Key year end tax planning strategies as 30 June approaches
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.
Purchasing fixed assets
Entities with turnover less than $2M are able to claim an immediate tax deduction for assets costing less than $20,000 as long as they are installed and ready for use before financial year end. If you have a turnover that is less than $2M and you need to buy assets we recommend that you consider purchasing these before year end to obtain a tax deduction in the 2016 year.
If you have a turnover greater than $2M you are only entitled to an immediate tax deduction for assets costing less than $100 so the above concessions are not available to you for the 2016 year. However, in the budget released in May 2016 the $20,000 immediate tax deduction will be extended to entities with turnover between $2M and $10M from 1 July 2016. Based on this we are strongly recommending to hold off purchasing higher value assets until the 2017 financial year.
Claiming depreciation – less than $2M turnover only
Under the simplified depreciation rules you are entitled to have all of your assets depreciated at 30% (15% first year) for those assets greater than $20,000. You should ensure that all qualifying assets are identified to ensure that the maximum depreciation deduction is claimed.
You are also able to write off a pool balance if it is less than the $20,000 threshold so please consider reviewing all asset classes.
For cars, the maximum cost you can depreciate for the 2015/16 year is $75,375 including GST for fuel efficient vehicles and $63,184 including GST for others. You must also ensure that depreciation is only claimed on the business use portion.
Capital Works are an exception to the Simplified Depreciation Rules and are generally depreciated at 2.5% per annum.
Superannuation – payment of liabilities
Superannuation is only deductible to the business when it is paid and also it must be paid on time. It is advisable to ensure that the superannuation liability relating to the June 2016 quarter is paid before year end, this will ensure a full deduction. You should also ensure that all other outstanding payments relating to previous quarters are made before 30 June and that the Superannuation Guarantee Charge forms are lodged for overdue payments.
Superannuation – maximising contributions
Business owners should also ensure that they have maximised their concessional contributions before year end if there is available cash in the business. The concessional contributions cap from 1 July 2015 is $30,000 for all individuals, unless you were 49 years of age or older which means your cap is $35,000. This amount is coming down to $25,000 for all people as of 1 July 2017 as per the recent budget.
When maximizing the concessional contributions you need to remember that the limit includes your compulsory 9.5% and that all payments must be received by the super fund prior to 30 June.
Deferral of taxable income
You should take care to identify which of your sales will fall in June and which will fall in July or later. Sales that occur in July or later will be taxed in the following year. This will also ensure that you pay less company tax as the tax rate for business with turnover less than $2M is reduced from 28.5% to 27.5% from 1 July. If you are a cash basis taxpayer for tax purposes and a sole trader, the income will be derived in the year in which the cash is received. If you are an accruals basis taxpayer the income will be derived in the year in which you issue an invoice.
Further, as part of the May 2016 budget, the 27.5% company tax rate will also be extended to businesses with turnover of less than $10M from 1 July 2016.
Make prepayments – less than $2M turnover only
Business with less than $2M turnover are entitled to a deduction for prepayments made for greater than $1,000 as long as the eligible service period is less than 13 months. You may consider prepaying a portion of rent or interest on borrowings. Prepayments under $1,000 are deductible regardless of the service period.
Write off obsolete stock
Make sure you conduct a stock take before the end of the financial year. Any obsolete stock that is identified should be written off. This will reduce your tax liability.
Stock take concession – less than $2M turnover only
If your turnover is less than $2M you do not have to perform a stock take if you assess that the value of your inventory will not vary by more than $5000 in the tax year. Also, consider the best method to value your trading stock either by choosing cost, sales value or market value.
Write off bad debts
If you are an accruals basis taxpayer and have bad debts, you should consider writing them off before 30 June to ensure a tax deduction is claimed in the current year. If you pay your GST on an accruals basis, any bad debt adjustment is likely to result in a refund of GST that has already been paid on a previous BAS. When writing off bad debts, make sure you follow the rules to ensure that the debt is bad and that the necessary steps have been followed to collect the debt.
Timing of disposal of assets
If you are planning to scrap fixed assets, consider doing it before 30 June to ensure a deductible adjustment.
Donations to charity
If you plan to make donations to your favourite charity, ensure you do so before 30 June. Remember, if you are expecting a tax loss, your donations will not be tax deductible in the year paid.
You can choose to spread the tax deduction over a period of up to five income years if it was a gift of money of $2 or more, a property valued at more than $5,000 or a property under the Cultural Gifts Program.
Capital Gains Tax
If you are trading as an individual or through a trust you should check whether the 50% General Discount is applicable for any proposed asset disposal. This requires that you have held the asset for at least twelve months. This means that you need to consider the timing of the disposal. In addition you may be entitled to further small business concessions and discounts. If you are considering the disposal of an asset, you would be wise to contact us so that we can help you to understand the consequences of the transactions and the concessions that may be available.
If you or any of your associates have received a benefit, had a debt forgiven or borrowed money from your company or trust then Division 7A rules may apply to you.
In today’s complex business environment, getting the right advice can mean the difference between success and failure. We are here to help! Empower your business and contact our team with any questions or to arrange a meeting to review your tax planning options.