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End-of-year tax planning tips for business

The general rule is that you can claim deductions for expenses your business incurs in its task of generating assessable income. Many of these deductions are obvious - rent, materials, supplies and so on - but there are also some less obvious options available, should your circumstances suit, to further reduce your tax burden for the year.

Pay tomorrow's expense today

If your business has taken out a loan, any interest accrued but not physically paid by June 30 is potentially deductible (the crucial factor of course being that the loan was used to produce assessable income, which most business loans are) - assuming that the business accounts for tax on an accruals basis. In a similar vein, see if you can negotiate with your finance provider to make upfront interest repayments - that is, they may not be "due" until after July 1, but the finance provider will accept them before then.

In a related tip, it is a fact of life that many sole traders fund some business activities through their personal credit card or a personal loan. Because the interest costs are not being incurred under the business name, but in the name of the business owner, many operators have unfortunately assumed that a deduction cannot be claimed.

But remember - a sole trader's business and non-business activities are all dealt with under the taxpayer's personal income for tax purposes. So qualifying business expenses will be deductible even if you used your personal credit card instead of your business one.

Bad debts

Another unfortunate fact of business life is that some amounts owed to you sitting on the balance sheet may be unlikely to ever be paid. Now is the best time of year to re-consider these amounts, and decide if any are legitimate bad debts, and therefore able to be written off and be transformed into a tax deduction.

To this end, it could pay to go back through your outstanding invoices to find potential bad debt candidates and write them off before June 30. However the ATO has rules regarding bad debt deductions - call our office for more details.

Capital gain shuffle

Capital losses can be offset against, and therefore reduce, taxable capital gains that you may make on selling other assets. So if your business is due to sell some assets that will realise a capital loss, try to crystallise these losses before June 30.

If however the sale will produce a capital gain, delay crystallising this gain until the 2017-18 income year so that you will have a full fiscal year to get in place options to offset that gain with capital losses or revenue expenses. It may even be worthwhile for you to sell an underperforming asset, and realise a loss, if this suits your CGT circumstances. Be careful however not to do a "wash sale" - where an asset is sold at a loss then bought back at a lower price to crystallise the capital loss.

And remember, as a general rule the "CGT event" for a disposal occurs at contract date - this could help in your planning if you sell an asset where settlement and/or payment takes place in 2017-18 but the contract is executed in 2016-17.

Trading stock isn't always standard

Taking into account the changed value of your trading stock over an income year can affect the resulting taxable income. But as you can have a choice of how that valuation is arrived at - that is, cost, market selling, or replacement value (or even a lower value due to obsolescence) - the end result may allow you to either bring forward deductions or alternatively increase taxable income if you have sufficient deductions to use up for the 2016-17 year.

And remember, each item of trading stock can be valued differently for tax purposes. Ask for our help should you need guidance.

Appreciate depreciation

Getting a tax deduction for the wear and tear and loss of value on business assets that are used to derive assessable income is a stalwart of the business tax regime, so a review of your enterprise's depreciation schedule is always prudent. Any number of opportunities can be discovered, including the ability to scrap and write-off amounts of redundant assets, reassess remaining effective lives, or allocate assets to a low value pool.

This is important for this and next tax year as the $20,000 instant asset write-off has been extended until June 30, 2018 (subject to legislation passing). It will thereafter revert to $1,000 (notwithstanding possible further changes in next year's Federal Budget).

A bonus from staff bonuses

Businesses that account for tax on an accruals basis are entitled to claim a tax deduction for an expense in the year in which the business has committed to the liability. If you have committed to pay employees end-of-year bonuses, the accrued expense can be claimed as a tax deduction even though it is physically paid next financial year.

A company can also claim director bonuses in the year the expense is accrued in the same way (directors are classified as employees). For a company to claim a deduction for a director or employee bonus without physically paying the money, the company must, before the end of the financial year, commit to the payment of a specific amount. The amount need not be quantified but the calculation methodology must be fixed (for example, a formula based on profits or revenue amounts yet to be finalised). The commitment should be documented (such as minutes of a directors' meeting).

Soak up those losses

There may be a case to offset prior year losses against current year income, however for companies and trusts the ability to do so can be subject to certain conditions (the carry forward loss rules). These include the continuity of ownership test and the same business test for a company.

See the accompanying article in this newsletter "What is a tax loss, and how can it be turned to good use?" Consult with us should this seem applicable.

Remember the concessions

Parliament has finally passed most of the business tax relief package announced in the last Federal Budget, but with some amendments. The legislation brings into effect the following changes for SME businesses:

  • Progressive cuts to the company tax rate:
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    • The tax rate will be progressively reduced to 27.5% from 2016-17 to 2018-19 for companies that are carrying on a business and have an aggregated turnover of less than $50 million.
    • The 27.5% rate for those entities will be progressively cut to 25% by 2026-27.
  • An increase to the small business entity threshold from 2016-17:
    • The aggregated turnover threshold for access to most small business tax concessions will be $10 million, with the exception of the below concessions.
      • The threshold for the small business income tax offset will be $5 million.
      • The threshold for the small business CGT concessions will remain at $2 million.

And finally a reminder that the small business income tax offset rate for unincorporated enterprises for 2016-17 has gone up to 8%, and will stay at that rate until 2023-24. It will then double to 16% by 2026-27 (the offset will remain capped at $1,000 a year however).

A summary of concessions available for small business and eligible thresholds is as follows (from July 1, 2016):

Aggregated annual turnover $20,000 instant asset write-off Small business CGT concessions Small business restructure roll-over Company tax cuts Small business income tax offset Small business pool Immediate deduction for certain start-up costs
< $2m Yes Yes Yes Yes Yes Yes Yes
< $5m Yes No Yes Yes Yes Yes Yes
< $10m Yes No Yes Yes No Yes Yes

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