June 2006
Why pay more tax than you need to? By taking a few simple steps before 30 June you can reduce your tax and make the most of any deductions or opportunities available to you and your business.
Strategies for your business
Superannuation - The next quarterly superannuation guarantee payment is due on 28 July 2006. However, you can claim a tax deduction this financial year by making the payment on or before 30 June 2006.
Employers are entitled to a deduction up to the maximum deductible limit for each employee. This is a strategy often used by small business owners who are employed through their own company. Where you are making top up superannuation payments before the end of the financial year, if you want the tax deduction in this financial year, then ensure the transaction is completed before June 30.
Bad debts – You can claim a tax deduction for bad debts incurred this financial year if:
1. All reasonable steps have been taken to recover the debt (but have failed) and it is clearly a bad debt;
2. The debt has been brought to account as assessable income; and
3. It is written off (removed from the debtor ledger) as bad before 30 June 2006.
Trading stock - If your business carries trading stock, identify any items of stock that are damaged or obsolete and no longer have any value as these can be written-off and claimed as a tax deduction. You also have options on valuing your trading stock. It doesn’t always have to be valued at cost price. Sometimes there is a benefit in using an alternative valuation method.
Review your asset register - Review your asset register prior to the end of the financial year for any plant and equipment that is obsolete and sitting on your depreciation schedule. Rather than a small amount each year, if the plant has become obsolete, scrap it and write it off before year end.
Buy now claim now – It’s hard to miss all of the signs around the shops at the moment offering tax time specials. Work out what consumables, repairs, trade gifts or donations you need to make and if cash flow allows, take action now and claim the deduction.
Bonuses & Directors fees – Your business can claim a deduction for employee bonuses and Director fees if the company is committed to the payment at year end. You don’t have to of actually paid the money as a clear liability is enough. The bonus or fee needs to be documented this financial year in the form of a minute or notification to the employees. Payment should be made during the first quarter of the new financial year and the appropriate tax withheld. Using this strategy can bring forward a tax deduction for the company, while the employee or director will not have to declare the income until the year of receipt.
Is it time to take another look at the Simplified Tax System (STS)?
This year’s Budget relaxed some of the eligibility conditions for businesses opting into STS. These include increasing the turnover limit to $2 million (up from $1 million) and removing the maximum limit for depreciating assets.
All of this means that STS will be available to a greater number of small business owners.
Key benefits of STS include:
- Accelerated depreciation deductions
- No need to complete a stock take where stock movements have been less than $5000
- The ability to make prepayments at June 30
- The ability to account on a cash or accruals basis
For some small businesses, STS will make tax time simpler and provide a better result. And, it’s not too late to enter STS for the current tax year. It’s not the right option for every business but for some, it can make life simpler and increase your access to deductions in the current year.
Strategies for you
Delay bonuses and bring forward payments
The tax cuts announced in the Budget come into effect on 1 July this year. Only those on an income over $150,000 will pay the top marginal tax rate of 45 per cent. If you earn $40,000, the income tax cuts mean you take home an extra $510. If you earn $75,000 it’s an extra $1,950. With the tax thresholds changing, if you can, defer any income such as bonuses until after 30 June as you will pay less tax than if the bonus was paid now.
Any legitimate expenses you have for this year, and providing they are paid before 30 June, should be more tax effective for you because of the drop in marginal tax rates.
Interest prepayments
If you have investments such as property investments or geared equity investments where you have an interest pre-payment plan, make sure you make your interest prepayment before the end of June. Prepayments are most tax effective in their first year as they bring forward the tax deduction. After that, you are only getting a single year’s deduction but if you don’t continue to prepay you will have a year where there is no deduction.
Be wary of tax effective schemes
There are a lot of schemes available to investors who are looking to reduce their tax prior to 30 June. For protection, ensure that the ATO has issued a product ruling for the investment. The product ruling sets out how the ATO will treat the investment for tax purposes. By their nature tax effective investments are likely to be investigated and possibly attacked by the ATO. If it sounds too good to be true, it is. A good investment should stand on its merits regardless of any tax benefit. This is also the ATOs rule of thumb when deciding the tax status of the scheme.
Most tax schemes defer your tax, not remove it. The benefit is a timing advantage. You will need to pay your tax eventually but some years may be better for you than others to make this payment.
Expense and business payments
If you have expenses falling due over the coming month such as income protection insurance and professional subscriptions, pay them before 30 June and take the tax deduction now rather than waiting until next year. One day can make a years difference in the timing of your tax deduction.
Superannuation
If you are self employed, you are entitled to a tax deduction on the first $5,000 you contribute to super and then 75 per cent of any amount above this. To claim a deduction this financial year the contribution has to be physically made before year end. The cheque in the mail won’t do.
Capital gains and losses
If you have made any capital gains throughout the year look at whether or not you have any available offsetting losses. Capital losses can only be claimed against capital gains. Otherwise they are quarantined and carried forward to be offset against future capital gains. At times it is worth crystallising capital gains or losses to utilise in a particular year. You may have shares or other investments that have a paper loss and where there may be a tax benefit in taking the loss into this year.
Landlords beware
Rental properties are high on the ATO’s audit radar. Many landlords unwittingly try to deduct almost every expense incurred without realising that different items are treated differently.
If you are looking to accelerate deductions before the end of the financial year, at this stage these are likely to limited to claims for repairs and maintenance, prepaid interest or body corporate charges. Claims for capital expenditure that must be depreciated will be of little tax benefit for the current year. You will only be eligible for a pro rata depreciation claim.
Repairs and replacements are likely to be deductible whereas new and improved items are more likely to be capital expenditure and depreciated over
time. If it’s new, bigger and brighter than what was already there, it’s likely to be capital expenditure.
The question is, are you improving or repairing and maintaining? Repairs relate directly to wear and tear as a result of renting out the property. They generally involve a replacement or renewal of a worn out or broken part. Replacement of an entire structure is capital. For example, replacing an entire fence is likely to be capital as opposed to repairing a few broken palings.
You can claim an immediate deduction for prepaid expenses such as interest on a loan or insurance if the expense is for a period of 12 months or less and that period ends on 30 June 2006.
Also, be wary of holiday homes that are rented out. If you or family members have used the holiday home throughout the year then you will need to apportion the expenditure on the property between private and investment.
Salary packaging
If you have existing salary sacrifice arrangements in place, it’s a good idea to reassess this arrangement to make sure that it is still viable when the new tax rates and thresholds come into effect on 1 July.
If you have a joint investment property with a low income earning spouse, consider salary packaging the interest payments on the investment property loan. By salary packaging you can transfer the tax deductions to the highest income earner and enable a low income earning spouse to derive a small income taxed at low marginal rates.
Salary packaging can only apply to unearned income. If you are looking to package your salary in the new financial year, ensure that your agreement with your employer is in place prior to 30 June.
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