Understanding what the potential tax liability will be for your business and allowing time for tax planning can result in considerable tax savings and with the end of the financial year fast approaching, now is a critical time to assess your year-end tax planning and tax compliance considerations.
The purpose of this guide is to highlight some year-end tax planning opportunities as well as some year-end compliance requirements you should be considering.
Small business entity?
From 1 July 2016, the small business entity (SBE) turnover threshold will be increased from $2 million to $10 million. Importantly, all business entities (incorporated or otherwise) that meet the new $10 million aggregated turnover test will be able to access a range of tax concessions.
To qualify as a SBE, the business must have an aggregated turnover (that is, your annual turnover plus the annual turnover of any business connected / affiliated with you) of less than $10 million and be operating a business for all or part of the 2017 year.
Relevant year-end tax planning initiatives to which the increased $10 million threshold opens up for the 2017 tax year include:
- immediate deductibility for small business start-up expenses;
- simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);
- simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;
- immediate deductions for certain prepaid business expenses (see further below);
- the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO; and
- FBT car parking exemption.
Small business taxpayers can claim an immediate deduction for certain prepaid (up to 12 months) business expenses before 30 June 2017 and obtain a full tax deduction in the 2016/2017 financial year.
The prepaid expenditure concession provides SBEs with cash-flow relief by enabling them to bring forward deductions that would otherwise be apportioned over two income years.
Examples of business expenditure items that you may wish to prepay over the coming months before 1 July include: • Rent • Insurance • Advertising • Repairs to business assets • Subscriptions • Business trips • Deductible interest • Seminars and conference bookings • Contract payments
Immediate deduction for depreciable assets costing less than $20,000
This concession, which essentially provides an immediate deduction for most depreciating assets costing less than $20,000 has been a very popular measure for small business taxpayers since the rules came into effect from 12 May 2015. The increased threshold was due to revert back to its original threshold of $1,000 from 1 July 2017, however the Government recently stated it will extend the availability of the $20,000 concession until 30 June 2018, giving SBEs another year to access the concession.
The popularity of this concession stems from the ability to bring forward tax deductions rather than having them spread out over more than one year. This can have significant benefits, however it is important to understand some of the practical and commercial issues regarding the application of the simplified depreciation rules for small business. Such considerations may include the optimal timing of deductions (e.g. a tax deduction is of limited benefit if your business is not paying any tax, or could better make use of deductions in later years), the impact that asset purchases may have on cash flow, and how the choice to access the $20,000 immediate deduction automatically triggers pooling rules that may not be beneficial to your business.
Broadly, to claim a deduction in 2016/2017 income year, a SBE must acquire an asset and must first use it or have it installed ready for use in its business on or before 30 June 2017.
Please contact us to ensure your future acquisitions will qualify as intended.
Other depreciation concessions for SBEs
Other depreciation concessions for SBEs include a write off of low value pool balances of up to $20,000 on or before 30 June 2018.
Depreciating assets costing more than $20,000 can be pooled and depreciated at a rate of $15% in the first year and 30% in subsequent years.
Concessional company tax rates
From 1 July 2016, the corporate tax rate for small businesses (i.e. businesses with an aggregated turnover of less than $10 million) has been reduced further to 27.5%. From 1 July 2017, this reduced corporate tax rate will apply to all business with an aggregated turnover of less than $25 million.
General tax planning tips
The following key points are helpful in terms of general tax planning.
- Delay income – Where appropriate, and if it will not adversely affect your cash flow, consideration should be given to deferring the recognition of income until after 30 June 2017.
- Prepaid expenses (see above) – A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2017 for services to be rendered within a 12 month period.
- Superannuation Guarantee Contributions (SGC) – The deadline for employers to pay their superannuation guarantee contributions for the 2016/17 financial year is 28 July 2017. However, if you want a tax deduction in the 2016/17 year the superannuation fund must receive the funds by 30 June 2017. The Tax Office deems a contribution made by electronic transfer is not paid until the amount is actually credited to a super fund’s bank account. As such, don’t leave the payment to the last minute.
