Published in Australian Financial Review, page 32, Thursday 17 June 2010
Business owners have the opportunity of one last-ditch effort to get their tax affairs in order before the end of financial year. If they haven’t already done so, now is the time to review depreciation schedules, says Dianna Dimitrov, business services manager at KNP Solutions.
“Often businesses pick up their depreciation schedule at year-end and find that it includes assets that are no longer in the business,” she says. “Some were replaced, are no longer used or even stolen.”
“A year-end review can help to identify these assets. This review may result in what is called a ‘balancing adjustment’ and, in many cases, [it may] result in a material tax deduction.”
Small and medium enterprises need to pay special attention to private company loans (Division 7A) this year because the Australian Tax Office changed the rules, says Timothy Munro, director and chief executive of Specialised Business Solutions in Brisbane. “Business owners who have borrowed funds from their company must ensure that the appropriate principal and interest repayments are made by June 30,” Munro says.
“The tax laws have changed dramatically in this area recently, so check with your accountant to avoid having included in your personal taxable income any loans you’ve taken from your company. You’ll also be affected if you have a family trust that makes a distribution of profits to a company that is not paid across in cash to your company.”
Small business concessions:
- Businesses turning over less than $2 million have some effective tax concessions at their disposal thanks to the government stimulus package.
- Immediate write-off for assets costing less than $1000 (which is set to rise under the Henry tax review proposals to $5000).
- Immediate deduction for pre-paying expenses (by June 30) such as lease payments, interest, rent, business travel, insurance and subscriptions up to 12months in advance.
There are some tried and true strategies that apply year in, year out. Bring forward expenses by buying consumable items (stationery, printing, office and computer supplies) by June 30. Make payments for repairs and maintenance on business, rental properties or employment. Make sure the business has kept an accurate and complete motor vehicle log book for at least a 12-week period for all company vehicles. The start date for the 12-week period must be on or before June 30, 2010.
Defer investment income and/or capital gains by arranging for the receipt of investment income (such as interest on term deposits) to occur after June 30, 2010. The same goes for the contract date on the sale of assets on which businesses or individuals might make a capital gain. “The contract date is the key tax date for working out when a sale occurred, not the settlement date,” Munro says.
Businesses staring down the barrel of large capital gains should consider selling any non-performing investments before June 30 to crystallise a capital loss and reduce or even eliminate their capital gains tax liability.
“Unused capital losses can be carried forward to offset future capital gains. But note that any assets sold at a loss should not be immediately re-acquired, as the ATO will view this as tax avoidance,” Munro warns.
What frequently catches employers out is the payment of workers’ superannuation. “To obtain a tax deduction in the 2010 financial year, for employee super contributions the contribution must be received by the super fund by June 30, 2010,” AccountantsRus chief executive Adrian Raftery says.
He says an alarming number of people overlook the benefits of income splitting. “Too often I see smart business people paying 46.5per cent tax on income which could be put in [the income] of their lower-taxed spouse (at a tax rate of zero or 16.5 per cent) or company (at 30 per cent),” Raftery says.
If it’s been a tough year, consider varying the PAYG instalment for the June 2010 quarter. Dimitrov says: “As you get closer to June 30, you can obtain a better picture of what your tax position is. Often it varies [from] what your quarterly tax instalments are based on and may in fact be much less.”
She also recommends that companies review passive assets. “Given the current economic climate, now is the time to review your assets and determine whether there is a benefit in holding on to them. Where you have shares not performing to your expectations, selling them now and realising a loss may be beneficial.”
Often businesses invest surplus funds in assets such as shares that may be put at risk in the business entity. “A review of current market value may reveal an opportune time to move these assets and achieve asset protection,” Dimitrov says.
Last but not least, Raftery warns businesses not to get caught out by the fancy marketing of retailers in coming weeks.
“Don’t spend purely for a tax deduction,” he says. “If you are running a business via a company then you are only getting 30 per cent back. Why spend money when you only get a fraction back?” In the end, it only strangles cash flow.
The ATO’s hunting strategy
The tax commissioner has delivered his annual wink-wink, nudge-nudge speech outlining taxpayer groups and practices the Australian Taxation Office will be on the lookout for from July as businesses and individuals start filing their annual returns. Here is a rundown of the areas it’s cracking down on:
- GST compliance and the cash economy. The ATO has set aside $445 million over four years to target problems of inflated or fraudulent GST refunds, systematic under-reporting of GST liabilities, non-lodgment and non-payment.
- Data matching has made it a lot easier for the ATO to track investment income, as well as employment, welfare, health insurance coverage, property, share ownership and disposals, employee share scheme information, significant cash transactions and other indicators of wealth, such as asset ownership (luxury motor vehicles, marine vessels etc) and partnership, trust and unit trust distributions. As a point in case, for the 2008 financial year more than $18.5billion in interest income, earned by 10.8 million individuals, was reported to the ATO by banks and other financial institutions. Of this, $322 million could not be matched to what the taxpayers had reported.
- Work-related expenses, especially among engineers, mechanics and teachers.
- Trust structures used by SMEs, which use unpaid present entitlements to minimise tax and fund growth.
- Offshore tax havens. The ATO has signed 25 tax information exchange agreements with popular tax havens, most recently with Vanuatu and the Marshall Islands. It also enacted a bank transparency strategy that allows it to access bank data to flush out taxpayers with undisclosed offshore income or over-claimed deductions involving international transactions.
- Maximise your allowable deductions before June 30. Consider bringing forward certain expenditure into June so you can claim a tax deduction earlier.
- Consider making superannuation contributions for yourself and/or paying your employee’s superannuation contributions for the last quarter before June 30. Maximum super deductions are $25,000 for those under 50 and $50,000 for those 50 or older.
- Review the assets you bought before December 31, 2009, to determine if you can claim the investment allowance (the government stimulus measure offering up to 50 per cent rebate on certain purchases).
- Conduct a full stocktake of your inventory and review how you value it for tax purposes. Write off damaged and obsolete stock.
- Consider prepaying expenses before June 30 if you are eligible to claim a tax deduction for pre-payments.
- Ensure that you review loans to shareholders and make minimum repayments before June 30.
- Review your outstanding accounts receivable and write off any bad debts.
- Review your out of pocket medical expenses to determine if you are eligible for the tax offset.
- Review your depreciation schedule and write off any scrapped assets.
- If you own a rental property, review whether you are claiming a tax deduction for depreciation on furniture, fittings and even construction costs. If not, consider getting a quantity surveyor’s report on your property to determine your allowable tax deductions.