It’s that time of year again. Businesses across the country are dragging out boxes of receipts, log books and forms to make the most of tax time and avoid being slugged with a hefty bill.
Australian businesses are beginning to emerge from the downturn, but SMEs know they need every dollar they can get. The tough times aren’t over, and money saved from being handed over to the ATO is money that can go towards keeping your business afloat.
The ATO is keen on cracking down this year, especially after the Government has delivered over $440 million in funding for eradicating the cash economy and cracking down on GST compliance.
To help businesses get through this time of year, here are 15 of the best tax tips for small businesses, with another 15 to come next week.
Consider a DIY super tax break
Do you have a self-managed superannuation fund? If not, now might be the time to think about setting one up.
Frank Brass, regional director of H&R Block, says setting up a self-managed super fund if you already have over $400,000 in an existing super account will come with some new responsibilities, but will deliver a significant tax benefit.
“The SMSF will allow you to benefit from franking credits which an investor may not be able to capitalise on in a public offer fund. There are also many other tax benefits and strategies available within the SMSF structure,” he said, but added business owners need to check with their accountants as to what requirements they need to fulfil.
Bring forward deductions
It’s important small businesses and entrepreneurs bring their deductions into the current financial year in order to claim a tax benefit. Some of these can require scrounging up a bit of capital, but if you have the cash on hand then you’re better off making these expenses now.
Brass says this can include prepaying expenses where possible including rent, accounting fees, interest expenses and subscriptions. Repairs are also deductible in the year they are carried out, including improvements and additions, which are also depreciated.
Brass also recommends businesses make any tax deductible donations before the end of the year, “but these must be checked against the ATO’s official register of deductible-approved institutions, so that you don’t end up making a mistake on your return”.
Additionally, businesses must be aware that prepaid expenditures don’t usually count for deductions unless they are under $1,000, are required to be paid by law, are part of salary or wages and cover a period of less than 12 months.
Prepay interest on investment properties
If you are using negative gearing on an investment property, make sure you prepay the interest and claim it is an expense in the current financial year. Equities manager Private Portfolio Managers says that by doing this, the Government is effectively giving you an interest-free loan.
Just starting up?
If you have a business turning over under $2 million per year, you are classified by the ATO as a small business and could be eligible for some tax breaks. Don’t forget about them – they’ll help you out with some payment requirements. Greg Hayes from Hayes Knight says a number of concessions are available.
“In the income tax area, they can access prepayments. For instance, they could prepay rent, they could prepay lease payments and that sort of thing and take tax deductions in the current year. That’s not available to a larger business.”
“There are some slightly preferential depreciation tax concessions, where at the present time they can write-off assets under $1,000. That sort of thing.”
However, these experts say you should check with accountants to see what specific requirements for which your business is eligible.
Time the sale of investments
If you’re planning on selling investments that will deliver a profit or make a loss, timing the sales of these investments could reduce the amount of capital gains tax you pay on the profitable sales, or cancel out capital gains altogether, PPM says.
Home office tips
Do you have a home office? If so, you need to get the most out of it by claiming as many deductions as possible.
Entrepreneurs looking to take advantage of their home offices should ensure they have logs and receipts available for computers, home phones, mobile phones and even the amount of time spent in home officers.
Frank Brass recommends keeping all receipts and invoices for any purchases, details of professional association expenses and union memberships, along with tools and equipment purchases and professional subscriptions, which are also deductible.
Personal deduction tips
If you have any medical work or procedures that need to be done, bring them forward before June 30 to take advantage of the 20c in the dollar rebate. This applies when your expenses reach over $1,500.
Also, Brass says deductions can be claimed for up to $300 in work-related expenses with no receipts, as well as a further $150 for laundry claims on top of that. There are also deductions available for depreciation of home office equipment and a professional library, and education expenses directly related to your field of work.
Beware GST compliance crackdown
In the latest Federal Budget, the Government provided an extra $440 million over four years to help crack down on the cash economy and promote GST compliance. Deloitte partner Craig Holland says the GST components of this will be particularly important.
“A lot more funding is being provided for GST compliance activity. This is really just putting people on notice. It’s nothing new, no new requirements, businesses need to be sure they have their ducks in a row because they could face an audit.”
Fringe benefits tax
This is a complicated one. Businesses often give gifts to staff from time to time, but SMEs need to be careful about how often they given them, and the overall price, in order to avoid a tax liability.
