YEAR END TAX TIPS SMALL BUSINESS FRIDAY 12 JUNE Check eligibility for small business tax regime. Maximise depreciation deductions now

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1 YEAR END TAX TIPS FRIDAY 12 JUNE 2015 SMALL BUSINESS Check eligibility for small business tax regime Small business entities (SBEs) that is individuals, partnerships, companies and trusts with a turnover of less than $2 million may be eligible for a range of tax benefits including simplified depreciation, capital gains tax concessions and accounting on a cash basis. Broadly, a SBE must carry on a business and its annual turnover (excluding GST) cannot exceed $2 million. Turnover will also be aggregated to include the annual turnover of certain affiliates and entities connected with the taxpayer. While meeting the $2 million turnover test automatically entitles SBEs to choose certain concessions such as simplified rules for both tax depreciation and trading stock, additional eligibility tests apply to claim, for example, the small-business CGT concessions. Maximise depreciation deductions now The Australian Government is proposing that SBEs will get an immediate tax deduction for nearly all individual assets they buy costing less than $20,000 each from 7.30pm AEST on 12 May 2015, and which are used to produce an income. For business assets first used, or installed ready for use prior to that time, SBEs can claim an immediate deduction where assets cost less than $1000 each, and which are used to produce an income. For businesses that are registered for the GST, the threshold is calculated on a GST-exclusive basis. For businesses not registered for the GST, the threshold is calculated on a GST-inclusive basis. A depreciating asset that is not immediately deductible that is an asset costing $20,000 or more from 7.30pm AEST on 12 May 2015, or an asset costing $1000 or more prior to that time and which is used to produce an income, will be automatically depreciated at a flat rate of 15 per cent in the year of acquisition. The asset must be used or installed ready for use by 30 June 2015; this is regardless of the date the asset was acquired during the year. In subsequent years, the adjustable value of the asset can be depreciated at 30 per cent.

2 In addition to the above accelerated depreciation for SBEs, from 7.30pm AEST on 12 May 2015, primary producers (for example businesses in farming, fishing, aquaculture or plant cultivation) can immediately deduct capital expenditure on fencing and water facilities such as dams, tanks and pumps. For capital expenditure on these items prior to 7.30pm AEST on 12 May 2015, primary producers will typically write off such expenditure over the effective life of such assets, being 30 years for fencing and three years for water facilities. From 7.30pm AEST on 12 May 2015, primary producers can depreciate capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed over three years. Prior to this time, primary producers will typically write off capital expenditure over the effective life of such assets, which can be up to 50 years. Of course, before SBEs do anything, professional advice should be sought to ensure qualification for the concession, and that it makes good business sense for businesses to make investments of this type now. Take advantage of the tax rate cut for small business from 1 July 2015 An opportunity for tax planning is provided through the proposed reduction in the company tax rate to 28.5 per cent from 30 per cent for companies that meet the small business entity test. Additionally, there is a proposed small business tax discount of five per cent on income tax payable on business income received from an unincorporated entity that meets the small business entity test; this is capped to $1000 per individual. In particular, eligible businesses could consider whether it is possible to bring forward expenses into this financial year, when they will receive a higher deduction for such expenses and delay revenue into the next financial year, as such revenue will be subject to a lower tax rate. As always, care should be taken to ensure that any actions do not breach the tax general anti-avoidance rules or any specific provisions such as the tax prepayment rules. Again, SBEs should seek professional advice to understand how they may legitimately benefit from the reduction in income tax, if eligible. Seek professional advice when starting a business The Australian Government is proposing that from 1 July 2015, professional expenses associated with starting a new business such as legal and accounting fees will be deductible in the year those expenses are incurred rather than deducted over a five-year period, as is currently the case. If you are in the process of establishing a business, if possible and practicable, wait to seek professional advice until after the new financial year commences. Review salary sacrifice arrangements Employees may wish to consider entering into salary sacrifice arrangements under which gross salary may be foregone to obtain either a packaged car for fringe benefits tax purposes, or to make additional superannuation contributions. Subject to complex transitional rules, a 20 per cent flat rate applies in calculating a car fringe benefit under the statutory formula method regardless of how many kilometres the car travels annually. However, there may still be some tax savings in packaging a car under these rules compared to the cost of funding all your car expenses from your net salary. In addition, employees who mainly use the car for work-related travel may be able to obtain tax savings by calculating the FBT paid on the car under the operating cost method, rather than fund the expenses from their after-tax salary.

