Benjamin Franklin stated there were two certainties in life, death and taxes. One can be delayed by living a healthy lifestyle. The other can be reduced by some sensible tax planning. Tax planning is an essential part of wealth creation. With a bit of planning you can take control over the amount of tax you pay. Many people pay more tax than they need to, yet with some simple planning you may legally reduce the amount of tax you need to pay. For most small to medium enterprises tax planning can be pushed down the agenda and only dealt with on an annual basis with little time and effort given. However, tax represents one of the most significant business costs and by implementing ongoing tax planning it can save a business time and most importantly, money. Like most things in life, it’s a matter of achieving the right balance, and tax planning should be looked at as just one part of your overall wealth-creation strategy.
The end of the financial year is approaching and business owners should now be talking to their accountant about ways to legitimately reduce their tax bill for 2009.
The most common tax planning strategies that should be considered prior to 30 June 2009 include:
Small Business Entity Tax (SBE) concessions
The Simplified Tax System (STS) was replaced from 1 July 2007 with the new “small business entity” (SBE) tax rules which provide access to a similar range of concessions that were previously available under the STS. Unlike the previous STS system which had an “all in, all out” approach, the SBE rules allow businesses to choose which one or all of the concessions that they wish to apply without the need to make a formal election in the tax return.
In order to be an SBE, there is only one test that needs to be satisfied, being that the turnover of the business, including connected entities and affiliates, is less than $2 million GST exclusive.
Some of the tax planning concessions that are available under the SBE rules are:
- The choice to account for GST on a “cash” basis;
- The choice to continue to use the “cash” basis for recording income and expenses where the business was in the STS during 2006/07 and continually used the cash basis prior to 1 July 2005;
- Claiming an immediate deduction for assets costing less than $1,000 GST exclusive;
- Depreciable assets costing $1,000 or more GST exclusive are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2009 where the asset has an effective life of less than 25 years regardless of when the asset was acquired during the income year;
- Choosing whether or not to do an end-of-year stock take if the value of trading stock has not increased or decreased by more than $5,000 over the income year;
- Claiming 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. Subject to cash flow requirements, the most common expenses that an SBE taxpayer should consider prepaying by 30 June 2009 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc; and
- Claiming the entrepreneurs’ tax offset which may reduce the tax payable by up to 25% where the business has turnover less than $75,000.
Deferring income and capital gains
- Businesses that return income on 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 2009.
- Businesses that return income on 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 2009.
- Realising a capital gain after 30 June 2009 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.
Maximising depreciation claims
- Non-SBE taxpayers can claim an immediate deduction for assets costing less than $100 GST inclusive (e.g. minor tools).
- Non-SBE taxpayers can scrap or sell depreciable assets for less than their written down value to realise a tax deduction loss.
- Non-SBE taxpayers can allocate assets costing less than $1,000 GST exclusive to a “low value pool” and claim depreciation of 18.75% for 2009 (37.5% thereafter) regardless of when the assets were acquired during the income year.
Claiming deductions for expenses not paid at year end
- SBE taxpayers that entered the previous Simplified Tax System (STS) prior to 1 July 2005 and who have not opted out of the cash accounting rules, can only claim a deduction for expenses when they are paid. Therefore to claim an immediate deduction the business should pay for the expenses by 30 June 2009.
- All other businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by 30 June 2009 including:
– Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked but have not been paid until after 30 June 2009.
– Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2009 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 2010 year when the amount is actually received.
– Staff Bonuses and Commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2009 where it is “definitely committed” to the expense.
– Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2009 but not paid until the next income year.
Writing off bad debts
Where taxpayers account for income on a non-cash basis and have previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2009 so long as the debt is declared bad by 30 June 2009.
The business will need to show that it has made a genuine attempt to recover the debt by year end to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a board minute).
Note the business can claim back the GST paid on debts that have been written off as bad.
Prepayment of expenses
Non-SBE taxpayers may be able to claim limited deductions for certain prepayments that are:
- less than $1,000 GST exclusive; or
- incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences. Note the ATO require not only for there to be a legal requirement to pay the expenditure in advance, but also that the expenditure is required to be paid in advance; or
- paid under a contract of service (e.g. prepayments of salary and wages, bonuses and commissions).
This also applies equally to SBE taxpayers
Deductible superannuation contributions
From 1 July 2007, the maximum superannuation contributions that can be claimed by employers on behalf of their employees is:
Employee below 50 years of age at 30 June: $50,000 (indexed)
Employee aged 50 and over at 30 June: $100,000 (unindexed) *
* This is a transitional measure that applies for the 2008 to 2012 income years, upon which the limit will reduce to the standard $50,000 indexed amount. The above applies equally to substantially self-employed persons who now obtain a 100% deduction up to those limits.
In order to obtain a deduction in the 2009 financial year, the contribution must to be received by the superannuation fund by 30 June 2009.
Other tax issues
- Where a private company has advanced funds to a shareholder or an associate of the shareholder, there are rules that may deem such loans to be an unfranked dividend paid by the company unless certain rules are complied with. It’s important that a proper loan agreement has been executed within the appropriate time frame and that minimum repayments of principal and interest are made in the relevant income year.
- Where individuals incur losses from business activities, the non-commercial loss rules should be considered as such losses may not be eligible for offset against other assessable income during the year.
- Businesses need to ensure that they have kept proper records to substantiate expenses claimed in their tax returns, including a new car log book every 5 years, plus annual odometer records, travel diaries in appropriate situations, loan agreements and tax invoices.
- Business owners need to continually review their operating structure to ensure that it is still appropriate taking into account issues such as asset protection, changes in marginal tax rates, and the changes to the small business capital gains tax concessions.
The tax strategies available to wage and salary earners may be limited, but there are a few things you can do:
- Keep good records
Even if you use an accountant to prepare your tax return, you are responsible for the information you provide and for keeping your tax records.
• Keep receipts of all your tax-deductible expenditure. If you are audited by the tax office, you need to be able to prove the expenses were incurred.
• Keep track of all your medical expenses. If net medical expenses exceed a threshold for the year, you are eligible for a tax offset.
• If you own investments you need to keep detailed records of income and capital gains. Required details include when they were bought, how much you paid, when they were sold and how much you received, and other details relating to the investment. These may include the costs of improvements to an investment property, or the amount of tax-deferred income received.
- Tax deductions
You may be able to claim a tax deduction for many of your expenses. These include:
• self-education expenses
• premiums on income protection insurance
• work-related expenses.
There are many other tax-deductible expenses, and different deductions apply to different industries.
- Tax-effective investments
If you are able to save, you could look at buying investments that provide some form of tax advantage.
- Salary packaging
Salary packaging involves the receipt of certain non-cash benefits in place of taxable salary. Fringe Benefits Tax (FBT) means that most non-cash benefits are taxed at the highest marginal tax rate. In most cases, receiving such benefit is actually a disadvantage for employees. However, some items receive favourable treatment under FBT rules, so it can still be an advantage to receive these benefits as part of a salary package.
Items that can be included in a beneficial salary packaging arrangement include mobile phones, laptop computers, and novated leases on motor vehicles.
Not everyone can obtain a real benefit from salary packaging, so seek qualified advice first.
Superannuation is one of the most tax-effective investment strategies available today. The earlier you start putting money into your super fund, the more tax you could save.
Because there are so many factors that contribute to the amount of tax you pay, it’s important to get the right advice. For help with maximising your after tax income, call MJ Accountants & Business Advice today.