End of Year Tax Planning Checklist
It is time to make sure that you are ready for the end of the financial year, and to take action to reduce your taxable income for the 2015-16 year. If you can defer taxable income to the next year you delay having to pay the tax.
Tips for Deferring Tax
Delay receipts: if you account for your income on the cash basis, you can defer income simply by deferring receipt of your income. One way to do this is to delay invoicing your customers. However, you cannot defer income by not banking cash or cheques you have received.
Unearned income: if you account for income on the accrual basis and receive payment for work before you have carried it out, you can defer that income until you have actually earned it. Your business records would need to be able to identify this unearned income.
Prepay expenses: if your business has a group turn-over less than $2 million per year, it is defined as a Small Business Entity (“SBE”). This entitles you to claim a deduction for expenses paid up to twelve months in advance. For example, you can claim for lease, rent and insurance payments made for up to twelve months ahead. If your business is not an SBE, you may only claim deductions for payments under $1,000 or for expense prepayments that are required by law.
Bring forward expenditure: if you know that you will need to incur expenses in the new financial year, such as repairs and maintenance, consider bringing them forward to the current year. You cannot accrue employee super contributions, so pay super guarantee contributions before 30 June. You can also stock up on consumable supplies, such as stationery, spare parts, lubricants, fertilizer and bulk fuel before the end of June. As long as you do not keep more than about three months’ worth of supplies, you can claim the expense in the year you purchased the supplies.
Purchase needed vehicles or equipment: If your business is an SBE you can claim 15% of the cost price in the year of purchase, even if purchased on 30 June.
SBE’s can claim an immediate tax deduction for assets costing less than $20,000 purchased between 12 May 2015 and 30 June 2017. Note that this is only an advantage if your taxable income is great enough to use this tax deduction.
Accrued expenses: you may claim a deduction for an expense in the year in which the liability to pay the expense arose. An employer’s liability to pay salaries and wages accrues on a daily basis as the employees perform each day’s work. This means that you can claim a deduction for salaries, wages and commissions that have accrued but which you have not paid by the end of the year. Note that wages and salaries are only taxable to the employees when they receive the payments.
You can also accrue directors’ fees and staff bonuses as long as you are definitely committed to the payment. This would require you (the shareholders, partners or trustee) to record a resolution to this effect before 30 June. However, if the payments are not made within a reasonable time the Tax Office may regard this as a sham.
Bad debts: you can claim a tax deduction for irrecoverable debts in the year that you actually write the debt off as bad. Review your outstanding debtors now before 30 June and write off those that you think will never pay you.
Trading Stock
Businesses are required to count and value their trading stock at the end of the tax year. You have to keep the records of the stock count to comply with your tax record keeping obligations. Each item of trading stock may be valued at cost price, replacement cost or market value. The cost of manufacturing goods must include not only materials and labour but also a proportion of factory overheads.
You may value obsolete and obsolescent stock at less than cost price. You can value unsaleable stock at scrap value or at zero value if you are going to dump it. You may value stock that is becoming obsolete at a fair and reasonable value considering the likelihood of selling it. The Tax Office will not accept an arbitrary percentage write-down.
If your business is an SBE, you are not required to take stock if the estimated value of that stock is within $5,000 of the previous year’s stock value. If you choose to value trading stock, you must do this in terms of the normal rules; you cannot use your estimate for tax purposes.
Log Books and Odometer Readings
Partnerships and sole proprietors have to comply with the car substantiation rules. If you have cars that are used for business you may be able to maximize your tax deductions by keeping a valid logbook for three months. You can use a valid logbook to estimate business use for the next four years as long as you record odometer readings every 30 June.
Without a valid logbook the only option for claiming car expenses is to claim 66 cents per kilometre to a maximum of 5000 km ($3,300). The one-third of expenses method is no longer available.
Distribute Profits
For shareholders of companies and beneficiaries of trusts to be able to use the profits generated, these profits must be distributed to them by means of dividends or trust distributions. Make a director’s or trustee’s resolution before 30 June to pay dividends to shareholders or allocate trust income to beneficiaries. In the case of a discretionary trust, if no resolution is made by the end of the financial year the income must be distributed according to the trust deed. This could mean that the income goes to the wrong beneficiaries or is taxed in the trust at 49%!
Trustees must report Tax File Numbers of beneficiaries receiving distributions or withhold 49% tax. Note that minor children can only receive $416 of interest and trust distributions before having to pay punitive levels of tax.
If you borrow money from your company, you must repay the loan before the end of June or there will be tax implications. Division 7A of the tax law treats outstanding loans to shareholders or their associates as taxable, unfranked dividends unless certain conditions are met. If this applies to your company, give us a call.
In a partnership where partners put in differing amounts of work, partners can make an agreement to pay partners’ salaries to the partners doing the bulk of the work. You should make this agreement at the beginning of the financial year, but an agreement made before 30 June will be acceptable. Note that partners’ salaries represent a distribution of partnership profits, and are not an expense to the partnership.
Consider Super Contributions
Consider whether to make additional superannuation contributions. Depending on your circumstances this could be a deductible expense to your company or trust, or you may be able to claim a personal deduction if you are a sole trader or partner. If your income is low you may qualify for the government co-contribution.
It is best to take advice before making contributions. Take care that your contributions from all sources do not exceed the contribution limits or you will be subject to penalty tax on the excess. This financial year the maximum deductible contribution is $35,000 for taxpayers 50 years or older on 30 June 2015, and $30,000 for all other taxpayers.
Contributions for taxpayers earning over $300,000 will be taxed at 30% not 15% within their super funds. If you have a trust it is better to keep the total of your taxable income plus deductible superannuation contributions below $300,000, and let your trustee pay tax on the additional income.