With the end of financial year just around the corner, SME business owners should now be planning to ensure you reduce your tax bill and get all your financial ducks in a row.
Grant Field, one of MGI South Queensland’s expert tax consultants and business accounting veteran of over 30 years, shares his thoughts on what you should be doing now.
1. Immediate Tax Deduction for Assets Costing Less than $20,000
The recent Federal budget has delivered some “no brainers” for small business taxpayers looking to reduce your tax prior to year end. The immediate tax deduction for assets costing up to $20,000 provides “easy pickings”. If you need to buy capital assets, you only have three financial years to take advantage of this concession, and the first of those years finishes shortly. But remember, this concession only applies if your business turnover is less than $2m.
How does it work?
In dollar terms, previously an asset costing a small business $20,000 would have been able to be depreciated at 15% per annum in the first year and then 30% per annum subsequently, meaning that the tax deduction in year one would be only $3,000, $5,100 in year two and reducing in each subsequent year. Assuming a 30% company tax rate, the business owner would have saved only $900 in tax in year one, $1,530 in the next year and reducing thereafter. Now, they will get a tax saving in year one of $6,000, being 30% of the $20,000. This represents a cash flow saving of $5,100 in year one.
“Bear in mind that this saving applies every time a new asset is acquired for under $20,000, so if a business bought multiple assets, each costing under $20,000 but totaling say $100,000 over the course of the year, then the cash flow saving would be five times the above figure, or $25,500.
Also remember that the asset must be less than $20,000. If it costs $20,000 or more you miss out altogether, but can still claim depreciation over a number of years.
2. Maximise Deductible Super Contributions
Making sure you maximise your deductible (or concessional) super contributions is “an oldie, but still a goodie” when it comes to reduce your tax.
Super contribution limits have increased slightly, from $25,000 to $30,000, this year for those under 50. For those over 50, the limit remains at $35,000 but still represents a great opportunity for a mum and dad business to put up to $70,000 into super and in the process, save themselves up to a maximum of $23,800 if they are paying the top marginal tax rate of 49%. Even if they operate through a company structure, there is still more than $10,000 in tax saving, and this benefit is available each and every year that contributions are made, so it can really add up over time.
Super contributions are only deductible if made during the year, so make sure your super fund receives the contributions well before 30th June to allow for potential bank processing delays.
3. Transfer Surplus Wealth into Super
Not only should you focus on maximising deductible super contributions, but also consider maximising non-deductible (or non-concessional) contributions to help reduce your tax. The tax effectiveness of superannuation is hard to ignore. Therefore, the more of your private wealth you can get into super, the less tax you’ll pay so take advantage of the $180,000 yearly limit on the amount you can contribute to super without getting a tax deduction. You might think – “why bother, I don’t get a tax deduction for these contributions”, but this is a strategy that can reap real dividends.
Once the contributions are invested into the super fund, earnings are only taxed at a maximum of 15% (or nil once you commence a pension), providing huge tax benefits over time due to compounding.
You can also elect to use the “bring forward” rule and bring forward three years’ worth of contributions and contribute up to $540,000 in one go. For typical mum and dad, they can therefore get over $1m out of their own name and into super where it is concessionally taxed. There are also significant asset protection benefits to this strategy.
4. Make Your Super Truly Super
This is one that can literally save your estate hundreds of thousands of dollars in tax, so don’t miss this one! Whilst you’ll need to die (some time) to reap the rewards from this one, your kids will truly thank you.
This strategy is particularly relevant if you are aged between 60 and 65, but can still work for others depending on their circumstances.
Most super fund members build up their super fund balance by making tax deductible super contributions. These are simply contributions for which you or your employer has obtained a tax deduction. When these are paid out to non-dependents on your death (e.g. adult children) they are taxed at 15%. With an average SMSF having a balance of around $1m, the potential tax savings could be up to $150k for a typical mum and dad fund.
Assuming you are able to meet the eligibility conditions, this strategy involves withdrawing these “taxed” amounts from your super fund and re-contributing them as “untaxed” amounts. By taking advantage of the “bring forward” rules discussed noted above, you can re-contribute up to $540,000 per member and then, if you need to, do it again in three years’ time (if you need to) once the “bring forward” rule timeframe expires.
