It’s almost the end of the financial year. Time flies when you’re working hard in your business. It’s now time to start wrapping up for the year and looking ahead for the new financial year here in Australia.
Here are a few handy tax planning reminders for small businesses out there.
1. Pay your superannuation before the year-end
Most businesses have payroll software that enables posting payroll expenses into the general ledger by the click of a button. Employees are paid their net wage, but the superannuation contributions may be left in an unpaid superannuation account until the end of the month or quarter.
While most expenses are eligible for deduction when incurred, superannuation is only deductible when it is paid and received, on time, by a complying superannuation fund. Superannuation contributions need to be received by the fund by the 28th day of each quarter (with significant penalties for late payment). The June quarter superannuation liability is only due by 28 July and is often not paid before year end.
However, by paying the June quarter liability before 30 June the amount is deductible in the year it is paid should the fund receive the amount by 30 June.
2. Use Instant Asset write-off by incurring capital expenditure before year-end
Considering purchasing assets to expand operations? Perhaps your plant and equipment are outdated and require updating.
Small business entities (less than $10 million turnover) have previously been able to deduct assets that cost less than $20,000 immediately. This year’s budget has not only increased the threshold to $30,000, but also allowed medium sized businesses (turnover between $10 million and $50 million) to access this immediate deduction for plant and equipment acquired after 2 April 2019.
Pay extra attention to small business assets acquired during the year to determine when the asset was in fact first used in the business as this may result in a better tax deduction based on these thresholds.
3. Write off bad debts before year-end
If you have a non-paying customer and there is a genuine concern regarding recovery of the debt, then some or all of the debt can be deducted in the current tax year provided it is written off before year end and was included as income at an earlier time.
It is important to substantiate the reasons behind writing-off the debt prior to year-end. Keep in mind that you may be entitled to a reduction in GST for the bad debt written-off. If you are registered for GST and have included the forgiven amount in a prior period Business Activity Statement, you are entitled to adjust down the GST payable in the period that you write-off the bad debt.
4. Scrapping/disposing of plant and equipment before year end
Businesses should review their fixed asset registers to ensure that they are not holding plant or equipment that they no longer require due to obsolescence. Even checking for assets that your business no longer holds could save you at tax time. Depending on the written down value of the assets, a deduction can be claimed should the asset be ‘scrapped’ or disposed of prior to year-end.
5. Valuing closing stock at lowest value
It may be time to review how your business values stock on hand. Perhaps the value of closing stock used for tax purposes is based on your management accounts that uses the higher of net realisable value or cost. The ATO allows a business to value its closing stock at any of the following values:
- Replacement value
- Cost
- Market selling value.
Depending on the stock valuation under these three methods a business can obtain a significant reduction in its tax liability by adopting a method that results in the lowest value.
In certain circumstances, a taxpayer may also be entitled to a deduction for a write-down of obsolete stock where appropriate valuations and measures are taken.
6. Committing to staff bonuses before year-end
It is common practice for a business to create a provision for payment of staff bonuses. However, a tax deduction is only available for staff bonuses to the extent that the business is ‘definitively committed’ to paying the bonus.
Therefore, a business looking to claim a deduction for current year bonuses should keep appropriate documentation to support approval of those bonuses prior to year-end.
7. Prepaying expenditure eligible for immediate deduction
Review any of your expenditure that is eligible for a discount if paid for the next year. Not only can you take advantage of this saving but depending on the expenditure it can also result in an immediate tax deduction.
Small businesses are eligible to deduct any prepayment that has a service period of less than 12 months and all businesses can deduct prepayments that are either required under a Government law or cost less than $1,000.
8. Accruing expenses paid after year-end
Just because you haven’t paid for goods or services until the following tax year, doesn’t mean you can’t take advantage of the deduction this year.
To the extent that services are provided to you before year end even though they are invoiced after year end, and the cost can be reasonably estimated, the expenditure is deductible in the year in which the service was provided.
9.Deducting ‘consumables’ contained within closing stock
If your business holds consumable stores or spare parts that are to be used within three months after year end, the ATO’s view is that businesses can deduct the costs of consumables in the year acquired, as opposed to having to include the amount in closing stock. It can be beneficial for businesses to review their consumables and claim upfront where possible.
10. Immediate deductibility of start-up costs
If you started your small business during the current year (or will do before year end), the costs associated with starting the business will be deductible (e.g. accounting fees, legal costs, company incorporation costs and trust deed costs).
11. Division 7A Loans – Company loan to shareholders
If you are a shareholder or a shareholder’s associate and you borrowed money from a company for personal use during the 2019 financial year, these loans need to be repaid or placed on a complying loan agreement by the lodgement due date of the company 2019 tax return.
If not, there is a risk that the loan will potentially be treated as a deemed unfranked dividend and taxed in the shareholder/shareholder’s associate hands.
With respect to existing Division 7A loans, please ensure the minimum annual loan repayment is received by the company prior to 30 June 2019.
All of these become easier and far more streamlined with tax planning ahead of year end (in fact, before the next financial year), but it’s also helpful to ensure that you are set up right and have the proper systems in place to ensure that you’re not missing out on important allowable deductions.
If you are ever unsure, please make sure you are consulting your accountant / tax advisor.
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