EOFY is just a matter of days away, so what should you rush through before 30 June and what’s best left until the next financial year? Here’s a look.
The world is moving at a frantic pace and businesspeople need to move with it to stay ahead. Same goes for tax planning. The days where businesspeople frantically search at the end of the financial year for ways to reduce their tax bills should be less common these days. Small business operators need to be more proactive with the help of their public accountant to make the most of ever-changing tax rules and tax-saving opportunities. Ideally, astute small business owners should be implementing strategies at the start of each financial year that help them avoid the end of year scramble.
Even with the best intentions of staying ahead there are changes that occur during the course of the year that require things to be done before 30 June and this looming year-end is no exception. This is another good reason to visit or call your accountant prior to end of the year to obtain an update on what needs to be done.
Below are some bread and butter end of year tax strategies for small business owners. Amongst the mix however are a couple of suggestions which will need to actioned before year’s end as the opportunity window will disappear forever due to changes to the rules.
1. To buy or not to buy before 30 June – small asset purchases
The answer to this will depend on the amount you intend to spend. This year’s decision is not as straightforward as the threshold for small asset write-off for small businesses goes up from $1,000 to $6,500 from 1 July 2012. If your asset purchase will cost less then $1,000, then there is a cashflow advantage to purchase before year end as per normal practice. If the asset purchase exceeds $1,000 but costs less than $6,500, there will be an advantage to delay the purchase until the new financial year and obtain a 100 percent write off in your 2012/13 tax year. Faster write off for tax translates to cashflow benefits as you are able to bring forward deductions which reduce your tax bill.
2. Motor vehicles
If you are planning to update or buy a vehicle then it might pay to hold off until after 30 June 2012. Small businesses will be entitled to an additional one-off depreciation deduction of $5,000. The remainder of the purchase cost is depreciated as part of the general small business pool at 15 percent in the first year and 30percent in later years. The positive aspect of this initiative is that it applies to both used and new motor vehicles. If a tradesman purchases a ute that costs less than $6,500 after 1 July 2012, which is used for business purposes only, then they will be able to claim the full amount as the vehicle is under the small asset threshold. If the motor vehicle cost say $14,000, the business could deduct $6,350 in its first year ($5,000 + 15 percent x ((100 percent x $14,000) – $5,000) = $6,350. If this vehicle was purchased before 30 June, the depreciation claimable would amount to $2,100 so the added tax advantage and cashflow benefit is quite significant.
3. Entrepreneurs tax offset (ETO)
This financial year will be the last where businesses with a turnover of less than $75,000 will be able to claim entrepreneurs tax offset. The ETO provided small businesses with a tax offset of up to 25 percent of their tax liability on their business income. Over 400,000 small businesses claimed this offset in 2008/09. The ETO will cease from 1 July 2012 to make way for higher small asset write off threshold (see above). If you meet the eligibility requirements make sure you fully exploit this offset before it disappears.
4. Superannuation cap to be reduced to $25,000 (regardless of age)
The Government was proposing to reduce the cap that applies to concessional superannuation contributions on 1 July 2012 from $50,000 per annum to $25,000 per annum for people aged 50 or over with more than $500,000 in superannuation. This measure has now been deferred until 1 July 2014. As a result, there will be only one concessional contribution cap regardless of age which will play havoc with retirement plans for those over 50.
Concessional contributions include the superannuation guarantee and other employer contributions (such as salary sacrifice), personal contributions claimed as a tax deduction (subject to 10 percent rule), and other amounts.
If you are likely to be impacted by the concessional cap reduction, you should consider taking full advantage of the current limit of $50,000 prior to 30 June this year. It’s a no-brainer if you have the cashflow to do it. Even if you have less than $500,000 in superannuation, it’s still a good strategy to top up as much as possible as you cannot carry over any unused cap in following years. If you are 50 or over, you are likely to have less than 15 years until you retire. So with the retirement clock ticking, under utilising this year’s cap means less money to generate a tax-free income at age 60 and over.
