From the 'Google Tax' to the Panama Papers, tax avoidance is in the news, but there is no crime in using legitimate tax deductions to reduce the amount your business pays to the taxman.
As the end of the financial year approaches, now is the time to consider your options.
The first thing you should consider is bringing forward all deductible expenses. This includes repairs and maintenance but you could also consider prepaying any monthly costs such as rent, interest, electricity, wages and utilities up to 12 months in advance.
On the flipside of prepayments, you should aim to defer income until after June 30 so that payments fall into next financial year. If you work on a cash basis then aim to defer payment until after July 1, and if you work on a non-cash basis then delay issuing the invoice.
Small businesses should also take advantage of the $20,000 asset write off introduced in the May 2015 federal budget. Under the scheme, small businesses with turnovers of less than $2 million can immediately write off any asset worth no more than $20,000 in one go.
Beware though, you can’t buy an asset for $30,000 and creatively account for it as two items. However, you can add assets worth more than $20,000 to the company’s general small business pool which also has an increased threshold of $20,000. Once the pool balance drops below $20,000, after depreciation at the annual rate of 15 per cent, the immediate deduction can be applied.
This $20,000 immediate write off can’t be used to buy assets for private use.
Another strategy is to write off any bad debts in the business. Make sure you physically write off the debt by June 30, rather than just backdate it after the end of the financial year. You must have documentation to show you have made serious efforts to recover the debt which must have been previously included as assessable income.
Similarly, if you have any obsolete stock, now is a good time to write it off. You must physically dispose of the stock in order to claim the immediate deduction.
Car expenses are another area where you may be able to claim a deduction. There are numerous ways to claim depending on your business model and the number of kilometres you travel for business. You can choose the method that provides your company with the best result, whether it be the logbook method or cents per kilometre. As the calculations can be complex, it’s probably wise to get some advice on which method will suit your company best.i
If you have any capital gains tax (CGT) liability, then the business may use capital losses, if any, to offset this. So you might want to consider selling any non-performing assets to create a capital loss. Be mindful that if you’ve made a gain on the sale of an asset that qualifies as an active asset of the business, then you may be able to reduce or even eliminate the tax on that gain by using one of the available small business CGT concessions.
Make sure though that your capital gain reporting is accurate or you might find your business facing an audit. The ATO has warned that it is cracking down on abuse of capital gains tax provisions using its data-matching program.
The ATO has also signalled that it will be paying close attention to players in the new sharing economy such as Airbnb and Uber to make sure they are meeting their tax and GST obligations.
Superannuation is another area to consider at the end of the financial year, both for you and your employees. While employees’ super guarantee contributions don’t need to be paid until July 28, it makes sense to pay them by June 30 so you can claim the tax deductions in the current year.ii
You can also take advantage of the current concessional arrangements by paying your own super, particularly if you are over 50. The $35,000 concessional contributions cap still applies this year and next but a $25,000 flat contributions cap was proposed in the May 2016 budget to be introduced from 1 July 2017.iii
Small businesses can claim an FBT exemption from portable work-related electronic devices for their employees.
The end of financial year also offers a good opportunity to review your business structure. For instance, if you are a sole trader, you might want to consider incorporation to take advantage of recent and proposed future reductions in tax rates for small businesses. It’s also opportune to check your business insurances.
And if you started your business in the last financial year you can now claim expenses involved in establishing the enterprise. This includes legal and accounting fees along with government fees and charges.iv
- Bring forward expenses
- Delay income
- Asset write-offs
- Claim car expenses
- Claim start-up costs
- Offset capital gains tax liabilities
- Make superannuation contributions
- Review business structure
- Write off bad debts
- Write off obsolete stock
Making sure your business pays the correct amount of tax (but no more) can be a complex process.
Call us to help with your pre-June 30 tax planning.
i ATO, https://www.ato.gov.au/Business/Income-and-deductions-for-business/In-detail/Transcripts/Video-transcript---Business-deductions---Motor-vehicle-expenses/
iii ATO, https://atotaxrates.info/superannuation/superannuation-contribution-caps/