Australia: Small business: Decisions for your end-of-year tax planning

Moore Advice edition 4
Last Updated: 17 June 2015

There are a variety of decisions that are required to be made at year end to manage your tax bill.

Your choice will be based on your businesses activities both past and future and also when you are looking to exit.

In relation to deductions, the general rule is that you can claim deductions for expenses your business incurs that links to making or trying to make income. Many of these deductions are obvious – rent, materials, and supplies are common examples. This year, small business owners are spoilt with the increase in the instant asset write-off amount to $20,000.

There are also some often overlooked and not so obvious tax deduction tactics you may be able to take advantage of in the run-up to the end of this financial year. These may not suit every business, so check with this office to ensure they are applicable to your situation.

Interest on loans

You can deduct interest charged on money your business borrows, including interest paid on business loans, overdrafts and other finance facilities. But there are some other aspects related to interest deductions that can easily be overlooked.

Any interest that is accrued on a business loan but not physically paid by June 30 may be deductible in that year. It is a fact of life that many sole traders fund some business activities through their personal credit card or a personal loan. Because the interest costs are not being incurred under the business name, but in the name of the business owner, many operators have unfortunately assumed that a deduction cannot be claimed.

But remember — the tax of a sole trader's business activities is dealt with through the personal taxes of the business owner, so the interest on borrowings made for business purposes, even on the personal credit card, still may qualify to be claimed as a deduction.

Manage the value of your trading stock

Tax time is a good opportunity to do a stocktake on your business to see if you can uncover any deductions from your trading stock that you have on hand – anything you produce, manufacture, purchase for manufacture, or sell for your business.

If your stock level changes by more than $5,000, you must take into account the change in value of your trading stock when you work out your taxable income for the year. If the value of the trading stock is higher at the end of the year than at the beginning, then the rise counts as part of your assessable income. But if your stock is worth less (or worthless), that decrease is an allowable deduction.

There are three different methods of valuing stock: the price you bought it for; its current selling value; and its replacement value. You can choose which you use for which piece of stock, providing you the opportunity to maximise your deductions. You can also write down the value of any damaged or obsolete stock (potentially to nil) that hasn't been sold.

Also, even if your stock levels change by less than $5,000, you can still chose to revalue your trading stock by one of the methods mentioned above. Note that the value of trading stock does not include GST where you are entitled to a GST credit. You should always keep records of the reasons that you have valued or written off your stock.

A CGT tactic

Consider whether you are sitting on a CGT gain for the current financial year or you have prior year CGT losses carried forward, and look at offsetting these gains or losses.

If your business is due to sell some assets that will realise a capital loss, try to crystallise these losses before June 30. Losses can be offset against taxable capital gains that you may make on selling other assets. If however the sale will produce a capital gain, delay crystallising this gain until the 2015-16 income year so that you will have a full fiscal year to get an offset that gain.

And if there are assets that may produce a capital gain, this could help your decision on the timing of making any capital losses. It may even be worthwhile for you to sell an underperforming asset, and realise a loss, if this suits your CGT circumstances.

As a general rule, the disposal of a CGT asset occurs at contract date — this could help in your planning if you sell an asset where settlement and/or payment takes place in 2015-16 but the contract is executed in 2014-15.

The good news about bad debts

It's a problematic fact of running any small business on credit that sometimes customers simply fail to pay for the goods or services you've sold them. But you can claim a tax deduction for the bad debt.

A bad debt is any owed amount that you have genuinely written off by year-end that you have previously been taxed on. It might pay to go back through your outstanding invoices to identify any doubtful debts to determine whether that have actually gone bad and write them off before the tax year ends on 30 June 2015. Contact this office for information on what constitutes a write-off for deduction purposes.

Also, if you calculate your GST on an accrual basis, don't forget to claim a refund for the GST you paid to the Tax Office when you issued the original invoice on your June BAS. If the debt is settled later, record this as assessable income in the period it is paid.

Commit to employee bonuses and director fee bonuses

Many businesses are entitled to claim a tax deduction for an expense in the year in which the business has committed to the liability regardless on whether it is actually been paid.

If you have committed to pay employees end-of-year bonuses and followed the appropriate steps, the accrued expense can be claimed as a tax deduction even though it is physically paid next financial year. A company can also claim director bonuses in the year the expense is accrued in the same way. Contact this office to have the process explained.

Take advantage of the $20,000 depreciation cap while you can

Small businesses shouldn't forget to claim for depreciation – a deduction for the loss of value and wear and tear on assets. Larger assets have usually had to be depreciated over several years, but new rules for small businesses mean that you can get an immediate tax write off for any asset costing up to $20,000. Importantly, this applies for assets acquired from Budget night (i.e. 7:30pm AEST, 12 May 2015).

For example, if your business bought a business asset worth $4,000 post-Budget night, the business could be eligible to claim an immediate tax deduction.

That said, this immense leg-up is set to expire on June 30, 2017, so if you're planning to buy any assets for your business, consider making the purchase before then to take advantage of the new cap. And, most importantly, any assets bought and used before 30 June 2015 can be included as a write-off in this year's tax return.

Instant asset write-off also applies to cars

The $20,000 instant asset write-off in this year's budget also means there's never been a better time to consider purchasing a vehicle and getting an immediate deduction. Under the rules, a $14,000 car can attract a deduction on that whole amount. But note that it starts from Budget night and finishes on 30 June 30 2017, so you'll have some time to consider your options.

Planning for this year due to budget changes coming next year

Immediate deductibility for start-up costs
If you are considering starting up your own enterprise, it could pay to bide your time. Small businesses starting out from the 2015-16 income year will get to immediately deduct a range of professional expenses associated with starting a new business. Legal and accounting costs are included, which will allow businesses to avoid deducting expenses over a five-year period and improve cash flow straightaway. For example, ask this office for advice in this area and our fees will be immediately deductible.

Tax rate changes
The 28.5% small business tax rate cut — assuming it's passed into law — comes in 30 June 2016. You're paying more tax now, so any savings you can make may be potentially worth more if you deduct them in the 2015-16 year rather than after. Talk to this office if you have any questions.

Dividends will continue to be franked at 30% even though the tax rate will be 28.5%, so going forward make sure you have enough tax paid to fully frank your future dividends. Ask this office for a review of your franking account.

FBT changes for work-related electronic devices
If your business provides its employees with more than one qualifying work-related portable electronic device — even if the devices are similar in utility, like a laptop and tablet for instance — you can now get an FBT exemption on those devices from 1 April 2016.

CGT roll-over relief for changes to business structure
This year's budget included a CGT rule change for small businesses that change the type of business entity under which they operate. From the 2016-17 income year onward, small businesses with an annual aggregated turnover of less than $2 million will be able to change legal structure without attracting a CGT liability at that point. If you are considering changing structure, also consider whether you can wait a year to do so and save on that possible future CGT.

DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.

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