3 Advice should also be obtained from a CPA Australia registered tax agent as to whether such salary sacrifice arrangements would be tax-effective. Make trust resolutions by 30 June 2015 Trustees of discretionary trusts are required to make and document resolutions by 30 June 2015 about how trust income should be distributed amongst beneficiaries for the year. Where a valid resolution is not in place by 30 June 2015, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax, even where they do not receive any cash distribution. Otherwise, the trustee will be assessed at the highest marginal rate of tax on any taxable income derived by the trust. A trustee must be able to evidence the making of an effective resolution in either draft minutes, file notes or an exchange of correspondence which has been documented before year-end (however, the trust's accounts do not need to be prepared by 30 June 2015). Such a notice should be sent out well before the 30 June deadline; this will allow a corporate trustee sufficient time to notify its directors that a meeting must be convened to pass and minute a resolution. Stream trust capital gains and franked dividends Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries where the trust deed allows the trustee to make a beneficiary specifically entitled to those amounts. The trustee documents this resolution before 30 June, and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend. These streaming rules are complex and taxpayers should consult their CPA Australia registered tax agent if they need advice on how these rules work. Private company rules The income tax law can potentially treat a payment or a loan by a private company to a shareholder or an associate (such as a family member), or the forgiveness of a debt owed by a shareholder or an associate, as an unfranked deemed dividend, unless an exemption applies. The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term which may be 7 or 25 years depending on whether or not the loan is secured. There are various things a private company can do before the due date of lodgment for its income tax return to minimise the risk of a shareholder or an associate deriving a deemed dividend. Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return's due date of lodgment. You should consult your CPA Australia registered tax agent if you believe such a deemed dividend has arisen for the year ended 30 June Prevent deemed dividends in respect of unpaid trust distributions An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2014 will be treated as a loan by the company where the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in the tax year.

4 However a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the due date of lodgement of the company's income tax return. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company and certain other conditions are satisfied. Trustees and beneficiaries should consult their CPA Australia registered tax agent on the full implications of these very complex rules, if applicable. Write-off bad debts Businesses can only obtain income tax deductions for bad debts where various conditions are met. A deduction will only be available where the debt is still in existence at the time it is written off. Thus, no deduction will be available if the debt is forgiven or compromised before it is written off as bad in the accounts. Moreover, the debt must be effectively irrecoverable and written off in the accounts as bad in the year in which the deduction is claimed. The amount representing the bad debt must also have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money lending business. Certain additional requirements must be met where the creditor is either a company or trust. Super guarantee If you are an employer you are required to contribute 9.5 per cent of your employees' salary to the super fund of their choice under the superannuation guarantee. Also, next time you're paying your employees' contributions, if you're substantially self-employed consider making a personal after-tax contribution to your own super, as you could claim a tax deduction for these. SMSFs and employer contributions From 1 July 2014 employers with 20 or more employees have been required to pay superannuation contributions electronically. All employers will have to meet this requirement from 1 July Superannuation funds, including self-managed super funds (SMSFs), need to have processes in place to continue to receive employer contributions from larger employers. Importantly, SMSFs will have to obtain an electronic service address from a SMSF messaging provider and provide it to their contributing employers. The Australian Taxation Office (ATO) website at has all the details.

5 EMPLOYEE TAX TIPS Do you know what tax deductions and offsets you may be eligible for? The following tips may help you reduce your tax liability in your return. Claim work-related deductions Claiming all your work-related deduction entitlements may save considerable tax. Check whether you have all the necessary receipts or credit card statements to make claims. Some typical work-related expenses include employment-related telephone, mobile phone and internet usage, computer repairs, union fees and professional subscriptions. Claim home office expenses A home office deduction may be allowable when part of your home has been set aside primarily or exclusively for the purpose of doing work. Some typical home office costs include heating, cooling, lighting costs, and potentially depreciation of your office equipment. To claim the deduction, you must have kept a diary of the hours that you worked from home for at least four weeks during the financial year. For more information on home office expenses see Claim self-education expenses Self-education expenses can be claimed provided your study is directly related to either maintaining or improving your current occupational skills, or it is likely to increase your income from your current employment. By contrast, if the study is designed to enable you to obtain new qualifications in a different field then the expenses incurred are not claimable. Some typical self-education expenses include course fees, textbooks, stationary, student union fees and the depreciation of assets such as computers and printers. Note: Higher Education Loan Program (HELP) repayments are not deductible. You must also disallow $250 of self-education expenses, which can include non-deductible amounts such as child care costs. For more information on self-education expenses see Claim depreciation deductions Immediate deductions can be claimed for depreciating assets that cost under $300 and are mainly used to earn non-business income. The deduction on assets which might include tools, calculators, briefcases, computer equipment and technical books bought by an employee, or minor items of plant bought by a landlord is only available to an individual employee or rental property owner, when used mainly to earn salary and wages or rent. Maximise motor vehicle deductions Where you have used your car for travel related directly to your work, and your claim for kilometres travelled for the year does not exceed 5000 kilometres, you can claim a deduction for your car expenses on a cents-per-kilometre basis. The allowable rate for such claims changes annually, so make sure you obtain this year's rate from the ATO website at Such claims must be based on reasonable estimates. On the other hand where your business travel exceeds 5000 kilometres, it may be possible to claim one-third of actual car expenses or 12 per cent of the original value of the vehicle without a log book. Alternatively, if you work-related travel exceeds 5000 kilometres then you may be able to claim a deduction for your total car running expenses to the extent you have used the car for work. However, such claims are only available where you have kept the required log book, odometer readings and receipts.