In the Federal Budget just handed down, the Government also proposes to introduce a superannuation surcharge for high income earners whose adjusted taxable income exceeds $300,000. Instead of 15 percent tax rate, a rate of 30 percent will apply to their concessional contributions. This is another good reason for high income earners to maximise this year’s concessional contributions ahead of the proposed super surcharge.
Warning: Be careful not to breach the contribution caps as you will be stung by draconian excess contribution tax. Whilst new rules allow you to get a refund of up to $10,000 of excess contribution for first time offenders who exceed the cap, it’s a hassle you can do without.
5. Non concessional contributions
You will need to review your concessional contributions and adjust them where necessary if you are over 50 years of age and contributing over $25,000 in concessional superannuation. Where surplus investible funds become available, it may be worthwhile making additional non-concessional superannuation contributions, which are subject to a different cap ($150,000 or $450,000 – bring forward three years’ worth).
Whilst concessional contributions are the most tax effective way to invest in superannuation, after tax or non-concessional contributions still make sense as they too enjoy tax benefits. The fund only pays 15 percent tax on earnings and once you start a pension both earnings and your pension is tax free after age 60, setting yourself up for tax free income forever.
6. Pay employee and personal superannuation
In order to obtain a tax deduction for employee and personal superannuation you need to ensure that you have physically paid superannuation contributions before 30 June. For most other expenses, businesses are entitled to claim an immediate deduction for certain expenses that have been incurred but not paid by 30 June. This is not the case with superannuation, as the rules stipulate that they must be physically paid and received by the superfund before year end. If paying by cheque, it needs to be received by the trustee before the end of the year and promptly banked within three business days. If the superannuation contributions are paid via electronic transfer, then they must be in the funds bank account by year’s end.
Warning: The 30 June 2012 falls on a Saturday this year and banks do not process transfers on non-business days.
7. Obsolete stock or capital items
If you have slow moving stock which is unlikely to sell, then the best option is to bite the bullet and physically write it off prior to the 30 June to obtain a tax deduction. For the remaining stock on hand you have the choice of valuing it at actual cost, replacement cost or market selling price. The closing value of trading stock effectively forms part of assessable income, so a lower value will result in a deferral of income and therefore tax. Similarly, for capital assets that can no longer be used. You can claim a tax deduction for the written down value of any obsolete assets that are actually written off in the fixed asset register on or before 30 June.
8. Write off debtors
Similar to writing off obsolete stock, a business can claim a deduction for a debt that was physically written off prior to 30 June. If you are on a cash basis you cannot get a deduction as the debt must have been originally shown as income in order for the write-off to be allowed. Also do not forget to claim a refund of the GST paid to the ATO on the sale, as the GST adjustment is often overlooked.
9. Pre-pay expenses
Another tax deferral strategy is to pre-pay expenses for the next 12 months. Small business entities for tax can generally obtain a full deduction in the year of payment, so long as the prepayment is not for more than 12 months and finishes before the end of the following income year. Businesses should review which expenses can be prepaid and whether they have adequate cashflow to take advantage of this strategy.
10. Personal tax rates for 2012/13 and means testing of the private health rebate
The flood levy ceases at the end of this financial year so those earning more than $50,000 will save money by deferring income into the next year. On 1 July 2012 the tax free threshold triples to $18,200. As a result the effective tax free threshold after taking into account the low income tax offset increases from $16,000 to $20,542. Only those earning less than $80,000 will benefit from an income tax cut next year.
From next year, the private health insurance rebate will be means tested. Those impacted can pre-pay their annual premiums for next year before 30 June and avoid losing the rebate for at least one year.
I have left the best tip for last. Your accountant will know what strategies are worth pursuing that best suit your circumstances, so it’s best to schedule a time to review what needs to be done prior to the end of the year.
If your business is run through a trust or a company then other factors need to be considered. For example, if you operate your business through a trust, the ATO require trust resolutions before year end which is a major departure from past practices. Not doing so could result in some disastrous tax consequences this year.
– Tony Greco is senior tax advisor at the Institute of Public Accountants.