With the end of the financial year looming, it’s not too late for SME business owners to do some planning to ensure you minimise your tax bill and put yourself in the best position to start the new tax year. I’ve identified a few ideas to get you started. (Updated Friday, 20 September 2019)
1. Minimise Capital Gains Tax
The end of financial year is a good time to think about your capital gains and losses for the year. Timing and planning are everything when it comes to minimising your CGT bill and making the most out of your investment returns.
Capital gains tax (CGT) is incurred when a taxpayer disposes of an asset, for example, commercial and residential property, shares, units in unit trusts or collectables. Where the asset is sold for a price that is higher than the cost base (which may be calculated based on the purchase price, associated costs and indexation) the difference is considered to be a capital gain. Where an asset is sold at a loss (i.e. for a smaller amount than it was originally purchased) a capital loss may be incurred.
Capital losses can be used to offset capital gains in a financial year. It is also possible for taxpayers to carry capital losses forward to subsequent years if they do not have capital gains against which they can deduct them at the time. Here are some strategies to reduce your CGT liability:
Dispose of assets before June 30
In years where you have incurred a significant capital gain, you may want to consider disposing of another asset that will yield a capital loss. In the event that an underperforming asset will not have a positive turn around, disposing of it before the end of financial year will allow you to use the capital loss to offset your tax liability from any capital gains.
Carry forward your capital losses
You can carry forward capital losses from previous years to offset capital gains in the current year. The real offset value of capital losses diminishes, so if you have incurred a significant capital loss you may care to consider bringing forward the sale of an asset that you expect to make a capital gain on.
2. Take advantage of the $20k instant asset write-off
There has been so much written about this recently with the proposed extension of this concession in the latest Federal Budget that this really should be a no-brainer for small business owners.
Effectively, if your business purchases assets up to the value of $20,000 you can get an immediate tax deduction for them rather than having to write them down over the following years. Previously such asset would have been depreciated at 15% in the first income year and 30% pa thereafter.
It’s important to be clear about what a depreciating asset is: to be eligible the asset has to be used in the business, have a limited effective life and be expected to decline in value over the period you use it. Examples of eligible assets include: work vehicles, IT hardware (but not software), office furniture and fittings and plant and equipment.
It’s also worth noting that the write off applies to each asset purchased under the $20,000 threshold not just one so be sure to take advantage of it if you were planning on buying multiple assets.
But remember that for the current financial year your business needs to have a turnover of less than $2 million to be eligible. It’s also worth remembering that if your business is not making a profit then a tax deduction is of no use to you.
3. Maximise concessional Super contributions
This is definitely a worthwhile area to explore to potentially save yourself some tax.
For those aged 49 and over your concessional contribution cap is $35,000 for 2015/16 while if you’re under 49 it’s $30,000. However with this year’s federal budget proposing a reduction in the cap to $25,000 for everyone from July 1 2017, you only have a couple more years to maximise the higher concessional caps.
Concessional, or before-tax contributions, include your employer’s compulsory 9.5% contributions, any amount contributed via salary sacrifice and any personal superannuation contribution that you are eligible to claim, and do claim as a personal income tax deduction.
If your taxable income is over $18,200 you pay 19% tax, over $37,000 and you pay 32.5% etc. up to 45% if you earn over $180,000. However, you pay only 15% tax on contributions into your super fund so you can see how the tax savings can add up!
It’s also worth pointing out that your super deductions need to be received by your fund prior to June 30 to ensure they will be treated as contributions received in the 2015/16 income year so don’t leave them until the last minute. In fact, it’s probably a good idea to submit them at least a week before to allow them to be processed in time.
4. Trading stock valuation
The method you choose to value trading stock can significantly affect your taxable income so choosing the most tax effective method is important. A different valuation basis can be used for each class of stock or for individual items within a class.
If stock can be valued at below its purchase price value, whether that be because of market conditions or damage, you should be able to claim a deduction even though the loss has not yet been incurred.
Also ensure you identify and write-off obsolete stock before 30 June to ensure you can claim an immediate tax deduction
5. Bring forward SGC payments for the June 2016 quarter
As tax deductions on super contributions are only applied when they are paid, why not bring forward the payment for the June quarter, which would normally be paid in July anyway?
Paying it early gives you the opportunity to bring forward the tax benefit by a whole year and if you have a large payroll the tax savings could be considerable.
6. Appoint trust income
If you have a trust entity, the trustee needs to decide to whom the trust will distribute its income. Once this is determined, that person or entity will be taxed on that share of the income.
For tax purposes the most important part of the process is the appointment of the income, which must be done before June 30th. The resolution is normally formalised by way of a trustee minute that documents the decision of the trustee. If you are a trustee and you don’t appoint the income then you become liable for tax at the maximum marginal tax rate.
As this is an area that the ATO is placing an increasing focus on, it is always worth working with your accountant to identify the most effective options for appointing the trust income.
7. Write off bad debts
If you have bad debts to write-off, it’s important that they are physically written off before 30 June to ensure a tax deduction for the financial year. Some business owners think that they are able to do this after the end of the financial year – this is not the case.
Writing off a bad debt effectively means that you are losing that money straight off your bottom line. You can write off a bad debt if it was included in your assessable income for this income year or for an earlier income year.
It’s also important to be able to show that reasonable steps were taken to try to recover the debt and it is always advisable to have some documentation to this effect.
While this list isn’t exhaustive, implementing one or some of these measures could significantly affect your tax position for the current financial year. If you would like some additional tips on paying less tax, why not get in touch with our tax financial adviser?