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Count down to tax time

With June 30 around the corner, take a moment to consider your tax situation. Gayle Bryant discusses every business owner's tax checklist.

 

It's tax time and, as a business owner, you should be seeking ways to legally minimise the amount of tax your business is liable for. Sydney-based accountant Peter Forsyth, of Forsyth GM Chartered Accountants, specialises in assisting medium businesses with their tax and accounting issues. He says there are a number of actions you should be undertaking to ensure you are minimising your current-year tax liability.

Some of the main considerations are:

• understanding your expenses
• deferring income
• maximise deductions
• superannuation
  
  

Understanding your expenses

Expenses can be divided into three main groups:

• expenses you can deduct in the year the expense occurs;
• expenses you can deduct over a number of years; and
• expenses you can never deduct.
• Expenses you can deduct in the income year in which they occur include items that relate to the everyday running of your business such as stationery, rent, salary and wages.

Expenses you can deduct over a number of years include the items that have a longer life and relate to the establishing, replacing, enlarging or improving the structure of your business. They are capital expenses and include items such as computers and furniture.

Generally you can't deduct the total expense for a capital asset in the income year in which you incur the expense but instead you deduct the amount for the decline in value of the asset each year over a number of years. These assets are called depreciating assets. Different financing methods can produce different rates of deductibility; for example, leasing versus hire purchase, versus taking out a loan.

Some expenses can never be deducted, such as those for private or domestic expenses or for costs such as parking fines.

Defer income

You might want to consider deferring income so you can account for it in the next financial year. Most businesses operate on an accruals basis and have to take up income when billed. Deferring some billing until July will defer tax for another 12 months.

Businesses with a turnover of less than $1 million ($2 million after 1 July 2006) may qualify to apply the STS (Simplified Tax System). STS is a package of measures that provides an alternate method of determining taxable income. Participating in STS is optional and the Tax Office's website contains details of whether or not you are eligible (www.ato.gov.au). The major advantages of the system are:

• you can apply either the cash or accrual basis of accounting. For many businesses, the cash basis is preferable as income is taken up only on receipt (not on billing).
• STS taxpayers also benefit from a faster rate of depreciation of their assets.
• in the first year of purchase you can claim 15% and then 30% of the written down value thereafter.
• prepayments are allowable and can provide an added deduction in the current year. For example, a new car lease entered in June with an annual payment.

Maximise deductions

All businesses should be maximising their deductions including items such as bad debts, stock, any repairs, prepayment of services and advertising costs.

"Any bad debts – that is debts that you do not expect to be paid, can be physically written off and deductible in the same year," Forsyth says. "Also check to see if any of your stock can be written down below book value."
Make sure that all the work carried out to date on your behalf has been invoiced. For example, ask all contractors, advertisers, and service providers to render a bill for work performed up to 30 June.

One way of reducing your tax is to pre-pay for any service in this financial year, even if the service will not be provided until the following year. STS taxpayers are entitled to claim the full amount of the prepayment in the year in which the payment is incurred, provided the service is completed within
12 months.

Bringing forward repairs can also make a difference to your tax bill. Repairs are deductible in the year that they are carried out so if you have anything that needs fixing and you are keen to reduce your tax bill, then now is the time to do it.

Superannuation

Superannuation is one of the most effective ways of reducing your tax bill. Be aware that you need to make sure that all your staff super contributions are paid by 30 June – and actually banked into the super fund's bank account. If not, the deduction is not allowable until the following financial year. NAB's Head of Financial Planning Iain Rogers says you are also able to make super contributions to your spouse if they work for you up to $50,000 – no matter what salary they are earning. "Some people may even qualify for higher transitional limits since the recent Federal Budget release," says Rogers.

For example, say Paul owned a number of computer IT Superannuation is one of the most effective ways of reducing your tax bill shops and employed his wife, aged 45 as a secretary. No matter what her salary was, he would be able to make contributions into her super account. Rogers says: "He can do so up to the new personal deductible limit of $50,000. These contributions are tax deductible to Paul so this strategy reduces the amount of tax his business pays. Paul can now claim 100% of his own contributions up to $50,000." Forsyth adds: "The major way you can reduce your tax is still through superannuation strategies. However, remember once you contribute to super it is generally locked away until you retire and as a business owner you need to ensure you have a regular cashflow – so don't place it all in super."

The recent changes

Rogers also warns that recent changes to the rules mean you should see your financial adviser before 30 June 2006. He says the May Budget introduced some unforeseen changes to the way that superannuation contributions and end benefits will be treated in the future. "These changes are generally beneficial, but do mean that most business owners need to re-assess their plans in this area," he says. "The new rules allow for tax-free super benefits to be paid to retirees over the age of 60 after 1 July 2007, making superannuation an increasingly attractive proposition. Lower limits will apply to tax-deductible super contributions for many people however, so planning ahead is now crucial. These changed limits were effective from Budget night, 9 May 2006. "Splitting of superannuation contributions is now largely irrelevant, and reasonable benefit limits will not apply after July 2007. The previous ability to sell a business prior to retiring and then contribute to super has been constrained, so business owners should be working with their adviser to plan ahead using new strategies that take advantage of the changed rules."

Gayle Bryant is a finance writer who contributes to The Australian and The Sydney Morning Herald.