Please note that the failure to make the required SGC by the deadline of 28 July 2017 will mean you incur a non-deductible levy equal to the unpaid contributions together with a penalty.
The SGC rate for the 2016/17 year is 9.5% of salaries. Note that there is no upper age limit for making super guarantee contributions for an employee. Removal of the limit is to encourage mature workers to stay in the workforce. This means you may need to make super guarantee payments for eligible employees aged 70 years or over.
- Bad debts – Consider writing off any bad debts before 30 June 2017. For tax purposes a bad debt is an amount that is owed to you that you consider is uncollectable or it is not economically feasible to pursue collection. However, unless these debts are physically recorded as a bad debt in your debtor system before 30 June 2017, a deduction will not be allowable in the current financial year.
- Repairs and maintenance – Are there any repairs and maintenance you should carry out prior to 30 June 2017?
- Depreciation claims – further to the SBE depreciation concessions discussed above, a review of your depreciation schedule may give rise to a number of opportunities, including the ability to scrap and write off amounts, self-assessing effective lives, or allocating assets to a low value pool.
FBT exemptions for certain work related items
The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.
Items that can be packaged include Handheld/Portable Tools of Trade, Computer Software, Notebook Computers, Personal Electronic Organisers, Digital Cameras, Briefcases, Protective Clothing, and Mobile Phones.
If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.
You should buy these items before 30 June 2017.
Businesses that are required to conduct a stocktake of all trading stock should do so as close as possible to the end of each income year. Note: simplified trading stock rules for SBEs (discussed above).
You can choose to value trading stock via one of the following methods;
- market selling value; or
- replacement value.
Whilst the opening balance of trading stock has to reconcile to the closing stock balance of the previous year, there is an option in regards to the method that the taxpayer may choose for the current financial year.
A lower trading stock valuation may result in lower taxable income. A review of all trading stock will identify any obsolete stock (which can be valued at nil) and help minimise your taxable income.
You may be able to claim the expenses you incur in creating or maintaining a website for your business as a deduction. Such costs include the costs of software, website development, domain name registration and server hosting.
Generally, you can deduction these costs in the year you incur them. You can also depreciate the costs of a website over time. You do this by various depreciation methods, including putting the expenses in to a pool.
If your company is planning on paying directors fees prior to 1 July 2017, you may want to consider putting a resolution in place by this date and pay the fees in the following financial year.
The benefit in such a strategy is that while the company claims a tax deduction for the director’s fees in the year that it makes the resolution, it doesn’t actually make the payment until the following financial year.
For tax purposes, accrued director’s fees are only deductible at the point in time that a company is definitely committed to making the payment. Consequently, it’s essential that your company, via an appropriately worded minute, makes an unconditional resolution in a shareholders’ meeting making the company “definitely committed” to making the payment. The resolution must not be conditional; it must not be subject to cash-flow considerations etc.
Please note also that directors fees are subject to PAYGW and superannuation requirements.
Private companies and deemed dividends
It is critical that all transactions between private companies and related trusts and individuals be identified and reviewed prior to 30 June 2017.
Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principal and interest repayments are made by 30 June 2017. Current year loans must be either paid back in full or have a loan agreement entered in before the due date of lodgement for the company return or risk having it counted as an unfranked dividend in the return of the individual.
Watch out for any unpaid distributions owing to corporate beneficiaries as they similarly will need action and documentation before 30 June.
Discretionary trust resolutions
Income distribution resolutions must be drafted by the 30 June 2017 or earlier if required by the trust deed in order to avoid the trustee (or any default beneficiaries) being subject to tax (49% in the trustee’s case).
Whilst considering who the beneficiaries will be for the 2017 year, consideration needs to be provided to the Trust Deed which defines whom qualifies as an eligible beneficiary. Beneficiaries such as related companies, trusts and de facto spouses may not be covered by this definition.
