This article first appeared in June 2013 Focus magazine and is reprinted here for reference by our clients.
June is upon us. The days are getting shorter, mornings are chillier and small business owners are talking to their accountants about financial year-end. At MJ Accountants, we answer a lot of tax questions every June – here are the answers to five of our most frequently asked questions.
Should I be buying equipment before 30th of June?
New rules effective 1 July 2012 provide significant tax advantages for small business. If your turnover is under $2million you are eligible for instant write-off on assets worth up to $6,500 so it makes sense to buy computers and other smaller assets now so you can claim the full deduction immediately.
If you’ve been eyeing off a new motor vehicle, the new small business rules will allow you to claim an immediate deduction for the first $5,000 on both new and second hand vehicles, the balance being depreciated at 15% in the first year and 30% in subsequent years. So again, it may be worth getting the new car before the end of the year.
Warning: Take a look at your cash flow before you go on a spending spree!
Can I defer some of my income so I don’t have to pay so much tax this year?
Yes. If you operate on a “cash” basis then you are assessed on income received, so simply delaying receipt of funds will defer income into next year. If you report on an “accruals” basis then income is assessed when invoiced. Delaying the issue of an invoice will effectively defer income to next year.
Can I claim prepaid expenses for next year to reduce my tax for this year?
If you are a small business with turnover less that $2million then the ATO allows you to deduct prepaid expenses for services that will be used up in the next 12 months, such as rent, interest, insurance etc. For larger businesses the rules are stricter, but you can prepay items less that $1000 (GST exclusive), statutory requirements such as Work Cover and employment related expenses.
Warning: Deferring income and prepaying expenses will impact your cash flow and should not be done without the advice of an accountant.
When does it make sense to defer income or prepay expenses?
It is important to remember that juggling your income and expenses to reduce tax in this financial year is effectively deferring tax payable into the next financial year. This makes sense if you expect your cash position to improve next year, making it easier to pay the tax. It is also a good strategy if you anticipate that your earnings will be less in the new year, or if you are winding the business down.
Can I claim my Directors Fees and Superannuation contributions?
Yes you can, but take care to ensure that both are handled properly. Directors Fees are deductible provided an appropriate resolution has been passed to approve the payment. Superannuation payments must actually be PAID before 30 June to be deductible.
If you need help with these or other questions, give us a call on 6652 8788 for a free, no-obligations initial consultation. We’ve got the answers and we explain your options in language you understand.
Image compliments of Stuart Miles and freedigitalimages.net.