1 Business Spectator special issue Tax Strategies: What you need to know before June 30 3 Your business tax check list before June 30 4 What your accountant can do for you 5 Is it time to take stock in your business? 6 Are you eligible for SME tax breaks? 7 Some SME tax moves that are definitely worth deferring 8 Is your business on the ATO s hit list? 9 Is this a super time for SMEs? 10 Why SMEs are losing the trust factor 11 Maximising your deductions before June Don t get caught in the SME loan trap Proudly brought to you by
3 3 Your business tax check list before June 30 With just over a month left until the end of the financial year 30 business days to be precise time is very quickly running out for small business owners needing to get their affairs in order before June 30. A good starting point, if you haven t done so already, is to make an appointment with your accountant for as soon as possible. That s because your accountant should be able to advise you of steps you can take before the end of the financial year to legally minimise the amount of business and personal tax you will need to pay to the Australian Tax Office. As a small business owner, it almost goes without saying that getting your financial house in order before June 30 is imperative. Here s a few of the things you should either already have done, or have in train. Get your accounts in order If you re a fairly organised business manager, then it s likely that you will have kept your financial accounts and records up to date throughout the financial year. That will make the job a whole lot easier when you get to meet up with your accountant before June 30. Unfortunately, if you haven t kept up to date and tend to leave the hard work until the last minute, it s definitely time to move into high gear. Step one is to track down an experienced bookkeeper who has the time to go through all your records, including invoices, bank statements and payment receipts, so you can get a clear picture of exactly where your business sits financially for the tax year. It s a much cheaper option than going to your accountant with a shoebox full of receipts. Send out invoices promptly If you re keen to lock in as much business income as possible this financial year, then it s important to prepare all invoices promptly and send them out for payment as soon as possible. Don t wait until the end of the month if the work has already been completed, as the June 30 countdown clock is ticking and, unless your clients are good payers, every payment day counts. Make sure your invoices clearly stipulate a payment due date, and that you contact the client immediately if they fail to meet that payment deadline. Chase up bad debts The odds are, especially in the current depressed business environment, that you have a few bad debts out there that may be 60 or 90 days, or even longer, overdue. Unfortunately, some of these bad debts may need to be written off if there s little or no prospect of recovery. On the other hand, if the client has every intention of paying what s owing and is just running behind, then it s important to impress on them that you need the funds to be paid before June 30 if you want the income to be declared from this financial year. If you don t mind letting it slide into the new financial year so you can defer income, then that s another story.
4 4 What your accountant can do for you With the tax countdown clock well and truly ticking, it s definitely time to see your accountant. Many business owners often only contact their accountant after the end of the financial year, when it s too late to make any adjustments that can save them tax. Best practice is to have ongoing dialogue with your accountant through the financial year, so that any needed strategies can be implemented well before the June 30 deadline. A good business accountant should be highly skilled in all aspects of corporate accounting to ensure you have the most appropriate structures in place for your business and personal needs, and should be able to help you identify business goals and the most sensible strategies for achieving them. What to ask before June 30 When meeting with your accountant, it s important to bring them fully up to speed on the state of your business so they can make an informed judgement on steps you can take over the next few weeks to not only get you in the best tax position for the financial year, but also plan ahead for the next financial year and beyond. flexibility in income distribution from your business. Financial analysis Ask your accountant to provide advice and assistance on areas such as stock taking; creditors; debtors; finance; expenses; stock cost and pricing analysis; cash flow management; staff recruitment and business support services; and in investigating proposed business acquisition and asset purchases such as acquiring or replacing plant and property. Changes Advise your accountant of any changes ahead, both on a business and personal level, which may impact on future activities and tax payments. These could include plans for expansion, for purchasing new plant and equipment, plans to move locations, or even changes in personal circumstances. Your accountant will be able to assess all these factors and provide an independent assessment of the measures you should take, both now and in the future. Legislation Ask your accountant about any changes to legislation in the last financial year that may require you to take steps in the next few weeks, and also ask about impending changes that need to be considered for both this financial year and next, such as recent changes announced in the May federal budget. Taxes Check with your accountant about any capital gains tax liabilities that may have arisen in the latest financial year, as well as any fringe benefits tax liabilities you should consider for this financial year, such as any benefits provided relating to motor vehicles, car parking, meals and entertainment, expense payments and other employee allowances. Business structures Ask your accountant whether you have the optimal structure for your business, and whether it s prudent to make any changes. For example, your accountant may recommend the creation of a corporate trust structure to provide more
