As the end of the financial year approaches, it’s a good time to take a look at your profitability and potential tax liability for the year. There are a number of strategies which if implemented by June 30, may reduce the liability to the Australian Taxation Office (ATO).
1. Get a double tax deduction for super contributions made in June
Some individuals may be able to get a double tax deduction for contributions to their SMSF during the month of June if they adopt what’s called a ‘reserving strategy’. 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.
Basically, you can get a double deduction for your super contribution limit. That is, even though the limit is $35k, you could put in $70k (provided it is made in June) and get a tax deduction for the full $70k. 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 by getting appropriate advice prior to doing this.
2. Research and development (R&D)
More and more SME’s are conducting research and development as a matter of course. Unfortunately, very few realise what they are doing qualifies as R&D and aren’t claiming the respective tax offset. Basically, you may be entitled to claim the offset if you are undertaking experimental activities conducted for the purpose of generating new knowledge in relation to products or processes whose outcome is unknown. If your activity is eligible you can get an extra 50% on the 30% company tax rate you currently get, meaning you get a 45% tax offset. Importantly, you can obtain the offset (or tax refund) even if you are making losses. The offset can then be used to fund your business R & D.
3. Immediate tax deduction for assets costing less than $20,000
If you need to buy capital assets, and your business has a turnover of less than $2m, you may qualify for an immediate write off where the asset costs less than $20,000. If it costs $20,000 or more, although you won’t get the immediate deduction, depending on how much it is and what other assets the business has, you may still be able to claim accelerated depreciation on it. .
However, if you don’t need the item, don’t waste your money. Whilst you’re getting a full tax deduction, you still have to pay the after tax portion (this could be more than half, depending on what tax bracket you’re in). It also only applies if you’re a small business entity, so make sure you meet the tests for this. You don’t get the deduction if you simply own a rental property. Also, don’t forget to consider your business cash flow. If you buy 2-3 items for close to $20k each, this can add up and can affect your business cash flow. Also remember, the item must be installed and ready to use by June 30.
4. Maximise deductible super contributions
Business owners may be able to reduce the overall taxable income of their business by making additional contributions to superannuation prior to June 30, 2016. The maximum amount that may be contributed and claimed as a tax deduction is $30,000, or $35,000 for those who were 49 years of age or more on June 30 2015. If you are over 65 years of age, you also need to meet the work test (40 hours in 30 consecutive days).
Super contributions are only deductible if made during the year, so make sure your super fund receives the contributions well before June 30 to allow for potential bank processing delays.
5. Get your super fund pension right
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 on transition to retirement pensions),make sure you also haven’t exceeded that maximum limit.
If you don’t meet these limits, the ATO view requires 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
Taxpayers with capital gains in the current financial year should also consider if there are ways to minimise the tax on those gains.
If you’ve had a capital gain, the aim is to put yourself in the lowest possible tax bracket in order to pay the lowest possible CGT. Useful strategies can include deferring income to next year, accelerating deductions or selling assets that may have unrealised capital losses. Remember, the date of disposal of an asset is the date of the contract, not necessarily the date you settle. You may be able to sell these to a related entity if you still want to keep the asset but make sure you get advice first.
7. Bad debts
It is important for businesses to review and write off any bad debts before June 30 to ensure that you can get a deduction. Otherwise, you could be paying tax on income you are not going to receive. It is important that these bad debts must physically be written off before June 30. It is not sufficient to do this when doing your tax return several months later. As always, some form of documentary evidence of the write off (prior to June 30) is good practice. This could be by way of accounting entries processed before year end or some other form of written record such as a minute. Another requirement is that the debt must have previously been included in your assessable income. If you’re a small business and only recognise income when you’re paid (i.e. cash basis), then you won’t previously have included the debt as assessable income and therefore won’t be eligible to write it off as a bad debt.
8. Trading stock
It is worth reviewing your stock for any old, damaged or obsolete items – you can write these items off in full and get an immediate tax deduction.
Furthermore, the value of trading stock at the end of the year can have a big impact on the overall profit & tax position of a business. There are a number of options available for valuing trading stock, including valuing it at cost price, market selling value or replacement value. You can choose between these options from year to year and item to item. Depending on your circumstances, this choice can significantly increase or decrease your taxable income.
9. Loans from your business entities
This is a potential high risk area and you need to make sure these loans are in order. Basically, where you owe money to your company (or potentially even a trust), you need to ensure that you have met the requirements of Division 7A of the Tax Act. This basically requires that you have a loan agreement in place and that you’re making the prescribed minimum principal and interest repayments. If you don’t, the ATO can deem the full amount of your loan to be a dividend, with potentially disastrous consequences. Surprisingly, this is an area that is till not that well understood by business owners.
10. Review your structures and estate planning
The end of year is a good time to review your structures to ensure they still do the job. What might have been an appropriate structure when it was set up may now be a hindrance. For example, the use of trusts for running a business now needs to be reassessed in light of (the above Divisions 7A) complications arising out of the distribution of trust income to so called “bucket companies”. This can give rise to an ever-increasing layer of complexity. There are now many “rollover” provisions in the CGT legislation which mean it is no longer as hard to change structure, although stamp duty can present issues in some states.
Year end is also a good time to review your wills and estate planning generally. Everyone’s circumstances change over time and a will that worked for you a few years ago may now not give the outcome you want.