The 2017 end of financial year (EOFY) is fast 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?
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, 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 Federal 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.
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.
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 2017. 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 2017.
Realising a capital gain after 30 June 2017 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 2017
The maximum concessional superannuation contribution limits for the 2016/17 financial year are $35,000, if you are aged 50 and over on 30 June 2017 and $30,000, if you are aged 49 and under on 30 June 2017.
From 1 July 2017, the concessional contributions cap will be reduced to $25,000 for all individuals regardless of age.
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 2017 financial year, the contributions must to be received by the superannuation fund by 30 June 2017.
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 2017 financial year, the contribution must to be received by your superannuation fund by 30 June 2017.
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 2017, 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 ending 16 June 2017.
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 2017 financial year, so long as the debt is declared bad by 30 June 2017. 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 2017 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
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.
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 2017. This may include:
Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2017 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 2017, but have not been paid until the new financial year. This also applies to staff bonuses and commissions.
Let’s have a chat
If you have any questions, let’s set up a time to discuss and agree on your pre-30 June action plan. Email me at firstname.lastname@example.org or call on 03 9583 9583.
Now you can relax and get ready for a bigger & better 2018 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 2017.
Trust distribution resolutions should be put in place by June 30. If you are considering making a distribution to a new beneficiary in 2017 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 2017. This will enable a tax deduction to be claimed in the 2017 financial year
PAYG payment summaries for employees
Payment summaries should be provided to your employees by no later than 14 July 2017. The PAYG payment summary statements need to be lodged with the ATO by 14 August 2017. Don’t forget to include reportable employer super payments and reportable fringe benefits.
The information presented is general in nature and not to be used, relied or acted upon without seeking professional advice to ensure that the information appropriate for your individual circumstances. National Taxation accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. www.nationaltaxation.com.au. ABN 63 665 545 130.