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End of Year Tax Planning 2017

By | Business Bookkeeping Services, External CFO, Tax Advice & Planning | No Comments

With 30 June fast approaching, now is the time to consider your year end tax position. We have compiled the following list of items to assist in the year end tax planning process.

We are always available to answer any queries.

INCOME

Deferral – You may be able to defer sales from the 2017 year to the 2018 year or bring forward sales into the 2017 year in appropriate circumstances
Company Tax Rate – Small Business Entities now include companies with turnover of under $10 Million and will be taxed at 27.5%
Unearned Income / Income In Advance – You should consider whether any income received is in advance of the goods or services being supplied and can therefore be taxable in a future year
Construction Contracts – The ATO allows construction contract revenue to be recognised under various methods and may impact when the revenue is taxable. The application of the different methods must be consistently applied
Interest and Dividends – Income is generally booked as revenue when received. If you have received a loan from a related company or trust you should consider whether a Division 7A dividend is likely to be paid
Personal Services Income (PSI) – If you provide services by yourself through a company or trust it is likely that you have derived PSI and any profits will be attributed to you directly

EXPENSES

Deductibility – You should check whether any expenses incurred during the year may not be deductible
Capital – SBE’s are entitled to an immediate deduction of all assets costing less than $20,000 excl GST, these assets should be bought and installed before 30 June 2017. Any assets over $20,000 will be depreciated in a pool at 15% for the 1st year and 30% for each year after. A pool balance of less than $20,000 can also be written off
Bad Debts – if you write off doubtful debts before 30 June you will be entitled to a tax deduction. You should consider whether you have made all necessary attempts to collect before writing off
Trading Stock – You should perform a stock take to ensure the correct gross profit is being taxed. As an SBE if your inventory movements is under $5,000 each year you are not required to perform a stocktake. You can choose to value your year-end stock as cost, market value or obsolete value
Employee Bonuses – If you are paying bonuses you should ensure that you are committed to paying them before 30 June and some documentation should be kept
Prepayments – As an SBE prepayments that have a period prepaid of 12 months or less are entitled to an immediate deduction

COMPANIES

Super Payments – Make sure all super payments are made and received by the Super Fund before 30 June 2017 to ensure deductible in the 2017 financial year
Maximise Deductible Super Contributions – The concessional cap for the 2017 year is $30,000 for persons aged under 49 at 30 June 2016 and $35,000 for persons aged 49 to 74, so you should consider maximising your contributions. Remember that your 9.5% is counted toward these caps. The cap drops to $25,000 per year for all ages from 1 July 2017
Division 7A Loans – You should review loans before year end to ensure you don’t accidentally trigger a debt forgiveness, deemed dividend etc and arrange a loan agreement with the company
Payment of Dividends – If you plan to pay a dividend or have paid a dividend you need to ensure the payment is allowed as well as documenting it via a Director Minute

TRUSTS

Trustee Resolutions – You should prepare a resolution or distribution plan before 30 June 2017 or earlier depending on your Trust Deed considering all types of income such as dividends, other income, capital gains. This will help to ensure income is not taxed at 49%
Meaning of Income – You should consider the definition of Income as per your Trust Deed to ensure your resolutions are effective in the distributions
Trust to Company Distributions – If these exist you need to consider Division 7A and whether all payments have actually been made to avoid any Unpaid Present Entitlements (UPE)
Family Trust Elections – You should review FTE requirements to ensure that franking credits can flow through and protect bad debts and carry forward losses
Trust Deed – Consider reviewing your Deed to ensure it is appropriate for the proposed distributions

CAPITAL GAINS

Timing of CGT Events – You should consider the timing of a capital gains tax event in respect to which financial year the event falls into noting that contract dates and not settlement dates are generally when the event occurs
Small Business CGT – Consider your ability to reduce any capital gains by applying the concessions
CGT Discount – Where assets are held for more than 1 year they may be entitled to a 50% discount on any CGT payable

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tax deductible expenses – how much are they worth?

By | Tax Advice & Planning | No Comments

Tax deductible expenses

Although we have just started a new tax year, it is still important to understand the value of your tax deductible expenses and the benefit of that spending on your disposable income.

