Year End Tax Planning For Businesses

With our local economy in a healthy growth phase, we see many small businesses making higher profits this year. Higher profits of course, mean higher tax, unless effective tax planning can be undertaken before the end of the financial year.

Before deciding on strategies to reduce your tax bill, it is necessary to determine how much your profit is likely to be. To do this, it is important that the accountant spends some time reviewing your year to date financials. The accountant can then suggest a range of options, and work out with the business owner, suitable strategies to reduce the tax bill to an acceptable level.

Tax planning measures can result in permanent tax savings, or they can defer the payment of tax until next financial year or several years down the track. Deferring tax is definitely a worthwhile strategy, not only for cash flow and financing reasons, but also because the increase in the “individual” tax thresholds from 1^st July this year will result in a permanent tax saving.

Following are a sample of the tax planning measures your business could adopt this year :

Prepayments

Identify prepayments under $1,000. These are deductible for all taxpayers.

Identify prepayments for interest on borrowings for property, shares or managed funds. These are fully deductible for all taxpayers.

Prepay business expenses for services to be provided within 12 months. These are fully deductible for business taxpayers who have elected to use the Simplified Tax System, and also non business taxpayers such as investors or landlords.

Bring forward Business Expenditure

For businesses not using the simplified tax system, you can still bring forward tax deductions into this tax year. Simply pre order business supplies (eg. Office supplies, stationery, materials etc., but NOT trading stock) a couple of months ahead. Simply get a tax invoice dated before 30^th June and take the items up as trade creditors. You don’t have to pay for the items until payment is due, under normal trading terms.

Bad Debts

Review your accounts receivable ledger and determine whether any debts should be written off. And if so, do this before 30^th June.

Trading Stock

Write off any obsolete stock.

Superannuation

Ensure super contributions, both for yourself (the owners) and your employees, are made and in the super fund before 30^th June. Otherwise the deduction is not claimable until next financial year.

It is also very important that your SGC contributions for staff are also made within 28 days of the end of every quarter. If this does not occur, the super is not deductible and penalties and interest also apply.

Plant and Equipment

Write off any unwanted or obsolete assets by 30^th June (computers are a good example). Any depreciation which hasn’t been claimed, is fully deductible in this tax year.

Capital Gains

Consider deferring the sale of an asset, on which you will make a taxable capital gain, until after 30^th June. If you also own an asset which will realize a capital loss (and it is unlikely that it’s value will ever rise), consider selling it, either before or at the same time as the gain asset, to help offset the gain. It is very important to note that the sale for CGT purposes occurs on the date that you enter into the contract, and not when you receive the money on settlement.

The above points are general in nature, and it is important to discuss specific strategies for your business, with your accountant. And act now, because your options to reduce tax are greatly diminished after 30^th June.

Tax Planning Checklist for Individuals

Deferring income is also a useful strategy for individuals, due to the increase in the tax thresholds from 1^st July. This particularly applies to higher income earners.

Since you don’t pay tax this year on wages and other income which is earned after 30^th June, consider deferring bonuses, rent and other such income until the next financial year.

Ensure you can substantiate (with receipts, motor vehicle log etc.) claims for all of your tax deductions.

Consider bringing forward the purchase of any work related expenditure, to this financial year. Note however, that the purchase of an asset such as a computer, will not give you any significant tax benefit this year, since you must claim depreciation on the item over it’s effective life.

Prepay interest on tax deductible loans for property, shares or managed funds.

Consider income protection insurance, if you think this may be of benefit to you. Premiums paid are tax deductible.

Consider private health insurance if you are a high income earner (to avoid the Medicare levy surcharge).

Gather together all receipts for the family’s medical expenses, if the gap which you have paid is more than $1,500 for the financial year. You can claim a rebate on the excess.

Consider making a contribution to super for your low income earning spouse. You can claim a rebate of 18% of contributions up to $3,000 if your spouse earns less than $13,800.

Consider making a contribution to super from your after tax dollars, if you are a lower income earner, in order to receive the government co contribution.