6 You can contact your CPA Australia registered tax agent to clarify what constitutes work-related travel, and which of the above methods can be applied to maximise your tax position. Rental property deductions Landlords can claim immediate deductions for a range of expenses such as interest on investment loans, land tax, council and water rates, body corporate charges, insurance, repairs and maintenance, agent's commission, gardening, pest control, leases (preparation, registration and stamp duty), advertising for tenants, and reasonable travel to inspect properties. Landlords may be entitled to claim annual deductions for the declining value of depreciable assets (such as stoves, carpets and hot-water systems), and capital-works deductions spread over a number of years (for such structural improvements as remodelling a bathroom). Maximise tax offsets Tax offsets directly reduce your tax payable and can add up to a sizeable amount. Eligibility for tax offsets generally depends on your income, family circumstances and conditions for particular offsets. For the year, taxpayers should check their eligibility for tax offsets which include, amongst others, the lowincome tax offset, senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse. Maximise your super contributions Gone are the days when you could wait until the kids had left home and you'd paid off the house to top up your super with additional contributions. Since the introduction of the contribution caps in 2007 you really need to contribute as much as you can each year up to the caps if you have any hope of maximising your super. The concessional contributions cap for the financial year is $30,000 if you're under 49, and $35,000 if you're aged 49 or over. Concessional contributions include any contributions made by your employer, salary sacrificed amounts and personal contributions claimed as a tax deduction by self-employed or substantially selfemployed persons. If you're making extra contributions to your super, and breach the concessional cap, the excess contributions over the cap will be taxed at your marginal tax rate, although you can have the excess contribution refunded from your super fund. High-income earners also need to be aware that the contributions tax on concessional contributions is effectively doubled from the normal 15 per cent rate to 30 per cent if their combined income plus concessional contributions exceeds $300,000. You can also boost your super by making non-concessional, or after-tax, contributions. While not as tax-effective you are still getting more money into the concessionally taxed super environment. The non-concessional contribution cap is $180,000 for , but you could also take advantage of the bring-forward provision if you're under 65 and utilise the cap for the next three years to contribute up to $540,000 this year. If you breach the non-concessional cap, the excess contributions over the cap will be taxed at the top marginal tax rate, although you can now have any excess non-concessional contributions made since 1 July 2013 refunded from your super fund. Importantly, don't leave it until 30 June to make your contributions as your super fund may not receive the contribution in time, and it will count towards next year's contribution caps, which could result in excess contributions and an unexpected tax bill next year.

7 Self-employed? Consider tax-effective superannuation contributions In the tax year, a self-employed person can claim their contributions to a complying superannuation fund as fully tax deductible up to the age of 75. However, such contributions will only be deductible if less than 10 per cent of the total of a person's assessable income, reportable fringe benefits or reportable employer superannuation contributions is attributable to their employment as an employee. Such a deduction cannot increase or create a tax loss to be carried forward. Employers can also claim deductions for superannuation contributions made on behalf of their employees. Consider the superannuation co-contribution An individual likely to earn less than $49,488 in the tax year should also consider making after-tax contributions to their superannuation to qualify for the superannuation co-contribution. The Australian Government will match after-tax contributions fifty cents for each dollar contributed up to a maximum of $500 for a person earning up to $34,488. The maximum then gradually reduces for every dollar of total income over $34,488 reducing to nil at $49,488. Consolidate your super It makes a lot of sense to have your entire super in one place. You'll reduce the amount of fees you're paying, receive just one lot of paperwork, and you only have to keep track of one fund. Having one fund also means you can take it with you when you change jobs. Look to consolidate the super funds you do have into one fund, then compare your funds to work out which best suits your needs. Important things to look at are fees and charges, the investment options available and life insurance cover. You can look at past investment performance as well, but remember it s no guarantee of how the fund will perform in the future. Once you've chosen the fund you want to keep, contact them and they can help transfer the money from your other super funds. If you've moved around or changed jobs occasionally, your old super fund may have lost track of you and you may miss out on some of your super when you need it. To find your lost super, check out the SuperSeeker tool under Find your lost super on the ATO website at Note: The list is not exhaustive and you should always speak to a CPA-registered tax agent about your specific circumstances.

