Tactical business deductions for your end-of-year tax planning
There are various legitimate ways to go about minimising your business’s tax liability, with various straightforward business deductions that most businesses can utilise. The general rule is that you can claim deductions for expenses your business incurs in its task of generating income. Many of these deductions are obvious – rent, materials, supplies and so on.
But for all the obvious possible deductions, there are also some very often overlooked and not so obvious tax deduction tactics that 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 our office on 08 8120 4877 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.
First, any interest that is accrued on a business loan but not physically paid by June 30, is potentially deductible in that year.
Secondly, 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 via the personal taxes of the business owner, so the interest on borrowings made for business purposes, even on the personal credit card, still qualify to be claimed as a deduction.
A CGT tactic
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, and therefore reduce, 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 2014-15 income year so that you will have a full fiscal year to get in place options to offset that gain.
And if there are potentially capital gain producing assets on your register, this could help your decision about which capital losses to realise. 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, a “CGT event” or a disposal occurs at contract date — this could help in your planning if you sell an asset where settlement and/or payment takes place in 2014-15 but the contract is executed in 2013-14.
You can profit from your losses
Tax time is a good opportunity to do a stocktake to see if you can uncover any deductions from your trading stock – 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 taxable income. But if your stock is worth less, you will qualify for a 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, giving you the opportunity to maximise your deductions. Note that the value of trading stock does not include GST where you are entitled to a GST credit. In this calculation, you can write down the value of any damaged or obsolete stock (potentially to nil) that hasn’t been sold.
The good news about bad debts
It’s a problematic fact of small business life that sometimes customers simply fail to pay for the goods or services you’ve sold them. But one (small) consolation is that 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. It might pay to go back through your outstanding invoices to find bad debts and write them off before the tax year on June 30. 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 business activity statement. If the debt is settled later, record this as assessable income on the BAS for 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. If you have committed to pay employees end-of-year bonuses, the accrued expense can be claimed as a tax deduction even though it is physically paid next financial year (provided the employee is not an ‘associate’ of the business entity — such as a shareholder of a company).
A company can also claim director bonuses in the year the expense is accrued in the same way. For a company to claim a deduction for a director or employee bonus without physically paying the money, the company must, before the end of the financial year, commit to and document the payment of a quantified amount (which could be a formula based on profits or revenue amounts yet to be finalised).
Note: The next three tips come with something of a “conditional” clause in that their effectiveness very much depends on the relevant legislation remaining as it stands. The next two tips, for example, may be affected by the repeal of the mining tax (which is not 100% certain at this stage) which, if this eventuates, will change the depreciation rules affective January 1, 2014.
Take advantage of the $6,500 depreciation cap while you can
Small businesses shouldn’t forget to claim for depreciation – getting a deduction for the loss of value and wear and tear on the business’s assets. Assets usually have to be depreciated over several years, but special rules for small businesses mean that you can get an immediate tax write off for any asset costing up to $6,500 (assuming the status quo holds for this financial year). For example, if your business bought a business asset worth $4,000 in the current tax year, the business could claim an immediate 100% tax deduction when you do your tax return.
That said, the legislative wrangles mentioned above would see this write-off limit drop to $1,000, so if you’re planning to buy any assets for your business, consider making the purchase before the end of this income year while you can still take advantage of the $6,500 cap. Note that the Tax Office has announced that should businesses base their tax claims on the legislation as it stands (that is, the cap of $6,500) but this is eventually changed with effect in 2013-14, it will not impose penalties or interest charges when 2013-14 returns are amended to account for the lower write-off cap (see separate story on page 9). However if the rules stay the same, and you don’t take advantage of the higher instant asset write-off, you may miss out on a valuable deduction and cash flow benefit (although of course you remain eligible to amend the return later, within the timeframes).
Vehicle depreciation opportunity
There are also (for now) generous depreciation concessions for a small business buying a motor vehicle. Small businesses can depreciate cars, trucks or vans and so on more quickly than other businesses. There is a 100% deduction allowed for the first $5,000 cost of the vehicle and then the ability to depreciate the rest at 15% in the year of purchase. So, a $14,000 car would attract a tax deduction of $6,350 in the year of purchase. And if the vehicle cost less than $6,500, the whole amount can be claimed as an immediate deduction under the instant asset write-off provisions outlined above.
But, as with the general depreciation rule, the government wants to remove these concessions; the initial deduction on a $14,000 car would then drop to $4,200. So if you’re considering buying a business vehicle, think about doing it before the end of the tax year. And again, if the rules change but you’ve based your tax return on the status quo, the Tax Office has promised no penalties or interest charges.
The debt levy and re-thinking your end-of-year strategy
One final thought is in regard to the impending Temporary Budget Repair Levy, which is planned to take affect from July 1, 2014 (2% on adjusted annual taxable income of more than $180,000). A generally accepted tactic is to maximise tax deductions in order to get the current tax year’s liability down. But there could be a case, should this levy become law, for doing exactly the opposite — delaying deductions until the next financial year, when they could be worth more because of the resulting higher overall tax rates.
This will of course depend on your circumstances, and if you operate your business as a sole trader or in a partnership, or perhaps if you withdraw large dividends from a family trading company (and you therefore pay your taxes at individual rates). Consult this office for guidance, and also for any further information regarding the above tactical deductions.
Guidance on how to deal with instant asset write-off uncertainty — at last
As most small businesses know, the previous government introduced a number of small business tax relief measures as part of its Mineral Resources Rent Tax (MRRT, or mining tax) legislation. These included:
the ability to instantly write off asset purchases up to $6,500 in value (up from the existing $1,000 relief)
instant write-off of the first $5,000 spent on a motor vehicle plus 15% of the rest of the purchase price
ability for small companies that incur tax losses to carry those losses back against profits of a previous year, with a resulting refund of tax paid in that previous year.
As part of the repeal of the mining tax, the current government proposed to also abolish these measures, with effect from January 1, 2014. However the mining tax repeal has not passed the Senate, which means that these measures have been in limbo — meaning that small businesses have also been left in limbo as far a knowing what to do about them from a practical tax treatment point of view. Currently these concessions are in the law, but should the Senate pass the legislation after July 1, they would retrospectively disappear, effective from January 1.
The continuing uncertainty for small businesses has not been helpful, and while the Federal Budget would have been an ideal opportunity to provide clarity, no such guidance was forthcoming.
The government’s failure to address these concerns for small businesses has led to the Tax Office having to step up to the plate and, sure enough, in the week after the Budget it provided guidance on how businesses should deal with these measures pending either the passing of the mining tax repeal law or a revision of the proposals.
The Tax Office advises that should the mining tax (and so the concessions) be repealed, taxpayers will have to amend any tax returns already lodged that have claimed the higher rate of instant asset write off, accelerated vehicle depreciation and loss carry-backs, but – crucially – has advised that businesses that have made such claims based on existing law will not have imposed on them tax shortfall penalties or shortfall interest upon amendment.
This means that small businesses which have bought qualifying assets or will make a tax loss in the current year can now take advantage of the existing measures confident that the worst that can happen is they will have to recalculate their tax based on the new law but that they won’t be hit with interest and penalties.