Prepare for EOFY 2023
There are less than four weeks before the end of the 2022-2023 financial year. It is time to get prepared for EOFY 2023!
What’s new in 2023-2024
Wage increases: The National Minimum Wage increases by 8.65% to $23.23 per hour. Award minimum rates increase by 5.75%. The new pay rates apply to the first full pay period commencing on or after 1 July 2023.
Superannuation guarantee: Required employer super contributions will be 11% of ordinary time earnings paid after 30 June 2023.
Minimum annual super pensions: The temporary reduction in minimum drawdown requirements end with the 2022-2023 financial year. Minimum super pensions will effectively double in 2023-2024.
Home office expense claims: This change actually takes effect from the 2022-2023 year. The 52c per hour fixed rate claim and the 80c per hour shortcut claim methods have been replaced with a new 67 cents per hour claim method. This method covers claims for home and mobile phone and internet, electricity and heating, computer consumables, and stationery. You do not need a dedicated home office to use this method. However, to use this method you will need to have a record of all the hours you worked from home for the entire year, such as timesheets, rosters, or a diary. You can no longer claim on the basis of a four-week diary extrapolated for the whole year.
Single Touch Payroll Phase Two: By now everyone should be filing wage payments with the ATO using the new STP2 reporting.
Year-end tax planning ideas
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.
Defer 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 earned it. Your business records would need to be able to identify this unearned income.
Your business is a Small Business Entity (“SBE”) if it has a group turnover of less than $10 million per year. 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 generally only claim deductions for prepayments under $1,000.
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 before the end of June. Examples of these include stationery, spare parts, lubricants, fertiliser, and bulk fuel. If you do not keep more than about three months’ worth of supplies, you can claim the expense in the year of purchase.
You can claim a tax deduction for irrecoverable debts in the year that you 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.
Purchase any needed vehicles or equipment
Under the Temporary Full Expensing rules, most business fixed assets may be claimed as an immediate tax deduction. This applies to assets first held, and first used or installed ready for use for a taxable purpose before 30 June 2023. Businesses with an annual group turnover under $50 million can claim all depreciating assets, new or used, with no limit on the cost.
Note that this is only an advantage if you really need the additional equipment, and your taxable income is great enough to benefit from this tax deduction. Also, full expensing makes your business balance sheet look very weak, which may be a problem when applying for finance.
Businesses that use the simplified depreciation rules have no choice and must use temporary full expensing. Other businesses can opt-out of temporary full expensing on an asset-by-asset basis.
If your businesses would be disadvantaged by temporary full expensing, speak to us about your options. These may include:
- Opting out of the simplified depreciation rules
- Changing your business structure to a company
- Holding off buying equipment
After 30 June 2023, small business entities can claim an immediate tax deduction only for assets that cost less than $20,000. Larger businesses must claim depreciation in the normal way.
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 daily 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 if you are 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 will regard this as a sham.
Scrap useless assets
Review your asset schedule and get rid of business assets that you no longer use. The remaining book value may be claimed as a tax deduction. This does not apply to assets that are pooled or written off in full, so this strategy will not help businesses that use the simplified depreciation rules. Of course, any business may benefit from having more space after getting rid of clutter!
All trading businesses must value their trading stock at the end of the tax year. You need to keep the records of the stock count to comply with your tax record keeping obligations. You may value each item of trading stock 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. If you are going to dump unsaleable stock, you can value it at scrap value or at zero value. 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 count stock if your estimated value of that stock is within $5,000 of the previous year’s stock value. However, if you do choose to value trading stock, you must do this in terms of the normal rules. You cannot use your estimate for tax purposes.
Logbooks and odometer readings
Partnerships and sole proprietors must comply with the car substantiation rules. If you have business cars, you may be able to maximise your tax deductions by keeping a valid logbook. A valid logbook is one kept for 12 weeks showing details of all business trips. You can use a valid logbook to estimate business use for the next four years if you record odometer readings every 30 June.
If there is no valid logbook the only option for claiming car expenses is to claim 78 cents per kilometre. This is limited to a maximum of 5000 km (a maximum deduction of $3,900).
If you have a company or trust with distributable income, consider how you will distribute income to shareholders, unitholders, or discretionary beneficiaries. We can help you with this aspect of your year-end tax planning.
Consider whether to make additional superannuation contributions. This could be a deductible expense to your company or trust. If you are a sole trader or partner, you may be able to claim a personal deduction. If your income is less than $41,112, you may qualify for the $500 government co-contribution, or partial co-contribution if your income is less than $56,112.
It is best to take advice before making contributions. Take care that your contributions from all sources do not exceed the contribution limits. The ATO will impose penalty tax on the excess. This financial year the maximum deductible contribution is $27,500 for all taxpayers. However, you may be able to benefit from your unused contribution caps from earlier years starting from 2018-2019. Your total super balance must be less than $500,000 to benefit from this concession.
Contributions for taxpayers earning over $250,000 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 $250,000, and let your trustee pay tax on the additional income.
With these EOFY planning tips in mind, you can act now and enjoy a great start to the year ahead. Best of all, checking all those important “must-do’s” off your list, you’ll be ready to relax and face the new financial year with confidence.