With tax time looming, tax specialists say leaders need to do five things to ensure they get good deductions or reduce their tax.
Personal super is often used as a deduction for any person running a business. Up until the last Federal budget, if you were aged 50 and older, you could claim up to $50,000 and have that taxed at 15%. The budget changed that – people aged 50 and older from next year will be allowed a maximum $25,000 contribution for the super fund to be taxed at 15%. The changes kick in from July 1, which means that anyone over the age of 50 running a business has until June 30 to get the maximum deduction. Tax experts say a $15,000 deduction for a concessional contribution could be worth as much as $15,750.
Geoff Steer, director of Melbourne-based Matthews Steer Chartered Accountants, says business leaders will not get another chance.
“That’s a permanent loss,’’ Steer says. “If you don’t take advantage of it this this year, it’s lost forever. A lot of business people until now have to make a decision as to whether they’re going to contribute into superannuation, depending on how they have gone with their profit and to top up their contribution now. If they don’t do it before June 30, from then on they will only be able to put in $25,000.”
The other point to note is that June 30 this year falls on a Saturday. While electronic transfers work on a Saturday, it needs to hit the super fund accounts on the business day before the weekend. Tax experts say you should get it in a few days early – don’t leave it to the Friday afternoon.
“It has to be physically paid before June 30. For a few days of cashflow, they might as well pay it early to get the tax deduction in the current year,” he says.
Steer says the Australian Taxation Office this year has tightened up the rules for when trusts can make resolution on distribution of income.
“In the past, the Tax Office has allowed the trustees to make their resolution through to August 31. The Tax Office has come out and said you have to make your resolution before 30 June in how you are going to distribute your income and profits for the year,’’ he says. “For any business carrying on business through a trust – and it applies to investment trusts as well of course – it’s critical they make their trust distribution resolutions before June 30.”
But how does the business know what profit it’s going to make before June 30?
“You either have to make an estimate or make the resolution based on percentages,’’ he says. “For example, resolve to pay 50% to the wife and 20% to one of the children and so on.”
Under changes that come into effect in July, small businesses with turnovers of under $2 million will enjoy an increase in the value of capital assets they acquire that they can write-off. That rises from $1,000 to $6,500. Similarly, they will be able to claim an accelerated deduction of an initial deduction of $5,000 for vehicles purchased from July 2012.
Tony Greco, a senior tax advisor at the Institute of Public Accountants says small businesses need to hold off their capital asset and vehicle acquisitions until July. “So if you bought 10 things for under six grand, you get a complete write-off for those 10 things, as opposed to writing them off over their effective life, so it can be a significant change for someone in that space,’’ Greco says. “It’s six and half times the existing threshold. You bring forward the write-off and therefore you get the cashflow benefit when you lodge your next tax return. It just brings forward the nice cashflow write-off and reduction in your tax.”
Greco says many businesses miss out on the tax benefits by failing to get their house in order before June 30. It means writing-off bad debts and stock that’s not moving.
“There is stuff that a lot of people don’t do,’’ Greco says. “For example, they don’t write the bad debts off before the end of the financial year. What you need to do before the end of the financial year is clean out your debtors, you clean out your stock and you clean out your fixed assets.”
“If a debt is bad, you might as well get the deduction and claim back the GST that you paid. A lot of people write the debt and forget to claim the GST. Not only do you claim the deduction, you can claw back the GST.”
The same goes for inventory, he says. “A lot of people carry too much and the slow moving stuff that is never going to be sold and a hard decision needs to be made to scrap it,’’ Greco says. “Lower stock for the year equates to lower profit so you want to clean out your inventory on the physical side and the valuation side opens a lot of opportunities with how you value.”
“It can be cost, it can be replacement value, it can be market value and you can do that on an item by item basis. That gives you a lot of manipulation of that balance and you can use that to either increase or decrease your profit legitimately.”
“You can then burn that asset value and then get a write-off, bringing forward a deduction. If you’re never going to sell that, you might as well get the cashflow benefit of writing it off and getting a deduction for it. If you can get a few bucks bringing forward a deduction, I think that’s a better way to manage an asset that’s not doing much on the shelf.”
For businesses organised as companies, there are the Division 7A rules of the Income Tax Assessment Act which are there to stop companies making tax free distributions of profits to shareholders in the form of loans, advances and other payments.
David Pring, a partner in corporate tax at Deloitte, says companies need loan agreements in place to make these distributions. Otherwise, the payment becomes a dividend which is taxable.
“If you put a loan agreement in place and you repay it within the correct timeframe, then there is no tax paid on that,” Pring says. “If you put a loan agreement in place, in compliance with the rules where the amount will be repaid over the following seven years, then that won’t be deemed a dividend. Lots of companies will need to put loans agreements in place, and then lots of companies will need to make sure they make the payments in accordance with those loan agreements.”