8 Tax tips for students Lodging a tax return can seem daunting for students. And for parents, helping your child to navigate these uncertain waters can also be challenging. To help again this year, CPA Australia has put together eight tax tips for students for the year ending 30 June Obtain your refund for tax withheld Where your taxable income for the year ended 30 June 2015 is below the effective tax-free threshold of $18,200 you will typically not have to lodge an income tax return for the tax year. However, to get back any income tax that has been withheld from your income during the year, you do need to lodge a tax return. Tax can be withheld from your pay, and it can also be withheld from any interest income you earned during the year if you have not provided your tax file number (TFN) to your bank. Similarly, tax may have been withheld from a distribution from a family trust where you have not previously provided your TFN to the trustee. Where you have not provided your TFN, tax is withheld at the maximum rate of 49 per cent. Identify all your sources of assessable income To determine whether you need to lodge a tax return or not, identify all sources of income derived during the year that is assessable for income tax purposes. Such amounts include: income from work as an employee or a contractor, including any tips or gratuities received, investment income, such as any bank interest or dividends on shares received, certain government payments received such as Austudy, ABSTUDY living allowance and Youth Allowance, some non-government scholarships, grants and awards, and distributions from a family trust or partnership. Consider the special rules for those under 18 Certain types of income derived by minors under the age of 18 may be taxed at a higher rate than would apply to that same income if the taxpayer was aged 18 or over. The types of income that may be taxed differently include income received as a beneficiary from a trust, interest, dividends, rent and royalties. Taxed rates are 68 per cent for income that is greater than $416 and less than $1307, and 47 per cent for income that exceeds $1307. Minors will also be unable to typically claim the low income tax offset to reduce their tax liability on such income. Ordinary marginal tax rates will apply to other income derived by a minor aged under 18, such as employment or business income, taxable government payments such as Youth Allowance, income from a deceased estate, income from property transferred to a minor as a result of a person's death or a family breakdown and net capital gains on a disposal of investments. Know your deductions You are entitled to claim deductions for certain expenses that are directly related to the income you have received. For example, you can claim work-related deductions if you have the necessary receipts or credit card statements. Some typical work-related expenses that are allowable include uniforms, protective clothing, employment-related telephone, mobile and internet costs, subscriptions and union fees. You should consult your CPA Australia registered tax agent to identify all eligible deductions.

9 Claim the right tax offsets If you receive Austudy, ABSTUDY living allowance, Newstart Allowance, youth allowance or other taxable Commonwealth government education or training payments, you are eligible for the beneficiary offset. This offset generally ensures you do not have to pay primary tax on those payments. You may however have to pay tax on other income, such as wages or investment income. In certain circumstances the low income tax offset will be available to reduce tax payable on such income, provided your taxable income exceeds the tax-free threshold for the particular year. The ATO will automatically calculate these offsets when they process your tax return. You may, however, be eligible for other tax offsets which you must claim through your tax return. Students should therefore consult their CPA Australia registered tax agent to identify if any other tax offsets available. Identify eligible self-education expenses If your study is directly related to maintaining or improving your skills in your current occupation, or could increase your income from your current employment, you can claim self-education expenses if you keep the appropriate records. By contrast if you are embarking on study for the first time or you are studying to obtain new qualifications in a different field then the expenses incurred are not deductible. Typical self-education expenses include: Course fees, textbooks, stationery student union fees and the depreciation of assets such as computers and printers. Understand HELP debts Higher Education Loan Program (HELP) debt repayments are not tax deductible. If you have a HELP debt, repayments only commence once your salary exceeds $53,344 (this figure is for year ending 30 June 2015 and is indexed annually). The specific amount required to be repaid will depend on a range of factors, including your taxable income. If you are working and you have filled out a tax file number declaration form your employer will withhold additional tax from your salary to assist you cover your HELP debt. The ATO will automatically calculate what your HELP repayment is for the year once you lodge your tax return. If you don't notify your employer that you have a HELP debt through the TFN declaration, your employer will not withhold the additional tax and you may therefore find yourself facing a hefty tax bill. If your income varies significantly over a year and you do not expect to exceed the minimum repayment threshold, you can ask your employer to stop withholding the additional tax for HELP purposes and that additional tax withheld may be refunded to you after you lodge your tax return. Know if you're a resident for tax purposes If you're an overseas student studying at an Australian education institution for a period of six months or more you will be regarded as an Australian resident for income tax purposes. This means that you will pay the same rate of tax as other resident taxpayers and have access to the tax-free threshold. You are only entitled to a pro rata taxfree threshold if you are only an Australian resident for part of the year. If you are an Australian resident, you will be required to disclose all your income earned for the year, including income derived overseas, and will be entitled to claim eligible tax deductions and offsets. Note: The list is not exhaustive and you should always speak to a CPA-registered tax agent about your specific circumstances.