5 5 Is it time to take stock in your business? If you re a wholesaler or retailer, and your business buys or sells stock, you usually need to do a stocktake at the end of each income year. You may not need to do an annual stocktake if, for income tax purposes, your business turnover is less than $2 million and the difference between the value of your opening stock and a reasonable estimate of your closing stock is $5000 or less. But if your turnover is $2 million or more, the Australian Tax Office requires you to do a stock take at the end of each income year. According to the ATO, where you do a stocktake, your records should include the following: a list describing each article of stock on hand and its value; who did the stocktake; how and when it was done; and who valued the stock and the basis of the valuation. The ATO points out that when you start a business, you may be entitled to GST credits and an income tax deduction for any goods you already own and bring into your new business as trading stock. This means you need records of the market value or cost of these goods at the time your business starts. Time to move old stock If you re like most businesses that buy and sell stock, then it s highly likely you have product on your shelves that just won t move. a tax deduction for stock that has lost value over the past financial year. Under the Tax Act, businesses are allowed to hold stock at lower than its commercial value. Where stock has lost a considerable amount of value, even if it still has some residual worth, businesses are also able to writedown the value and book a loss on that stock. Businesses need to prove the stock is obsolete, and that there is a possibility of paying more tax in the next financial year, but the process will allow you to gain some savings on this financial year s tax bill. It could be stock that s been superseded, or some product clangers that just aren t in demand. The end of the financial year is a great opportunity to move unwanted stock, and sometimes that means selling it at cost or a loss. This is very likely to be the case in the current climate, where product values have depreciated due to factors such as the higher Australian dollar and intensified competition, particularly from the online retail space. Claiming a tax deduction The good news is that the ATO allows businesses to claim
6 6 Are you eligible for SME tax breaks? An important, but often overlooked, opportunity for small to medium businesses is that if your business has an annual turnover of less than $2 million, you may be eligible for a range of tax concessions. Eligible businesses can choose to use the concessions that best suit their business, although they may have to satisfy additional conditions. You will need to check whether your business qualifies for the concessions each tax year, and your business accountant should be able to provide more information on these. The small business tax concessions apply whether you operate your business as a sole trader, partnership, company or trust. Small business tax break You can claim an additional tax deduction when your business bought eligible assets, and when you spent money to improve eligible assets, subject to certain time limits and thresholds. You can claim a tax deduction of 50 per cent of the cost of new investment in eligible assets. The tax break is in addition to deductions available under the simplified depreciation rules or the normal depreciation rules (uniform capital allowances). Simplified trading stock rules You can choose whether or not to do an end-of-year stock take and account for changes in the value of trading stock, if the value of your trading stock has not increased or decreased by more than $5,000 over the year. Capital Gains Tax concessions If you ve owned an asset to conduct your business (an active asset ), you will only pay tax on 50 per cent of the capital gain when you sell the asset. There is a CGT exemption on the sale of a business asset, up to a lifetime limit of $500,000. If you are under 55, money from the sale of the asset must be paid into a complying superannuation fund or a retirement savings account. If you are aged 55 or older and retiring, and your business has owned an asset for at least 15 years, you won t pay CGT when you sell the asset. Also, if you sell a small business asset and buy a replacement, you can roll over your CGT liability to the value of the replacement asset. This means you won t pay any CGT owing until you sell the replacement asset. Simplified depreciation rules You can generally pool your assets to make depreciation calculations easier and also claim an immediate deduction for most assets costing less than $1,000 each. Immediate deductions for prepaid expenses You can claim an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year. Paying GST on a cash basis You can account for the GST you must pay on sales you make in the same tax period you receive payment for them. Accordingly, you would claim GST credits for the GST you pay in the price of your business purchases within the same tax period that you pay for them. Annual apportionment of GST tax credits If you purchase items that you use partly for private purposes, you can choose to claim full GST credits for these items on your activity statements and then make a single adjustment to account for the private use percentage after the end of your income year.
