With the end of the financial year fast approaching, we look at some common tips and strategies for businesses looking to reduce their taxable income and tax bill by 30 June 2014.
Small businesses
Tax planning strategies differ if your business is considered a small business under the Tax Act.
In order to be a small business, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive per annum. The turnover for either the current financial year or the previous financial year can be used.
Consider the following 2 strategies that apply to small businesses:
1. Instant asset write-off for assets reduced to $1,000 from 1 January 2014
Under the current law, a small business is able to claim an immediate tax deduction for “individual” assets (including motor vehicles) costing less than $6,500 (GST exclusive), including individual assets that form part of a set.
Similarly where the cost of a vehicle is $6,500 or more (GST exclusive), an immediate deduction can be claimed for both the first $5,000 plus 15% of the cost less $5,000. The balance of the purchase price is depreciated as part of the asset pool at a rate of 30% in the second and subsequent years.
This immediate write-off applies equally to the purchase of new and second hand assets which are used in the business.
As part of the changes contained in the “mining tax repeal Bill”, the Government has proposed that the instant asset write-off will be reduced from $6,500 to $1,000 for “individual” assets (including vehicles) “first used or installed ready for use” on or after 1 January 2014.
It is unlikely that this bill will be passed by the Senate and made law prior to 1 July 2014.
This proposed change means that for the 2013/14 year, a small business can still claim a $6,500 instant asset-write-off for individual assets that meet the above “use or “installed” test up to 31 December 2013.
Therefore, where an asset was purchased prior to 1 January 2014, but was first used or installed ready for use after this date, the instant asset write-off threshold of $1,000 applies.
Note that the business is not required to aggregate individual assets costing less than $1,000 which form part of a set, when applying the $1,000 threshold from 1 January 2014 or $6,500 threshold prior to this date. For example, if on 15 January 2014 you buy a boardroom table costing $950 and 5 matching chairs each costing $200, the business would still be entitled to claim an immediate deduction for the entire $1,950.
2. Claim deduction for pre-paid expenses
A small business can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. The most common expenses that you should consider prepaying by 30 June 2014 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc.
Note that your business must be able to make the prepayment under the relevant contractual agreement to get the immediate tax deduction this financial year – you cannot simply choose to prepay the expense.
Make super contributions by 30 June
The maximum concessional superannuation contribution limits for the 2013/14 year are:
– Individuals aged 60 and over on 30 June 2014 – $35,000 contribution limit
– individuals aged 59 and under on 30 June 2014 – $25,000 contribution limit
Note that employer super guarantee contributions and salary sacrifice contributions are included in the cap. Where a concessional contribution is made which exceeds these amounts, the excess is taxed at your marginal rate from the 2013/14 year onwards, less a 15% tax offset for the tax already paid by the super fund on the excess contribution.
If you are self-employed and making a personal superannuation contribution, ensure you obtain the correct documentation from your superannuation fund to substantiate claiming the deduction before lodging your tax return.
In order to obtain a deduction in the 2014 financial year, the contribution must to be received by your superannuation fund by 30 June 2014 (see below).
Super contributions made by cheque or electronic funds transfer (EFT)
Care needs to be taken where last minute contributions are made by cheque or electronic fund transfer to ensure that the deduction can be claimed in the current financial year.
Where the super contribution is made by cheque and the fund receives it by 30 June 2014, the deduction is allowed in the current financial year so long as the trustee banks the cheque within 3 business days and the cheque is not subsequently dishonoured.
Where the contribution is by EFT, it is taken to be made when the amount is “credited” to the bank account of the fund and not when the transfer is made.
Unless the contribution is made between linked accounts of the contributor and the fund (held at the same bank), the deduction may be deferred to the next financial year where the funds are not credited to the super fund account by 30 June 2014.
Defer income & capital gains tax
- Businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay “receipt” of the income until after 30 June 2014.
- Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the “issuing of invoices” until after 30 June 2014.
- Realising a capital gain after 30 June 2014 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes. In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.
Family trust distributions
For the 2013/14 year, minors (i.e. children under the age of 18 at 30 June) can receive investment income (including trust distributions) of up to $416 without paying tax. Any income earned above this amount is taxed at penalty rates.
Generally, income received by a family trust should be allocated amongst the various beneficiaries before 30 June each year and documented by way of resolution. It is preferable that the resolution is made by 30 June 2014 to avoid any later dispute with the ATO as to whether the income was properly allocated by this date.
The exact requirements for allocating trust income are set out in the trust deed, and as each trust deed is different, it is vital that trustees are aware of the terms applying to that particular trust.
Failure to follow the terms of the trust deed and to allocate the relevant income by 30 June may result in the trustee paying tax on income at the top marginal tax rate of 46.5%.
Note also that special rules apply to the “streaming” of capital gains and franked dividends received by family trusts to particular beneficiaries, and if you wish to stream it is critical that this is done correctly.
Write-off slow moving or obsolete stock
All businesses have the option of valuing trading stock on 30 June 2014 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
For example, where the market selling price of stock items at year-end is below the actual cost price, your business can generate a tax deduction by simply valuing the stock at market selling value for tax purposes.
Also, in situations where stock has become obsolete at year-end (e.g. fashion clothing), your business may elect to adopt a lower value than actual cost, replacement cost, or market selling value.
Maximise depreciation claims for non-small businesses (i.e. turnover >$2M)
- An immediate deduction can be claimed for assets costing less than $100 GST inclusive (e.g. minor tools).
- A tax deduction can be claimed for depreciable assets that are scrapped or sold for less than their written down value.
- Assets costing less than $1,000 GST exclusive can be allocated to a “low value pool” and depreciation claimed of 18.75% for 2014 (37.5% thereafter) regardless of when the assets were acquired during the income year.
Claim deductions for expenses not paid at year end
All businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not paid by 30 June 2014 including:
Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2014, but have not been paid until the new financial year.
Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2014 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 20145year when the amount is actually received.
Staff Bonuses and Commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2014 where it is “definitely committed” to the expense.
Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2014 but not paid until the next income year.
Write-off bad debts
If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2013/14 so long as the debt is declared bad by 30 June 2014.
Your business will need to show that it has made a genuine attempt to recover the debt by 30 June to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a company directors minute).
Your business can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.
Personal services income rules
If you conduct a business through a trust or company structure that relies on your personal effort and skill to generate the income, there are special rules that apply to the diversion of some or all of that personal services income.
For example, if your company earns the personal services income, the ATO can treat the income as having been earned by the individual earning the income (rather than the company) unless certain tests can be satisfied.
Note that these rules apply on an annual basis, so even though you may have passed the tests in prior years, you can be caught if your circumstances have changed during the current financial year.