10 EOFY resolutions no business should do without Do a financial health-check of your business Year-end is a good time to check the financial health of your business. Reviewing your financial statements and doing some basic calculations using liquidity ratios, solvency ratios, profitability ratios and return on investment ratios, and comparing these results with prior year figures and similar businesses in your industry will help you identify key areas of weakness or potential threats to your business as well as strengths. Revisit your strategic plan After doing a financial health check, use the end of the financial year as an opportunity to reconsider the strategic direction of your business. This involves an analysis of your market and predictions on future developments. It is important that your strategic plan reflects the objectives you, as the business owner, have for your business and your personal life. Your strategic plan should also include steps to address areas of weakness identified in the financial health check. To bring your strategic plan to life, it should also include a work plan, responsibilities and due dates, and the implementation of the work plan should be monitored throughout the coming year. Draw up a budget for the new financial year To achieve your strategic plan, you must allocate resources. Therefore, your budget will need to be aligned with your plan. If your budget shows that a particular objective in your plan is not affordable, you will either need to seek more resources for that objective or modify your strategic plan. In setting your budget, you should list your assumptions. To stress-test your business, amend your assumptions to see how it affects your financial position. An example could be a 10 to 20 per cent reduction in sales, or a 20 per cent increase in fuel costs. One of the most important aspects of a successful budget is regular monitoring against actual results; where there are any variations, look closely and find out why. Prepare a cash flow forecast One of the most significant problems faced by business is poor cash flow. Therefore, a fundamental part of good business practice is a cash flow forecast. Ensure that your cash-flow forecast aligns with your budget and is monitored regularly. Review your business's profitability Issues impacting the profitability of your business may have come to light in your financial health check, the review of your strategic plan and in drafting your budget. Other issues impacting the profitability may also be found by reviewing: staff productivity your production process your supply chain how you are using your business assets costs

11 You should also consider tactics to increase sales of your most profitable products or services, reducing input costs, and seeking advice on tax-effective expenditures just to name a few. Ensure you have finance options All businesses need finance to fund ongoing operations and grow. Finance can be provided from debt, equity and internally generated cash flow. What you need the finance for for example asset purchase will help you determine the type of finance you should access. It is good business practice to have some surplus finance available to cover business contingencies, including taking advantage of new opportunities should they arise. When you borrow from a lending institution, year-end is the perfect time to meet with your lender to discuss your business plans for the coming year. You may find that they will offer further finance for your future plans. Revisit your marketing plan While it may seem obvious, it is important that your marketing plan is focused on achieving key objectives, particularly improving your cash position. Some ideas for better aligning your marketing plan with improving the cash position of your business, include: focusing on sales that have a high margin and bring in cash quickly. Well-placed visual displays such as instore signs and posters can be a great way to highlight a special or high margin product rewarding staff for sales of products with a higher margin only paying staff a commission when payment is received measuring the success of each promotional activity or campaign so as to gauge its effectiveness focusing on encouraging customers to pay at the point of purchase or to pay as early as possible. Review your risk management strategies Whether your business is facing good times or bad, it is important to always have appropriate risk management strategies in place. Important risks to be aware of and manage include: relying too heavily on a small number of major customers. This can in part be managed through increasing the number of your customers and helping smaller customers to grow relying too heavily on one supplier. This can in part be managed through identify potential alternative suppliers selling on credit. This can in part be managed through subjecting potential customers to credit checks, limiting the amount of credit that a customer can have, following up on payment before the due date and stop supplying customers if they are late payers fraud. This can be managed in part through having in place internal controls in high risk areas such as cash handling, making sure those internal controls are enforced and breaches are acted upon promptly. Take advantage of opportunities Don't turn a blind eye to new opportunities that are consistent with your strategic direction and can be properly funded.

12 Conclusions Businesses that are well run use these ideas during both the good times and bad in order to maximise their profits, grow and minimise risk. Using them now can help your business to emerge in a much-improved condition, likely lead to long-term growth.