7 7 Some SME tax moves that are definitely worth deferring If you were thinking about rushing out before June 30 to purchase some assets so you can claim a deduction this financial year, don t. This is one of those times when it s definitely worth putting that off, because the federal government has announced a number of small business tax incentives that kick in from the start of July. From , businesses with a turnover of less than $2 million will be able to immediately write-off any business asset purchase they make that costs them less than $6500. So if you re looking to update your office computers, printers, telephones or other small business assets such as plant and equipment that fall within the $6500 threshold, it s prudent to wait another month or so to get the higher tax break, unless you really need to make a purchase now. value will rise to $9344. That s a $4250 tax incentive to hold off buying that vehicle for a little while longer. As the old saying goes, good things come to those that wait. How does the immediate deduction work? In the past, when a small business purchased low-cost assets, these needed to be depreciated over a number of years. The simplified depreciation pooling arrangements will allow small businesses to depreciate some assets more quickly (at a rate of 30 per cent instead of 5 per cent), and will help to reduce compliance costs. In effect, the budget measure just announced means a full tax deduction will be claimable at the end of the tax year for assets purchased after July 1 that fall within the $6500 limit. Vehicle purchases get more traction If you were thinking of buying a new car before June 30, it s also worth parking that decision until the new financial year. That s because the federal government has also announced some attractive depreciation changes for the purchase of motor vehicles. From July 1, small businesses will be able to claim up to $5000 as an immediate deduction for motor vehicles acquired from The remaining cost is depreciated at 30 per cent (15 per cent in the purchase year), which was the previous treatment for the entire cost of the motor vehicle. This new small business write-off of $5000 for motor vehicles will replace the Entrepreneurs Tax Offset. Cars and vans are often a small business s main asset, so an immediate write-off on motor vehicle purchases will assist with this significant cost. As an example, if you purchase a vehicle before June 30 that is worth $33,960, under the existing small business depreciation rules you can receive a deduction of $5094 in the first year. Under the new rules that come into effect on July 1, that first year deduction on a vehicle of the same
8 8 Is your business on the ATO s hit list? The Australian Taxation Office is continuing to increase its surveillance of small businesses involved in cash transactions as part of a major effort to clamp down on undeclared income. It is now using a suite of benchmarks to identify and deter activities in the cash economy by determining the average proportion of cash sales a business should be making and which businesses are not reporting as much cash income as others in the same industry. Those businesses that fall under the benchmark are likely to be audited at some stage. The benchmarks have been initially developed for a range of industries including; restaurants and takeaways, hairdressing and beauty, clothing retailing, grocery retailing and hardware and building supplies. Coffee shops are a key ATO target, with information received from suppliers about coffee shops receiving more than 15 kilograms of coffee a week being checked by the ATO to ensure they are reporting all their business income. enquiry, examination, investigation, review or audit undertaken by a government agency with which you lodge returns or declarations. The ATO is amassing data from state government agencies (stamp duty records of car, boat and property sales over the last one to five years), banks (interest paid and monetary transactions over $10,000), stock brokers (share transactions), Centrelink (undeclared benefits), credit card companies, foreign banks and many other sources. It is cross checking this information against activities and figures being reported by businesses and taxpayers. Going offshore could land you in hot water In the past it may have been easy to get away with not declaring income earned offshore, especially when that income was diverted to a bank account in a so-called secrecy haven. But the ATO is likely to be on your trail. It has successfully recouped almost $1.3 billion in tax liabilities from illegal offshore accounts, and more than $600 million in unpaid taxes. Around 3,000 business audits have been completed, and another 290 are in currently in progress, with 65 people charged to date and 22 convictions. Do you have audit insurance? If you ve always done the right thing in your business affairs, you definitely have nothing to worry about even if the ATO comes knocking on your door. But it s a good investment as a business owner to have audit insurance in place, because the costs of getting your professional accountant to manage a tax office audit can be quite high. There has been a sharp increase in audit and compliance activity by the ATO and other government agencies to ensure individuals, trusts, self-managed super funds, the self-employed, business entities, associations and organisations are compliant and paying their proper levels of taxes, duties, levies, workers compensation and superannuation. Audit insurance generally covers fees incurred to engage professional assistance to respond to a questionnaire,
