Year-end tax planning for small businesses

The management of your tax liabilities is crucial to the success of any small business. There are certain strategies that can be implemented before year end to ensure you pay the right amount of tax. Below are some of the common tax plans for small business owners.

1. Defer your income

Consider deferring your sales until July

  • Consider the timing of billing work in progress
  • Consider the impact of realising sales of assets that are likely to provide assessable gains
  • Consider the timing of lodgement and receipt of insurance claims

2. Make prepayments

Prepayments are entitled to an immediate deduction if you have made <$1000 under a contract of service. For a small business entity (SBE), you can claim a deduction for a prepaid expenditure greater than $1,000 as long as the eligible service period is less than 12 months. For example, you can prepay your rent prior to 30 June 2014 for the 12 months ended 30 June 2015.

3. Evaluate your stock

  • Make sure you conduct a stocktake before the end of the financial year. Any obsolete stock that is identified should be written off and claimed as a tax deduction. If you qualify as a Small Business Entity (SBE), you do not have to perform a stocktake if you assess that the value of your inventory will not vary by more than $5000 in the tax year.
  • Also, consider the best method to value your trading stock either by choosing cost, sales value or market value.

4. Write off bad debts

  • Ensure that any bad debts are written off before 30 June to ensure a tax deduction is claimed in the current year.
  • If you pay your GST on an accruals basis, any bad debt adjustment is likely to result in a refund of GST already paid to the ATO
  • When writing off bad debts, make sure you follow the rules to ensure that the debt is bad and that the necessary steps have been followed to collect the debt.

5. Disposal of assets

  • If you are planning to scrap fixed assets, consider realising the disposal before 30 June to ensure a deductible adjustment

6. Immediate write-off for assets less than $6,500

  • Assets costing less than $6,500 and purchased before 31 December 2013 can be written off if they are installed and ready for use before 31 December 2013
  • The Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, designed to abolish the mining tax, also contains provision to write back the deductible amount to $1,000 from 1 January 2014 to 30 June 2014.

This Bill was defeated in the Senate meaning the proposed amendment has not been passed. This leaves SBE in a bit of a pickle as to whether the Government will be able to back date the amendment to 1 January even if it is passed after 30 June.

Accordingly, I urge all small business owners to be cautious in respect to assets purchased after 1 January 2014 costing between $1,000 and $6,500, as an immediate deduction may not be available.

7. Motor Vehicle Deduction

  • Under existing law, a SBE is entitled to a one-off $5,000 deduction plus 15 percent depreciation of any additional value for any new motor vehicle purchases. The remaining value of the asset after the $5,000 is allocated to the general pool with a 30 percent deduction allowed in later years.
  • As the Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 has not passed in the Senate, these motor vehicle rules have provision to be repealed from 1 January 2014
  • The normal depreciation rules would then apply from 1 January 2014 and as mentioned above, we urge caution with motor vehicle purchases from 1 January to 30 June 2014 with respect to the deductions available.

8. Make donations

  • If you plan to make donations to your favourite charity, ensure you do so before 30 June. Remember, if you are expecting a tax loss, your donations will not be tax deductible in the year paid.
  • You can choose to spread the tax deduction over a period of up to five income years if it was a gift of money of $2 or more, a property valued at more than $5,000 and a property under the Cultural Gifts Program.

9. Capital Gains Tax (CGT)

  • You should check whether the 50 percent General Discount is applicable for any proposed asset disposal (Individual, Trust). You need to satisfy the following basic conditions for Small Business CGT relief:
    • <$2M turnover
    • <$6M net assets
    • Active asset test satisfied
      • 15 year exemption
      • 50 percent reduction
      • Retirement exemption
      • Roll-over

10. Carried forward losses

  • If there are tax losses carried forward from a previous year, ensure that they can be offset this year under the Continuity of Ownership Test (COT) and the Same Business Test (SBT) rules. You should ensure that capital losses are only offset against capital gains.

11. Make superannuation contributions

  • Ensure that all June quarter contributions are paid and received by your Superannuation Fund before 30 June to allow for a tax deduction. Any other outstanding amounts should also be paid before year end.
  • Ensure that concessional superannuation contributions caps have been maximised. They are:
    • < 59 years at 30 June 2013 = $25,000
    • > 59 years at 30 June 2013 = $35,000

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The information provided here is of a general nature for Australia 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 for end of financial year.