Everybody wants to save tax. The late Kerry Packer (Australian billionaire and media magnate) once said in reference to the Australian Government, “Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because as a Government I can tell you they are not spending it that well that we should be donating extra.”
No doubt, Mr Packer had a big tax problem to solve.
Tax planning is a very important part of our role as accountants. With the 2018/19 financial year drawing to a close, now is the time to look at some tax planning strategies to help you minimise your tax liability within the framework of the Australian taxation system.
There are two primary tax minimisation strategies for businesses including:
- Delaying the Derivation of Assessable Income
Of course, there’s no point delaying the receipt of your income if it will cause cash flow problems. You’ll save some tax this year but it might put your business under financial pressure.
Please note, not banking amounts received before June 30 until after June 30 does not qualify because the income is deemed to have been earned when the money is received or the goods or services are provided (depending on whether you are on a cash or accruals basis of accounting).
- Cash Basis Income – Some income is taxable on a cash receipts basis rather than on an accruals basis (e.g. rental income or interest income in certain cases). You should consider whether some income can be deferred in those instances.
- Consider delaying your invoices to customers until after July 1 – this will push the derivation of the income into the next financial year and defer the tax payable on that income. If you operate on the cash basis of accounting, you simply need to delay receiving the money from your customers until after June 30.
- Lump Sum Amounts – Where a lump sum is likely to be received close to the end of a financial year, taxpayers should consider whether this amount (or part thereof) can be delayed or spread over future periods.
- Bringing Forward Deductible Expenses or Losses
- Prepayment of Expenses – In some circumstances, Small Business Entities (SBE) and individuals who derive passive type income (such as rental income and dividends) should consider pre-paying expenses prior to 30 June 2019. A tax deduction can be brought forward into this financial year for expenses like:
✓ Employee Superannuation Payments including the 9.5% Superannuation Guarantee Contributions for the June 2019 quarter (that have to be received by the
Superannuation Fund by June 30, 2019 to claim a tax deduction).
✓ Superannuation for Business Owners, Directors and Associated Persons
✓ Wages, Bonuses, Commissions and Allowances
✓ Contractor Payments
✓ Travel and Accommodation Expenses
✓ Trade Creditors (if on a cash basis of accounting)
✓ Rent for July 2019 (and possibly additional months)
✓ Printing, Stationery and Office Supplies
✓ Advertising including Directory Listings
✓ Utility Expenses – Telephone, Electricity & Power
✓ Motor Vehicle Expenses – Registration and Insurance
✓ Accounting Fees
✓ Subscriptions and Memberships to Professional Associations and Trade Journals
A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2019 for services to be rendered within a 12-month period. While this strategy can be effective for businesses operating on a cash basis (not accruals basis), we never recommend you spend money on items you don’t need. However, paying expenses in June that are due in July could save you some tax this financial year and provided your cash flow permits, it makes good business sense.
Businesses should also consider:
- Accounts Payable – If you operate on an accruals basis and services have been provided to your business, ensure that you have an invoice dated June 30, 2019 or before, so you can take up the expense in you accounts for the year ended 30th June 2019.
- Stock Valuation Options – Review your Stock on Hand and Work in Progress listings before June 30 to ensure that it is valued at the lower of Cost or Net Realisable Value. Any stock that is carried at a value higher than you could realise on sale (after all costs associated with the sale) should be written down to that Net Realisable Value in your stock records.
- Compulsory Superannuation Guarantee – as mentioned above, if you want a tax deduction in the 2018/19 financial year, the superannuation fund must receive the funds by 30 June 2019. The Tax Office doesn’t consider a contribution to be made until the amount is actually credited to a super fund’s bank account so an electronic transfer to another bank account on June 30 is not necessarily considered paid. We strongly recommend you make the payment a week or so before June 30 and then follow up with the super fund to ensure the funds have been received. Don’t risk the tax deductibility of what can often be a significant amount by leaving payment to the last minute.
- Write-Off Bad Debts – if you operate on an accruals basis of accounting (as distinct from a cash basis) you should write off bad debts from your debtors listing before June 30. A bad debt is an amount that is owed to you that you consider is uncollectable or not economically feasible to pursue collection. Unless these debts are physically recorded as a ‘bad debt’ in your system before 30th June 2019, a deduction will not be allowable in the current financial year.
- Repairs and Maintenance Costs – Where possible and cash flow allows, consider bringing these repairs forward to before June 30. If you don’t understand the distinction between a repair and a capital improvement, please consult with us because some capital improvements may not be tax deductible in the current year and could be claimable over a number of years as depreciation.
- Obsolete Plant and Equipment should be scrapped or decommissioned prior to June 30, 2019 to enable the book value to be claimed as a tax deduction.
- Immediate Write Off for Individual Small Business Assets – The accelerated depreciation write-off for small businesses has been extended to 30th June 2020 and the threshold has increased to $30,000. The asset can be new or second hand and a number of conditions apply.Here are some key points to consider:
- The amount must be under $30,000 (or $20,000 depending on date of purchase) exclusive of GST (i.e. $33,000 including GST)
- If you borrow to purchase the asset, the asset is still eligible
- The asset must be installed and ready to use by the deadline (purchasing a car to be delivered in the future won’t qualify until the car is actually delivered)
- To claim the write off on a motor vehicle you will need to have a valid log book and claim only that percentage of the cost as an immediate write off
- Some taxpayers may try to reduce the cost of an asset to under $30k by using trade- in when purchasing the asset (for example a car). However, the monetary value of the trade-in will form part of the asset cost and not reduce the cost of the asset
- Any attempt to manipulate invoices etc. will attract the ATO’s use of the anti-avoidance rules, thereby eliminating the $30,000 write off
- If your business has a small profit or even a loss, the write off will be of little or no benefit in the current year (losses are not refundable but can be carried forward to the next year)
- Building structural improvements are not eligible for the instant write off
- Depreciating assets valued at more than $30,000 will be depreciated in one pool at a rate of 15% in the first year and 30% in future years
- If your pool balance at the end of the year is less than $30,000 before applying any other depreciation deduction, the entire pool balance can be written off
- If your business is not a ‘Small Business Entity’ you will need to depreciate all assets purchased over $100. Any assets purchased for $100 or less can be written off immediately
- Superannuation Contributions – some low or middle-income earners who make personal (after-tax) contributions to a superannuation fund may be entitled to the Government Co-Contribution. In 2018/19, the maximum $500 co-contribution is available if you contribute $1,000 and earn $37,697 or less. A lower co-contribution amount may be received if you contribute less than $1,000 and/or earn between $37,697 and $52,697.
- Capital Gains/Losses – the timing of the sale of assets is critical and deferring the sale until after June 30 will defer the tax if you make a capital gain. Of course, if you have made other capital gains during the financial year it could be worth bringing forward the sale of an asset to crystallize a loss that you can offset against other capital gains. Note that the contract date is often the key date for when a sale has occurred for capital gains tax purposes, not the settlement date.The above strategies are general in nature and depending on your circumstances (including your turnover and whether you are on a cash or accruals method of accounting), terms and conditions may apply. We encourage business owners to schedule a meeting as soon as possible to assess your options and this might require the preparation of a preliminary calculation of your taxable income for the year ending June 30, 2019.