9 9 Is this a super time for SMEs? With only a short time left before the end of the financial year, business owners need to make sure they have all their superannuation affairs in order to maximise their deductions. Your contributions As a business owner, there is a good opportunity to divert income into superannuation before June 30 to reduce the amount of income you will need to pay at the full company tax rate. The benefits are obvious as by doing so you will have to pay less corporate tax and will simultaneously achieve a generous personal tax benefit. If you re a sole trader or partner in a partnership, you don t have to pay super for yourself, but you can make super contributions as a way of saving for your retirement. As an individual, you are able to contribute up to $25,000 as a concessional payment into your superannuation at the current 15 per cent contributions tax rate. What are the budget super changes? Changes in the latest federal budget that come into effect from July 1 make it imperative that business owners earning above a certain level, and those who are aged over 50, maximise their contributions before June 30. One of the big changes coming into effect from July 1 is that anyone earning more than $300,000 will face a rise from 15 to 30 per cent in their tax rates on super contributions. This is likely to affect many small to medium business owners, and those with the opportunity to contribute their full entitlement in this financial year will be able to get in before the latest superannuation tax hike comes into effect. Also, keep in mind that is the last financial year before the standard cap for concession contributions by members over 50 is halved from $50,000 to the indexed $25,000 that applies to other fund members. financial year is also prudent as it will allow you to achieve a tax deduction in the current year. Making a contribution from a business sale If you have sold your business in the last financial year, there is an opportunity to make extra large super contributions by contributing proceeds from the sale of your small business. Non-concessional contributions using proceeds from the disposal of small business assets that qualify for certain capital gains tax exemptions (the 15-year ownership or the retirement exemptions) do not count towards the standard contribution caps if within a lifetime limit. The indexed limit for is $1.205 million. Offset capital gains tax with super contributions Another strategy to consider is that if you are selling an investment for a capital profit this financial year, you should consider maximising your concessional super contributions before July 1. Employee contributions As well as making sure you are up to date with your employee superannuation contributions by June 30, prepaying your employee entitlements before the end of the
10 10 Why SMEs are losing the trust factor If your small to medium enterprise is operating under a trust structure, it s important to be aware that changes came into effect from the start of the current financial year that limits the amount of income that can be distributed to minors (children under 18 years of age). The measures were introduced in the federal budget and effectively mean that, as a business owner, you should be seeking advice from your accountant now on what steps you can take (if any) before June 30 to offset the impact on this legislative change on your tax liability. Under the tax system in operation until the start of this financial year, up to $3,300 of business and investment could be distributed tax free from a family trust to trust beneficiaries under the age of 18. Children were eligible for the low-income tax offset income to reduce tax payable on their unearned income, such as distributions from discretionary trusts, interest, dividends, rent and royalties. The new distribution rules The rules have now changed and the Australian Tax Office will now only allow a maximum of $416 to be distributed to minors tax free. Any trust income distributed over this will be taxed at the highest marginal tax rate of 45 per cent. Income that is earned by a minor through work, such as salary and wages, will still be eligible for the low income tax offset. Also, unearned income of minors who are disabled or orphans, as well as compensation payments and inheritances received by minors will not be affected by the changes. The ATO uses an example of a minor who has earned $10,000 of part-time income in the current financial year, and who also receives $2,000 in trust distributes. The minor s part-time income will be subject to normal tax rates, and will incur an unchanged tax liability of $600. This $600 will be offset by the low income tax offset and netted down to $0. However, the additional $2,000 in trust income, taxed at 45 per cent, is not eligible for any tax offset and will therefore attract a tax liability of $900. What should you do? While the opportunity to split income with minors has been reduced, consider minimising tax by earning as much investment income in the name of a lower-earning, lowertaxed spouse. Also, the tax-free threshold will more than triple to $18,200 from , which may provide an excellent incomesplitting opportunity if your spouse earns a low-income or has no income.
