In preparation for the end of financial year, I’ve listed my top 10 small business tax deductions that you should not overlook.
Please note the strategies listed below are for businesses that have a turnover of less than $2 million. Also, some of the tips below are meant for businesses that are profitable this year or have a big fat profit sitting in their Profit and Loss Statement and want to avoid paying lots of tax.
If your cash flow permits, try my top 10 list of tax deduction strategies.
1. Prepay Expenses
Here’s something that will generate an immediate tax deduction – prepaying your expenses. Prepaying expenses that cover a period of no more than 12 months out is a great way to bring forward operating expenses before 30th June.
Examples of items you can prepay: rent, insurance, repairs to business assets, subscriptions, business trips, seminars and conference bookings, leases, and telephone and internet services.
Tip: Review purchases of supplies before 30 June, and top up.
2. Expense non-paid deductible goods and services
The cost of deductible goods or services that have been invoiced/billed (or incurred) but not paid for as at 30 June can be claimed as a deduction in the income year. Examples are: legal advice, electricity, gas, telephone, advertising, and business materials and supplies.
Tip: If you need supplies, ensure that the supplier invoices the business by 30 June to claim the deduction.
3. Contribute to superannuation
Pay all employee superannuation contributions before 30 June. Note that the super must have been actually paid, cleared in the business bank account and received by the employees’ Superfund by 30 June to be claimed as a tax deduction for June. An accrual for this expense is not tax deductible.
Tip: Make sure you have details of each employee’s superfund account at all times so there is no lag in payments due.
4. Review assets schedule
Need new assets? Well, now is the time to consider buying because you have been given a nice gift from the government. Any asset costing less than $6,500 is eligible for an immediate 100 percent tax deduction.
Other assets costing $6,500 or more are eligible for an accelerated depreciation deduction: flat 15 percent in the first year and flat 30 percent each year after. Also, don’t forget to write off any assets no longer held or used before 30 June.
Tip: Depreciation of assets purchased in the year do not have to be pro rated from the date of purchase — it is just a flat 15 percent for the whole year no matter which date it was purchased.
5. Stocktake of inventory
Identify damaged and obsolete stock, and write it down or write it off. This affects the value of the trading stock and hence, your business profit.
Tip: Businesses can value obsolete or discontinued stock at less than cost, market selling value or replacement value.
6. Value stock
Consider how to value the trading stock as at 30 June — a business is entitled to a tax deduction when the opening stock exceeds the closing stock.
Alternatively, a business taxpayer whose closing stock exceeds the opening stock has to declare this as income. Closing stock can be valued at cost, market selling value or replacement value.
Tip: Adopt the valuation method that produces the lowest closing stock value. Note that businesses do not have to account for movement in the value of trading stock if the movement does not exceed $5,000. If the value of the closing stock is below purchase cost, then the business will effectively realise a loss and obtain a tax deduction in that income year.
7. Review debtors and write off any bad debts
What is a bad debt? It’s a taxable sale that has been overdue for 12 months or more and there is no chance of it being recovered. The business must document that the debt has been written off.
Tip: Be aware of the effect on the GST position of the business if a bad debt is written off.
8. Deduct staff payment
You can deduct staff wages, salaries and commissions that have been incurred by 30 June, even if they haven’t been paid by that date. In other words, the employee has performed the work, but he or she has not been physically paid by 30 June. You can still count that for the year in which the work was done.
Note: The employee PAYG Payment Summary will not include salary and wages accrued by the business but not physically paid by 30 June.
Tip: Bonuses and directors’ fees must be declared and passed by a properly authorised resolution of the shareholders and committed to be paid by 30 June. Crediting to the directors’ loan account via journal entries will not suffice.
9. Remember interest
Interest paid on all business loans, overdrafts and other finance facilities, and any interest accrued on a business loan that has not been paid as at 30 June can be claimed as a deduction.
Tip: Consider prepaying interest or asking to be charged interest in advance.
10. Update motor vehicle claims
Need to update that car? You are eligible for an immediate 100 percent tax deduction for the first $5000 of a new car (brand new and second hand vehicles). The balance of the cost is eligible for an accelerated depreciation deduction of a flat 15 percent for the first year and a flat 30 percent each year after. Ensure all cars have a current and up-to-date logbook detailing business-related car travel for a consistent 12 weeks during the financial year to substantiate the business percent usage.
Tip: Logbooks are only valid for five years. The five-year period starts on the later of the due date for lodging the tax return and the start of the logbook date.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced tax agent as each small business’ circumstance will vary for end of financial year.
It’s important to meet all your tax and compliance obligations this EOFY. Check out MYOB’s Tax Changes Information section, meant to help startups and small businesses stay on top of their game with tax changes.