Trustees may decide to distribute its profit to beneficiaries with low tax thresholds. However, whilst it may seem like a positive tax saving strategy, the unpaid distribution can be called upon at any time from the beneficiary.
Furthermore, the trustee may consider distributing to company beneficiaries. Such distributions will be taxed at the corporate tax rate, being 27.5% for entities under the $10 million threshold and 30% for all other corporate entities.
There are many other critical areas of trust compliance. We recommend you contact us to ensure that these matters are properly attended to prior to year-end.
The abolition of the Deficit Levy from 1 July 2017 presents a tax-planning opportunity for high-income taxpayers. By way of background, the Deficit Levy was introduced on 1 July 2014. It is a 2% levy which applies on that part of an individual’s taxable income which exceeds $180,000. If you are on track to earn over this amount in 2016/2017, then consider deferring income where possible until after 30 June 2017 and enjoy a 2% tax saving.
Income deferral and expense acceleration
Similar principles apply for those individuals earning below $180,000 who are not impacted by the Deficit Levy as follows:
If you will be earning more money this financial year (2016/2017) than next year (2017/2018) then consider deferring income until after 30 June 2017 where possible. This may involve for example deferring taxable capital gains by simply delaying the sale of the asset. Or it may involve delaying your retirement slightly and thus receiving any payout in 2017/2018 when you will likely be earning less income than when you were working.
Or if you have made a capital gain, and are holding a loss making CGT asset, you may wish to consider crystallising that loss – however, in pursuing this strategy, we recommend you speak us before any sale.
If you are looking to minimise your taxable income in 2016/2017 (perhaps you will be earning more money this financial year than next year, or you just need some cash-flow relief) consider bringing forward some planned deductible expenditure to before 1 July.
Individual taxpayers have access to a variety of different deductions and offsets which they may be able to claim against their assessable income. However, given increased ATO scrutiny on work related expenses and rental property deductions, we recommend that you claim only what you are legally entitled to claim and ensure that you have all necessary receipts or credit card statements to back-up your claims.
Maximise motor vehicle deductions
If you use your motor vehicle for work-related travel, there are two choices for how you can claim work related travel. If your annual claim for kilometres travelled exceeds 5,000 kilometres, you will need to ensure that you have kept an accurate and complete log book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2017. You should make a record of your odometer reading as at 30 June 2017, and keep all receipts/invoices for motor vehicle expenses.
Alternatively, if your annual claim for kilometres travelled does not exceed 5,000 kilometres, you can claim a deduction for your vehicle expenses on a 66 cents per kilometre basis (regardless of engine type) based on a reasonable estimate.
Rental property owners
Investors in residential rental properties should be aware of proposed changes (as announced in the recent Federal Budget) to certain tax deductions available to residential rental property owners.
From 1 July 2017, investors will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent on a residential rental property. Investors who engage third party property managers to manage their property, including carrying out inspections, can continue to claim tax deductions for the fees paid.
Also from 1 July 2017, depreciation deductions on plant and equipment will be limited to expenses actually incurred by investors in residential rental properties (i.e. the investor must purchase the depreciable plant themselves in order to claim the depreciation). This means that when a subsequent investor purchases residential property which includes items of depreciable plant and equipment, they will not be able to claim depreciation deductions for those pre-existing items that they inherit with the property. Going forward it is now proposed that the value or cost of items of existing plant and equipment will be reflected in the cost base of the property for CGT purposes.
This proposed measure will not, however affect existing investments held at 9 May 2017, with plant and equipment forming part of residential rental properties continuing to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.
It is noted that these measures are intended to apply solely to residential properties. Investors who own commercial rental properties will not be affected by these measures.
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. Taxpayers should check their eligibility for tax offsets which include, amongst others, the low-income tax offset, senior Australians and pensioners offset and the offset for superannuation contributions on behalf of a low-income spouse.
As you can see there are many factors that need to be considered before the end of the financial year. If you wish to discuss any of the above in further detail, please contact our office on (08) 6311 6900.