The 2016 end of financial year (EOFY) is rapidly approaching and you should be considering the available options that may just boost your business. So, as thoughts turn to getting your business’s house in order before the EOFY, what tips and traps should small business owners be aware of?
Here are the top 6 practical strategies on how to minimise your 2016 tax.
$20,000 instant asset write-offs
Write-off stock & Bad debts
Claim deductions for expenses not yet paid
Prepaying expenses before year end can reduce your current year tax liability. If payments are due early next financial year, a pre-payment may entitle you to the tax benefit much earlier.
A small business can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. The most common expenses that you should consider prepaying by 30 June include lease payments, interest (make sure your financial institution is aware of what you are doing. Otherwise the payment may be used to reduce the principal, which is not tax deductible), rent, business travel, insurances, business subscriptions, etc. Please note that your business must be able to make the prepayment under the relevant contractual agreement to get the immediate tax deduction this financial year – you cannot simply choose to prepay the expense.
Also, Individual taxpayers such as employees and investors can claim a deduction for a prepayment of up to 12 months of expenses. Typically, this includes subscriptions, memberships and interest paid on investment loans (including negative gearing property loans).
Write-off for assets up to $20,000
As announced in the 2015 Budget, a small business is able to claim an immediate tax deduction for ‘individual’ assets (including motor vehicles) costing less than $20,000 (GST exclusive), including individual assets that form part of a set. This provides a great opportunity to get an upfront deduction for assets that would otherwise be depreciated over their useful lives.
This immediate write-off applies equally to the purchase of new and second hand assets which are used in the business. In addition assets do not need to be purchased outright, they can be financed by way of loans or hire purchase arrangements.
To access the small business write-off, the only criteria that counts is turnover. The turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive per annum. The turnover for either the current financial year or the previous financial year can be used. To be entitled to the deduction this financial year the asset needs to be ordered, used, or installed ready for use by 30 June 2016.
Defer income & capital gains tax
If you’re in a position to defer taxable income (by invoicing late or delaying completion of a job for instance) until the start of the new tax year, this revenue will be taxed next year at the lower rates coming into force from 1 July 2016.
Businesses that utilise a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay “receipt” of the income until after 30 June 2016.
Businesses that utilise a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the “issuing of invoices” until after 30 June 2016.
Realising a capital gain after 30 June 2016 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes. In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.
Make Super contributions by 30 June 2016
The maximum concessional superannuation contribution limits for the 2015/16 financial year are $35,000, if you are aged 50 and over on 30 June 2016 and $30,000, if you are aged 49 and under on 30 June 2016.
This means that your business can claim a tax deduction for all concessional contributions made for employees. In order to claim a deduction in the 2016 financial year, the contributions must to be received by the superannuation fund by 30 June 2016.
If you are self-employed and making a personal superannuation contribution, ensure you obtain the correct documentation from your superannuation fund to substantiate claiming the deduction before lodging your tax return. In order to obtain a deduction in the 2016 financial year, the contribution must to be received by your superannuation fund by 30 June 2016.
Care needs to be taken where last minute contributions are made by cheque or electronic fund transfer (EFT)to ensure that the deduction can be claimed in the current financial year. Where the super contribution is made by cheque and the fund receives it by 30 June 2016, the deduction is allowed in the current financial year so long as the trustee banks the cheque within 3 business days and the cheque is not subsequently dishonoured. Where the contribution is by EFT, it is taken to be made when the amount is “credited” to the bank account of the fund and not when the transfer is made. In order to ensure that you can claim a deduction for the superannuation contributions, it may be prudent to make these payments in the week commencing 20 June 2016.
You may also want to consider spouse super contributions. Spouse contributions tax offset applies to superannuation contributions made on behalf of non-working or low income-earning spouses, whether married or defacto. The maximum tax offset is 18% of super contributions of up to $3,000 resulting in a tax offset of $540 (maximum) each financial year.
Write-off Bad debts
If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in the 2016 financial year, so long as the debt is declared bad by 30 June 2016. We also recommend recording this in the minutes of the business. Your business can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for at least 12 months.
Write-off slow moving or obsolete stock
All businesses have the option of valuing trading stock on 30 June 2016 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
Claim deductions for expenses not paid at year end
All businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not paid by 30 June 2016. This may include:
Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2016 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2016/17 year when the amount is actually received.
Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2016, but have not been paid until the new financial year. This also applies to staff bonuses and commissions.
If you choose to implement any of the above tax strategies, your 2016 income tax obligations should be impacted positively.
If you pay quarterly PAYG instalments, we should consider varying the instalment amount for the June 2016 quarter, as the estimate of business income tax payable for the year may be less than the instalments raised by the ATO.
If you have any questions or would like some advice on your pre-30 June plans, please call Cam on 03 9583 9583. Visit our downloads page and have a look at the 2016 Small Business Taxation checklist.
Now you can relax and get ready for a bigger & better 2017 financial year.
Other EOFY considerations:
Motor vehicle log books
To reduce your Fringe Benefits Tax or to maximise your vehicle deductions, it is a good idea to keep a log book if you haven't kept one in the last 5 years. A log book must be maintained for a continuous 12 week period and is valid for 5 years. For example, if you have not maintained a log book since the 2011, you will need to start recording prior to 30 June 2016.
Trust distribution resolutions should be put in place by June 30. If you are considering making a distribution to a new beneficiary in 2016 you will need to report the tax file number to the ATO by 28 July. Also, if a distribution is to be made to a beneficiary who has turned 18 during the year, the tax file number of the beneficiary will need to be reported for the first time.
ATO rules require that stock be physically counted at year end unless there is a perpetual stock record system. Stock take records should be retained as part of the business records. Small Businesses can be exempt from conducting a yearly stock take if the value of stock has moved by less than $5,000 during the year. If you expect to purchase consumable items such as office supplies and cleaning products in the coming months, consider purchasing them before 30 June 2016. This will enable a tax deduction to be claimed in the 2016 financial year
PAYG payment summaries for employees
Payment summaries should be provided to your employees by no later than 14 July. The PAYG payment summary statements need to be lodged with the ATO by 14 August.
Don’t forget to include reportable employer super payments and reportable fringe benefits.
Tax exempt minor benefits
Employers can provide minor and infrequent benefits, valued less than $300, to employees. Gift cards of less than $300 are tax exempt to the recipient, deductible and FBT free for the employer. If you want to give a year-end bonus, consider a gift card rather than a cash bonus.