I think in general, we tend to view that if we spend a dollar on tax deductible expenses or assets, it will save us a dollar in tax. Sadly, the tax man is not that generous. In fact, with the ongoing changes to marginal tax rates, there is less advantage given to lower income earners.

Individual taxpayer and the marginal tax rates

To illustrate, let’s consider you, as an individual taxpayer and the marginal tax rates that apply to you for the 2014 tax year:

0 – $18,200 $Nil
$18,200 – $37,000 $Nil plus 19 cents for each dollar over $18,201
$37,001 – $80,000 $3,572 plus 23.5 cents for each dollar over $37,000
$80,000 – $180,000 $17,547 plus 37 cents for each dollar over $80,000
$180,000 and over $54,547 plus 45 cents for each dollar over $180,000

If your taxable income is less than $18,200 per year, you will not pay any tax. Technically, if you buy that tax deductible subscription, you will not have any tax deductible expenses because hey, you’re not paying tax anyway.

But let’s imagine you earn more than $180,000 and you spend a dollar on the same tax deductible subscription. How much tax will you save and get back from the tax man? Any income earned over $180,000 attracts tax at 46.5 cents in the dollar (including the Medicare levy of 1.5%), so a $1 tax deduction will give you a tax saving of 46.5 cents. But what is the actual cost of the subscription once tax is accounted for? The $1 for the subscription less a 46.5 cents tax saving equals an out of pocket cost of 53.5 cents.

Not bad! It’s no wonder those who have taxable incomes over $180,000 say, “I love being in partnership with the Taxman!”

Why do you think people who earn over $180,000 do negative gearing with residential property? It’s because every dollar they lose, the taxman pays nearly half of that loss in tax savings. For the uninitiated, negative gearing involves investing in property or shares etc where the expenses of ownership such as, interest paid, rates, insurance, agent’s commission etc. exceed the rental / dividend income, with the resulting loss being tax deductible expenses claimed against your other income.

But, even though the taxman is paying for nearly half the loss, the investment in the property or shares is only worthwhile if the property or shares go up in value and recover the after tax costs of the years of ownership plus some. Remember, tax is a consideration when negative gearing into assets, but it’s not the only consideration.

So where does that leave you if your taxable income is less than $180,000? Well, it will depend on what your taxable income is. If your taxable income is between $37,001 and $80,000, every dollar you spend on tax deductible costs will earn you a tax saving of 25 cents including the Medicare levy.

Should you rush out and start spending?

Well, the higher your taxable income the more the ATO will shelter the cost, but I would suggest that at lower taxable incomes, incur the cost only if you really need to.

Self Managed Superannuation Fund (SMSF)

Your tax paying entity/company will also have an impact on your tax saving. For example, a company is taxed at 30 cents in the dollar and a self managed superannuation fund (SMSF) is generally taxed at 15 cents in the dollar assuming it is in accumulation phase.

So a dollar spent on a tax deductible expense in a company or SMSF will cost the company 70 cents after tax and the SMSF a significant 85 cents after tax.

It begs the question why negative gearing into property in an SMSF is considered so attractive when you consider that every dollar lost after rental income, the taxman only pays 15 cents. The SMSF funds every dollar lost to the tune of 85 cents. All I can say is that the investment had better be a good one, if it is to recover the after tax losses over the period of ownership and still provide the SMSF with a solid capital gain.

Other tax concessions

Don’t forget there are other tax concessions available that will impact your decision on whether you incur a cost or not. Obtaining a tax deduction in June 2013 will mean that you will receive the tax credit for that cost in your 2013 income tax return, and accordingly you will receive the refund for the expense when you lodge your 2013 tax return. Incurring the cost in July 2013 will mean that you will not receive the tax saving until you lodge your 2014 income tax return and that is at least another 11 months. In essence, timing is a consideration, but only if you really need that tax deduction.

For other tax compelling ways to save tax, read Ryan Miller’s blog, “Want to reduce tax? The tax write-off way”. Always think about the need, the timing and the tax saving (based on the applicable marginal tax rate) when offloading those hard earned dollars of yours.

Small business owners need to meet all their tax and compliance obligations. Visit MYOB’s Tax Changes Information section, specifically prepared to assist startups and small businesses to stay on top of their game with tax changes.

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