But beware, there are quite a number of “i’s” to dot and “t’s” to cross, so get professional advice before doing this.
If you’re currently drawing a pension from your self-managed super fund (SMSF) make sure you’ve paid yourself the minimum pension required by law. Where there is also a maximum limit (e.g. those aged under 60) make sure you also haven’t exceeded that maximum limit.
If you don’t meet these limits the ATO view seems to be that the fund must pay 15% on its earnings rather than zero. According to ATO statistics, the average size of a SMSF is about $1m. So getting this wrong could work out to be a very expensive mistake.
6. Take Advantage of Capital Losses
If you’ve made some capital gains during the year don’t just accept that you’ll have to pay tax on them. If you’ve got assets (particularly shares) where their current market value is less than what you paid for them, consider selling them and realising the loss. This loss can then be offset against the capital gains you’ve made on other assets.
With Capital Gains Tax (CGT), timing is everything. You don’t want to pay tax on a capital gain this year and then have a loss next year. If you don’t have capital gains next year you may not be able to use the loss and may have to carry it forward for years before you can use it.
Also, if you’re looking to sell an asset at a profit make sure you’ve held it for more than twelve months. The 50% CGT discount only applies if an asset is owned for more than 12 months. A 50% discount could amount to a lot of money if you’ve got a large gain.
7. Trustees of Trusts Beware
If you operate through a trust structure make sure you’ve decided (and documented) how you’re going to distribute the trusts income before 30th June.
Many trustees may not be aware that most trust deeds will require the trustee to decide and minute what portion of its 2015 income it’s going to distribute to which beneficiary. The ATO is paying increased attention to this and if you haven’t minuted where you’re distributing your income you could end up paying tax at the top marginal tax rate of 49%. Your accountant should be talking to you about how much income you’re going to make and the most tax effective way to distribute this income.
8. Make Effective Use of Dividend Imputation Credits
If you have a company in your business structure you may have imputation credits that you can stream out to shareholders in a tax effective way. If so, take the opportunity to pay these out.
If some shareholders have little or no income in the current year, paying them dividends will literally “pay dividends”. This is because their marginal tax rate may be quite low. Franked dividends carry a credit for the tax previously paid by the company on those profits at 30% (called imputation credits). By paying dividends to shareholders with low income, they may actually get a refund of these excess imputation credits – so real cash back from the ATO.
9. Write Off Bad Debts
This one might not seem very exciting but the effective writing off of bad debts is crucial to ensuring you reduce your tax and get a deduction.
Many business owners think they can write the debt off after the end of the financial year (e.g. when doing their tax return months down the track) and still get a deduction. Not so. Bad debts must physically be written off prior to 30th June and you should document your reasons and decision to do so in case you’re queried by the ATO later. You should also write the bad debt out of your debtors’ ledger before 30th June.
But be careful, this deduction only applies to accruals basis taxpayers. If you’re a cash basis taxpayer and only report income when physically received then you can’t write off a bad debt because you haven’t booked the income to start with.
10. Bring Forward Future Expenses
If your cash flow is strong, consider bringing forward expenditure that you would otherwise have to outlay in the months following 30th June. By bringing this expenditure forward a month or two you effectively get a year’s tax benefit because you’re saving tax now rather than in twelve months’ time.
Some common expenditure that can be brought forward might include the June quarter super guarantee contributions for your staff. Super is only deductible when paid, so if you’re having a good year consider paying these before 30th June. They would normally be payable by 28th July anyway and depending on the size of your payroll, the tax savings could be significant. Expenditure on other consumables could also be brought forward but bear in mind you may not necessarily need to have physically paid for an item in order to obtain a tax deduction. Simply ordering the item (and definitively committing to the obligation) will generally be sufficient, except for super.
The above represent a number of opportunities to reduce your tax bill for this financial year. However time is of essence, and to make sure that you have sufficient time to take advantage of the above strategies, it’s best you start planning for end of year now.
MGI has a number of expert tax accountants and consultants in Brisbane and on the Gold Coast who can provide you with the most up to date tax advice to help you reduce your tax. If you have any questions speak to your MGI advisor today on 3002 4800.
MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.