paying more attention to logbooks that are used to document car expenses, whether by business owners themselves or as part of a fringe benefits package for employees.
“Ensure your business use percentage is still accurate and that your logbook is not older than five years,” says Field.
“And no one has a nice, round percentage. If you do, that’s a target for the ATO to look at.”
- Dividend and income interest
Theo Sakell, tax partner at Pitcher Partners, told SmartCompany last year business owners should consider income earned through interest and dividends at this time of the year.
“For interest received around year-end, examine the timing of interest income closely for tax purposes as interest is typically assessable on a receipts basis,” Sakell said.
“Dividends accrued may not be assessable at year-end if they are only declared but not paid.
“Make sure you also take into account franking credits in your tax planning.”
- Distributions from trusts
If you operate a trust and will be making distributions to other entitles or individuals from the trust, you must make sure resolutions to make those distributions are made and documented by the end of June.
This is another area that the ATO is paying attention to, says Field, adding that the decision to make a distribution must be minuted.
It’s also important to ensure the beneficiaries of the distributions are eligible under the trust deed before the resolutions are finalised, while business owners who themselves are beneficiaries of a trust should account for any expected tax distribution they may receive.
- Family trust elections
If you are operating a family trust, it’s also worthwhile reviewing the trust election requirements.
Sakell told SmartCompany last year this kind of review can help to “protect bad debts, carry forward losses and franking credit flow-through”.
“Make sure all new trusts have made an election to be within the family group,” he said.
- Division 7A
The complex Division 7A tax regulations are a relatively common concern for SMEs at the end of each financial year.
Division 7A regulations can affect loans made from a business to directors and the anti-avoidance measures are designed to discourage businesses from distributing loans to shareholders or their associates for personal use and enjoyment.
Field describes this area of tax law as “real danger territory”.
“There is specific legislation for how these loans need to be treated, otherwise they will be deemed to be a dividend to the shareholder and are fully taxable at the full amount of the loan,” Field says.
Nielsen also recommends reviewing any loans that could trigger Division 7A.
“Make sure you’ve met the minimum loan repayment obligation by year end,” he says.
“Also consider whether you have an opportunity to clear out any loans before year end and before they become an issue.”
- Write off bad debts
If your business has any bad debts that you have not been able to recoup in the current financial year, now is the time to write them off.
Bad debts must be physically written off before the end of June and as with any measures you take to minimise your tax bill, make sure the debts are documented – as well as the efforts you’ve made to recover them.
“It’s not sufficient to only provide for a debt to be written off, there needs to be documented evidence that a decision has been made to write it off,” Field says, adding that the decision must be made by someone in a suitable position in the business, whether that’s a director or someone with responsibility for senior financial decisions.
Business owners should also make sure the debt in question had previously been included in the business’ assessable income, which can be problematic for cash-based businesses that only recognise income when they are paid.
- Review trading stock
Now is the time to identify any obsolete stock in your business and to write it off in full.
It’s also worthwhile reviewing how the business’ trading stock is valued; businesses have a choice about how to value trading stock and that choice can help to minimise the tax bill.
Trading stock can be valued at year-end cost, market selling value, replacement value or obsolete stock value.
“How you value the stock affects your taxable income and there is significant flexibility in how you value it,” Field says.
“You can use one any one of the methods and change it year-to-year.”
- Manage capital gains and losses
Businesses that have made a capital gain in the current financial year should also consider if there are ways to minimise the tax on those gains, says Field.
For example, this could include selling assets that have an unrealised capital loss, such as shares, as a means of offsetting against the capital gains.
- Employee bonuses
Do you pay your employees bonuses? If yes, now is a good time to sign off on those payments.
While the actual bonuses do not need to be paid by June 30, the business needs to have made a documented commitment to paying a bonus to the employee if it wants that payment to be tax deductible.
“Often you’ll have bonuses accrued by a business but that doesn’t mean it’s deductible,” Nielsen explains.
“To be able to claim deductions, there has to have been a clear commitment by June 30 to pay that bonus.”
Nielsen says the bonus payment must also be quantifiable, for example by using a formula.
“In order words, it has to be largely free of any contingencies that might alter it later,” he says.
“It doesn’t mean business operators have to know with certainty what the number is at June 30, but it has to be that nothing is open [to change] after June 30.”
- Review depreciables
Make sure you also set aside time to review your business’ depreciables before the end of the month.
Each year the ATO publishes a taxation ruling about the effective life of assets and this can be used as a guide for business owners when calculating the depreciation rates of their assets.
But the ATO ruling is just a guide and businesses do not have to follow it if they can show the life of a particular asset is different to the ruling. For example, if you can show the effective life of the asset is shorter than the ATO’s guidance, it may be possible to increase the depreciation deductions claimed in your tax return.
- Claim self-education expenses
If you’ve spent money on self-education this year, make sure you claim that expense on your tax return.
Claimable expenses can include: course fees, textbooks, stationery, student union fees and depreciation of other study-related items such as computers and printers.
Paul Drum, head of policy at CPA Australia, previously told SmartCompany education expenses can be claimed if the study is “directly related to either maintaining or improving your current occupational skills or it is likely to increase your income from your current employment”.
- Review business structures
The end of the financial year is also a great time for business operators to “take stock and review their structures”, according to Field.
“You may have put in place a structure years ago that was appropriate at the time but circumstances change and it may not be the most appropriate structure now.”
Some SMEs may also be eligible for capital gains tax relief when changing the legal structure of their business, as a result of changes included in the 2015 federal budget and legislated for earlier this year.
Under the change, eligible small businesses will have access to an optional rollover provision when they transfer an active business asset to another small business entity as part of a genuine business restructure. However, to qualify, the “ultimate economic ownership” of the asset much not change.
- Pay on time
Once your tax bill is finalised, do what you can to pay it on time.
The ATO has previously said making prompt payments is the best way for SMEs to avoid penalties.
And if there is some reason why you are not able to pay your bill on time, contact the ATO.
- Ask for help
Tax regulations are complex and business owners should not hesitate to pay a visit to a professional bookkeeper or accountant if they need to.
It also pays to stay in touch with your accountant throughout the year, especially when it comes to major financial transactions.
In a survey conducted by the Institute of Public Accountants (IPA) and MYOB in 2014, losing touch with an accountant was found to be the third most common mistake made by small businesses at the end of the financial year.
“Clients not making contact with their accountants will not know what changes they need to adjust to and may miss things they need to factor in to their returns and this cannot be corrected once the clock ticks over,” said Tony Greco, general manager of technical policy at the IPA.
- Plan ahead
Starting a new financial year is an opportunity to get your business into shape.
Field previously shared his top tips for business financial help with SmartCompany, the first of which is to “realise your business is just a pot of money – your money”.
It’s essential to decide what rate of return you want from you business and to understand the financial “drivers” of your business and its free cash flow, says Field.
“Many fast-growing businesses have gone broke through lack of cash flow,” he says.