Deloitte partner Frank Klasic says the minor benefit exemption for FBT carries a threshold of $300, but there are other factors to consider.
“Another common issue is the frequency or regularity of benefits. If you’re applying it towards meal entertainment, which most FBT payers would use, you can’t apply for certain exemptions.”
“For example, take a meal event. If I have 10 of those events throughout the year, that is considered regular, but if they are just under $300 each, they add up and can become substantial.”
Update your log books
Keeping log books is essential if you want to cash in on some essential tax breaks. But there are a number of different things you need to keep in mind when keeping these logs up-to-date.
The most important log you can keep is for a company vehicle. These need to be filled out in detail and experts say you may need to clamp down on staff who often ignore them.
But one detail often overlooked by employees, and employers themselves, are travel diaries. These need to be filled out where an employee is travelling overseas for more than five nights.
Klasic says that without a travel diary, business owners face the risk the ATO will tax the entire expense, regardless of what you claim, “which could result in a substantial amount of tax to be paid”.
Additionally, travel diaries for domestic travel are only required for trips longer than five days. “These are not often maintained properly, or even at all, and can result in a huge expense.”
One of the most common tax tips is to defer taxable income into the next financial year. Matthew Field says this is one of the most common – and one of the most overlooked – tips.
“Look at timing of income to maximise a benefit. If you are a small business enterprise then you can defer income received, and you should be deferring this until you actually receive it. If you aren’t a small business, you can invoice some of your income into the new financial year so it’s not bought into a taxable calculation.”
Brass says businesses need to pay strict attention to what income they are likely receive, and be hasty about moving that into the new financial year. However, only do this when appropriate, he warns.
Most businesses would be aware group certificates, or payment summaries, must be handed out by July 14. But not many know about certain tax requirements that need to be stated on them.
“There is a common misconception that group certificates can be given with minimal information, but salary sacrifice and fringe benefits tax details must be included on the summaries,” Klasic says.
“Also, if you get things wrong, there is a penalty scheme the ATO can enforce and that fine could be as much as $2,200 per employee. If you put a wrong number on that group certificate, it could end up costing you and your business.”
Beware non-commercial loans
Following regulations relating to non-commercial loans is crucial or you could end up facing a significant tax problem that could put your business in jeopardy.
A non-commercial loan is made when a business provides funds to a shareholder or associate. The rules are clear – if you don’t make sure the required repayments are made before June 30, the loan could be classed as an unfranked dividend and your business slugged with a tax rate on the payments worth 46.5 cents in the dollar.
“If I have a loan of $100,” Craig says, “and I don’t pay it back, then it could be classed as an unfranked dividend. The long and the short of that is I’m hit with a 46.5c in the dollar charge, and no business wants that.”
MPR Group partner Marc Peskett also reminds businesses of the new requirement for shareholders and associates to pay market value “rental” costs for the private use of company assets, such as holiday homes, boats and other vehicles.
Be careful with non-commercial losses
If you are an individual, operating either as a sole trader or within a partnership, and have a net loss then you must adhere to the ATO’s non-commercial loss rules. These determine whether you can use a business loss to offset income from other sources.
However, Klasic says there are certain requirements that must be followed, including some changes from the 2009-10 year. This include a new exception for business losses solely caused by deductions claimed for the small business and general business tax break and a new Commissioner’s discretion for individuals who don’t meet the income requirement.
Most significant, however, is the introduction of a new requirement for higher-income earners.
Individuals earning over $250,000 will only be able to deduct expenses from non-commercial business activities against the income only from those activities. The changes are designed to stop people from renting out holiday homes for a few weeks and then claiming a $30,000 deduction for related expenses.
PKF director Matthew Field says businesses need to “make sure all the steps are in place to ensure you’re carrying on the business in the right way, and are not using those losses inappropriately”.
Sell managed funds with a capital loss
PPM says business owners should consider selling off managed funds with a capital loss. If those new investors enter a fund, the pool of losses will be diluted, and as a result, the original investor will lose full tax benefits.
The company also says businesses should be careful about getting their timing right in entering a new managed fund. “Don’t put money into managed funds just prior to their annual distribution – you could get an immediate tax bill.”
Ref: Smart Company E-Newsletter 27 May 2010