1st January, 2015
“How can I pay less tax?” would have to be one of the most common questions I am asked by small business owners (SMEs), especially given the current economic climate.
One great way to save on paying tax is to make sure your business is taking full advantage of the various tax write-offs available to you. Some methods don’t even require you to spend money in order to incur a deduction. A simple clean-up of your trade debtors, fixed asset register and inventory can result in significant tax savings. Furthermore, making sure you take advantage of the various capital expenditure concessions and prepayment rules can save you even more tax dollars.
Below, I have summarised some important ways in which you can save on paying tax. With June 30 just around the corner, now is the right time to start the process.
From 1 July 2012, any business related asset purchased up to $6,500 can be deducted (written off) from the date of purchase. The asset must be used for a taxable purpose and it must be installed and ready for use before 30 June for the deduction to be available in your 2013 tax return.
Worth a mention: The $6,500 threshold is applied on an asset by asset basis. This means you can claim the $6,500 more than once during the year.
Example: If you have been planning an IT upgrade and buy two new computers at a cost of $4,000 each (excluding GST), you are entitled to an $8,000 deduction, as each asset costs less than $6,500.
Accountant’s Tip: Before committing to any capital expenditure, it is highly recommended that you assess the cash flow of the business as you may want to consider financing asset purchases.
Also, ensure that you enter all asset purchases in your MYOB accounting software as an asset and not an expense, and have your accountant calculate the depreciation of 100% of the cost as a year-end depreciation expense. This way you will have a perpetual list of your assets in the fixed asset register which will also be beneficial for insurance and asset protection purposes.
From 1 July 2012, any business related motor vehicle purchased is entitled to a one-off deduction of up to $5,000. The value of the motor vehicle will need to be adjusted for business use based on your current log book and luxury car limits still apply.
The remainder of the motor vehicle will be pooled in the general small business pool and entitled to a 15 percent deduction in the first year and 30 percent every other year.
Worth a mention: The one off deduction is available for both new and used vehicles.
Accountant’s tip: If you purchase a vehicle costing less than $6,500, you may be entitled to write-off the whole amount.
Your business is entitled to claim a deduction for any expenses that are prepaid, where the payment is for a period of service that is 12 months or less and ends in the next income year.
Worth a mention: The main prepayments that small businesses claim include rent, insurance, supplier payments, subscriptions to associations, advertising and even accounting fees.
Example: If your business prepays $50,000 of rent in June 2013 that relates to the period from July-December 2013, then the deduction will be allowed in full in the 2013 tax return.
Accountant’s tip: Before committing to the prepayment of business expenses you will need to ensure that the business has adequate cash flow.
This is one of the biggest challenges faced by small business owners, particularly in the early stages. Almost all small businesses I come across have a handful of debts which are old and potentially not recoverable. If you decide to write-off these debts, you will be entitled to a tax deduction or the full amount in the year in which the decision to write-off the debt was made.
Worth a mention: The tax office requires that the debt must be classified as “bad” and not just “doubtful” and that all necessary steps to recover have occurred, such as phone calls, reminder notices and reasonable time for collection has passed before a write-off can occur. If your business accounts for GST on an accrual basis, you will be entitled to a refund of GST collected and paid on your previous BAS when the debt was raised.
Accountant’s tip: Review your MYOB trade debtor’s reconciliation report for the debtors that are nine-plus days outstanding and make a decision on whether the debts are collectible or not.
If you write-off any inventory that is obsolete, slow moving or has been subject to theft, the business will be entitled to a tax deduction as the closing value of stock forms part of assessable income.
Worth a mention: You are able to value the remaining stock on hand at actual cost, replacement value or market selling price which may also potentially provide a tax saving.
Accountant’s tip: Make sure you review your MYOB inventory reports to determine what inventory is slow moving or obsolete and ensure the write-off is done by 30 June to allow the tax deduction this financial year.
A tax deduction is allowed for the written down value of any fixed asset that is written-off.
Worth a mention: You will need to calculate depreciation up to the date that the asset is written-off.
Accountants tip: Review your fixed asset register before 30 June and ensure all write-offs are performed to allow the tax deduction in the 2013 year.
For EOFY 2013, all businesses need to meet tax and compliance obligations. Find the latest and most up-to-date Tax Tips, Changes and Resources from MYOB to help startups and small businesses (SMEs) to stay on top of their game with tax changes and tips.
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.