Well it only feels like yesterday that I drew your attention to tax planning strategies before 30 June for last year let alone this year. It is timely that the 2015 Federal Budget has provided us with some scope for considering some additional tax minimisation strategies.
So what’s new this year?
I guess the most talked about tax changes for Small Business Taxpayers (with aggregated Income of less than $2 Million pa) are the immediate tax deduction for new or used assets costing less than $20,000 that are installed ready for use by 30 June 2017, and of course, the company tax rate change to 28.5% from the current 30% from 1 July 2015. The franking credit rate for dividends will however, remain unchanged at 30%.
These two measures alone provide small businesses with opportunities for tax planning, bringing forward the purchase of a much needed asset will have immediate tax consequences and the timing of the invoicing of revenue may provide a benefit from the reduced company tax rate. The proposed changes are of course subject to the amending legislation passing through Parliament in a timely manner.
The usual year-end tax planning suspects are as follows with a newbie for your consideration now or in the future:
1. Bad debts
It is essential that bad debts are written out of your MYOB debtors listing before 30 June. Be aware though that the debt must be bad, you must have taken all reasonable steps to recover the debt eg. reminder letters, follow up calls, legal action, liquidator advice that the debt will be lost or partially recovered etc.
As a small business with income of less than $2 Million per annum or net assets of less than $6 Million your company or sole tradership is entitled to claim the prepayment of 13 months of expenses in advance, or longer, if the amount prepaid in total is less than $1,000. For example, in June you could prepay your small business’s rent for the 12 months to 30 June 2015. Alternatively or as well, you could pay for a 2 year magazine subscription for $900 and claim the cost in full in the year of payment.
3. Income protection insurance
I have, on a number of occasions become the accountant for clients who had not claimed their income protection insurance for a number of years. With you now only having the ability to amend the last 2 year’s income tax returns it is essential that these types of claims are not overlooked. Of course, the policy must be for the replacement of your income as a result of illness or disability. Any claim will be assessable and accordingly, it makes sense that the premiums are deductible.
4. Obsolete inventory
If you sell product, it is important to review your stock on hand prior to 30 June in order to determine whether there are items of stock that are obsolete. By writing these obsolete items out of your MYOB stock inventory module you immediately create a deduction and tidy up your perpetual inventory records.
5. Plant and equipment past it’s use by date
Prior to 30 June you should review your depreciation schedule and write/scrap plant and equipment that is no longer useful to your small business. We all have them, it is simply a matter of taking the time to review, write off and benefit from a deduction for the written down value of the defunct equipment.
6. Superannuation – don’t over fund!
How often have you had to ask the question – “so how much can I put into my super fund this year”? Listen up, the limits have changed again! If you were 49 or more at 30 June 2014 you can contribute $35,000 into super in the 2015 tax year, if you are under 49 you are entitled to contribute $30,000. Perhaps the biggest misconception is that the 9.5% is excluded from the above contributions caps. You should be careful to include all employer 9.5% and any salary sacrificed amounts in your relevant contributions threshold.
You should ensure that if you are paid by multiple employers, your superannuation should not exceed the above limits ie., the collective contributions from all employers should not exceed the relevant limit. Beware, if you exceed this limit, the excess contributions will be taxed at your personal marginal rate of tax. In relation to the timing of payment of your contributions, if your employee is late in paying your quarterly superannuation, it may cause you to exceed your annual contributions limit. Checking your contributions and having a chat to your employer(s) before you salary sacrifice to your contributions threshold may save you an excess contributions tax bill.
7. Salaries and Wages if your company is in a projected year-end tax loss situation
I have seen numerous occasions where clients continue to pay themselves their usual salary even though their company is likely to incur a tax loss for the year as a result. A good tax planning strategy is to replace some of those salary payments with a dividend, assuming of course the company has retained earnings and sufficient franking credits. The company simply pays a dividend to the same level as the selected net salary payments (perhaps May and June), thus reducing the possibility of a tax loss, which will only carry forward to future years with the risk of not being recovered quickly. This works best when it is a family company and you are comfortable to pay dividends to all shareholders who are related ie., the cash stays in the family.
The added benefit is that the employee/shareholder receives a dividend for a few months’ salary which carries with it a franking credit of 30%. The net result is that less tax is paid at the personal level. Please seek advice if you are in this situation as every company’s circumstances are different. It is however, a strategy worth considering.
If you’d like to learn how to make your business more successful, visit myob.com.au/businesstips.
The information provided here is of a general nature for Australians and should not be your only source of information. Please consult an experienced and registered tax agent as each small business’s circumstance will vary.