Getting Ready For Tax Time
June 30 will be here before you know it, so its time to get serious with your tax planning. But don’t get caught up in the hype, test your ideas against these three tax planning rules.
1. Stay within the law but don’t pay any more tax than you need to
2. Pay your tax at the lowest possible tax rate
3. Don’t pay your tax before you need to
These rules mean that you maximise your deductions, defer the taxing points where practical and ensure that income falls with the person or entity where the tax rate will be at its lowest.
Now is the time to get your end of year tax planning checklist together to ensure that you achieve the best tax outcome possible. Tax planning should be an all-of-year event but there are always some last minute items that need to be attended to. Don’t leave it till the last minute. The more time you allow yourself, the more likely the better the decisions will be.
Here’s a list of tax housekeeping items to start thinking about:
Trading stock – if you have any stock that is old, damaged or obsolete then scrap it and write it off before June 30. The written off amount forms an immediate tax deduction. Also start to review your stock in terms of the appropriate valuation method. Whilst this is often cost price, it doesn’t have to be. You can value stock at the lower of cost, replacement or net market value. You may have stock that you don’t want to scrap but may be worth less than its cost price. The market value approach will give you the tax saving into this year.
Bad debts – write them off before June 30 and take the tax deduction. They should be written off in your debtors ledger and recovery action should have ceased by June 30. If you are still pursuing the debt then they will not be a bad debt for tax purposes.
Depreciation and your asset register – have a look at your asset register and write off any plant or equipment that has been scrapped. Doing this will give you the tax benefit into the current year.
Bonuses and director’s fees – if you are planning to pay bonuses or directors fees make sure that these are declared before June 30. They don’t have to be paid before June 30 to take the tax deduction but the company does need to be legally committed. This is normally achieved by a director’s resolution approving the bonus or fee. Do this and the company takes the deduction into this year. The recipient does not need to declare it on their personal return until the year of actual receipt.
Prepayment of expenses – if you are a Small Business Entity for tax purposes then you can take advantage of the prepayment rules. Expense prepayments for up to 13 months service, made in June, will qualify for deduction into the current year.
Superannuation – make sure that you make your superannuation payments before June 30. The funds need to be receipted by the superannuation fund to be eligible for current year deduction. Where you have SGC payments (superannuation guarantee charge) for staff for the June quarter, if you can pay these before June 30 you will take a current year tax deduction.
Trustee appointments of income – if you operate through a trust structure, make sure you decide on the appointment of income to beneficiaries before June 30. This is an area that is under ATO spotlight at the moment. The trustee needs to have decided which beneficiaries will receive trust income for the year and how much. The actual amount does not have to be paid before June 30, but the decision to appoint the income should be made by then.
Manage any loans to shareholders – if you operate through a company structure and the company has advanced you money during the year or paid expenses on your behalf then work out whether you are going to repay the loans or put in place a complying loan arrangement. If you already have loan agreements in place from prior years make sure that you make the minimum repayment and interest payment before June 30.
Dividends – if you operate through a company and are going to pay dividends in this financial year make sure that the appropriate resolutions are made and documented. Check whether you need to pay the dividend before June 30. If you wait until July 1 you will defer any additional tax for another year. Where your company has accumulated franking credits you need to decide whether or not the dividends you are paying will be franked. In most cases this makes sense because it gives you a tax credit to accompany the dividend. The effect of this is that the shareholders only pay the difference in tax between their marginal tax rate and the franking amount (normally 30 cents in the dollar).
Small business entity (SBE) depreciation deductions - the 2013 financial year is the first year where the accelerated depreciation provisions apply. They only apply to SBEs. To be an SBE you need to be carrying on a business and have a turnover of less than $2 million per annum. If you qualify, then any assets you purchased from July 1 last year with a GST exclusive value (assuming you are registered for GST) of up to $6500 can be written off immediately. Assets worth more than this will go into a general asset pool and be written off at an accelerated rate of 15% in year 1 and thereafter at 30% per annum. And if you purchase a motor vehicle you will get an immediate write off for the first $5000, with the balance being subject to the normal depreciation rules.
Defer your income – if you are able to, defer your income into the new financial year. In particular this can work for service based businesses or where you are billing your clients on a progress payment basis. Make sure that you can manage any cash flow effects that come with this one.
Manage your capital gains and losses – remember that capital gains trigger on the date of the contract not the date of payment. So be careful about any contracts you enter into in the run up to June 30. Capital losses can only be written off against capital gains. So if you are selling assets that will trigger a capital gain try and delay the contract until 1 July unless you have some capital losses that you are able to offset against.
Make the marginal tax rates work for you – if you operate through a trust structure or have discretion around who to pay director’s fees or bonuses to, look at the individual marginal tax rates or the use of entity rates where income could be appointed to a wholly owned company. With trusts there may be an opportunity to appoint income to children or family members where no tax would arise.
Key person or income protection insurance – if you’ve always meant to take out theses insurances, now might be the time. Pay the annual premium before June 30 and take the deduction into this year.
With all of your tax planning - a word of warning. The closer we get to the end of the financial year the more people will be out there encouraging you to spend your money, with the lure of the tax saving being one of the big selling points. And the closer we get to the end of the financial year the more focussed business owners get on how to keep their tax down and what opportunities are there to reduce it even further.
Keeping your tax down makes good sense. It is just plain dumb to pay more tax than you need to. However there is a balance between smart tax planning and throwing your money away on things that you really don’t need or that will add no real value to your business.
So as the tax-planning season gets into full swing here are some tests to apply to the different buying opportunities presented to you.
- What will the spend do to your cash flow? Every small business owner recognises the importance of cash flow and available cash funds. Every time we make a spending decision we impact our cash position. Often we don’t go out there and make the big purchasing commitment. There is a tolerance limit where people will be wary about that additional commitment. Sometimes though we achieve the same outcome through a series of smaller buying decisions. They add up. If you are going to purchase additional items or bring forward some of your buying to take advantage of the tax position you need to know that you have the free cash to commit to this.
- Does it add value to the business? Saving tax alone, is not a good enough reason to commit to additional expenditure. That tax saving only cushions the cost, it does not remove it. The value of the tax deduction to you is your marginal tax rate. If you operate through a company then that is 30 cents in the dollar. At an individual level it will be your marginal tax rate – at worst 46 cents in the dollar. Know what the value of the tax saving is, look at the after tax cost and then make sure the expenditure is justified and will add value to your business.
- Does it come with any risks and are you committing to ongoing expenditure? Some of the buying options presented to you will have an ongoing commitment. They provide some tax relief now but also lock you in to future commitments. If this is the case you need to ensure that this will work not only today but also into the coming years.
Measured against these tests, some of the purchases that you may consider in the coming months just will not stack up. And if this is the case then you are better to pay the extra tax and keep the after tax dollar in your pocket.
Having said all of this, there will be opportunity for you to save tax and do some smart tax planning as we run up to June 30. Test your decisions and if you are not sure get some advice on what you are considering.
And if you are on the other side of the transaction and are trying to encourage your customers to spend more then it’s a good idea to have a few more value propositions then just the tax saving.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice. For more information and contact details, visit www.hayesknight.com.au
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