11 11 Maximising your deductions before June 30 Small to medium business owners can claim a wide range of tax deductions as part of their normal course of operations, from general office expenses all the way through to vehicle expenses and many other legitimate deductions in-between. Work-related deductions Businesses can claim work-related deductions for up to $300 in business expenses without receipts, though you must be able to account for these expenses if asked. Some additional small deductions for businesses worth considering include: Eligible laundry claims. These can include cleaning expenses incurred for work-related protective clothing, uniforms, occupation-specific clothing, shoes, stockings, and socks. Repair costs for work-related clothing can also be claimed. Costs for purchasing or cleaning plain uniforms and clothes are not deductible. Education expenses. If you re studying in a field directly related to your present job, you may be able to claim for the costs of study. Home-based workers. In some cases, you may be able to claim a deduction for heating, cooling, or lighting office equipment. You may also be able to claim depreciation. Beyond purchasing deductible items before June keeping in mind that there are incentives to defer some asset purchases until the new financial year as a result of changes announced in the latest federal budget below are some areas to consider when it comes to maximising deductions before June 30. Rental property deductions If your business has an opportunity to make payments in advance, there may be an opportunity to maximise deductions in the current financial year. For example, there may be an opportunity for your SME to pay rent six months in advance. This will help reduce the company s tax position before June 30. Repairs and maintenance If you own your own commercial property, there may be an opportunity to spend funds on repairs and maintenance before the end of the financial year. The work being undertaken will need to be paid inside this financial year, and if time is running very tight there is always the option to prepay for work this financial year that will be completed after, but if you are confident it will actually be done. Building depreciation A major deduction item that can often be overlooked is building depreciation. If the building is constructed after 1982, when this depreciation rule came in, there is a 2.5 per cent straight line deduction for things like structural improvements. Certainly these structural improvements would extend to things like driveways and car parks. Also keep in mind that deductions travel from owner to owner as the property is sold, so new owners can also claim the depreciation benefits. Should you gear up? In the current trading environment, gearing up your business to claim a tax deduction can be a double-edged sword. On the one hand, low interest rates make it an attractive option to borrow additional funds to finance business growth. But on the other, with business conditions generally being very tough for many SMEs, it s important to be mindful of cash flow and to ensure your profitability is not impacted as a result of increased borrowings.
12 12 Don t get caught in the SME loan trap The Australian Taxation Office has very specific legislation regarding loans from private companies to shareholders or their associates, and it s important to be aware of the tax consequences of this. Under Division 7A of the Income Tax Assessment Act, advances, loans and other payments or credits to shareholders (or their associates) are, unless they fall within specified exclusions, treated as assessable dividends to the extent that the private company has a distributable surplus. The dividend is taken to be paid out of the private company s profits to the recipient as a shareholder in the private company, and therefore the recipient must declare this as part of their assessable income unless loan agreements are in place, with interest and capital payments meeting minimum standards. What you need to do To prevent shareholders of a small business or their associates from facing the deemed dividends provisions of the Tax Act, there are a few options which should be addressed before June 30. Option one is to repay any amounts that have been borrowed from the business before June 30 so this can be reconciled in the financial accounts for this year. Alternatively the money borrowed from the business can be treated as a dividend distribution, and therefore will be treated as taxable income. The final option is to enter into a complying loan agreement before June 30. If the funds borrowed from the business date back to one or more previous financial years, a loan agreement should be put in place now, and interest and capital payments brought up to date. Your accountant will then need to seek dispensation from the Tax Office to ensure you are not caught in the deemed dividend provisions under Division 7A of the Act. Use of business assets Another aspect of the deemed dividends legislation is the use of business assets by shareholders or their associates for less than market value. Under the law, the deemed dividend component is equal to the price that would have been paid for the use of the assets by an unrelated party, less any amount paid for the use. One solution is to transfer the asset involved out of the company, such as to a shareholder in lieu of a dividend. However, even if the asset is transferred out of the company before June, there could still be deemed dividends for previous private use.