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End of year tax tips
The closer to 30 June we get the closer to that time of year it is again. Businesses across the country are dragging out boxes of receipts, log books and forms to make the most of tax time and avoid being slugged with a hefty bill.
Australian businesses are beginning to emerge from the downturn, but Small to Medium Enterprises (SMEs) know they need every dollar they can get. The tough times aren't over, and money saved from being handed over to the ATO is money that can go towards keeping your business afloat.
The ATO is keen on cracking down again this year, especially after the Government has delivered many more millions in funding for eradicating the cash economy and cracking down on GST compliance.
How can SMEs survive tax time unscathed and even come out on top? Here are some tax tips for small businesses:
1. Consider a DIY super tax break Do you have a self-managed superannuation fund? If not, now might be the time to think about setting one up.
Setting up a self-managed super fund if you already have over $400,000 in an existing super account will come with some new responsibilities, but will deliver a significant tax benefit.
A Self managed Super Fund (SMSF) will allow you to benefit from franking credits which an investor may not be able to capitalise on in a public offer Super fund. There are also many other tax benefits and strategies available within the SMSF structure such as a direct deduction for any contributions made to the Super Fund via an SME, but business owners need to check with their accountants as to what requirements they need to fulfill.
2. Bring forward deductions It's important small businesses and entrepreneurs bring their deductions into the current financial year in order to claim a tax benefit. Some of these can require scrounging up a bit of capital, but if you have the cash on hand then you're better off making these expenses now. No deduction for an expense is allowed for the year if physical payment for that expense is not made by 30 June.
Some deductions are prepaying expenses where possible including rent, accounting fees, interest expenses and subscriptions. Repairs are also deductible in the year they are carried out, including improvements and additions, which are also depreciated.
Other deductions include any tax deductible donations before the end of the year, but these must be checked against the ATO's official register of deductible-approved institutions, so that you don't end up making a mistake on your return, and incorrectly claiming a non deductible donation as a deduction
Additionally, businesses must be aware that prepaid expenditures don't usually count for deductions unless they are under $1,000, are required to be paid by law, are part of salary or wages and cover a period of less than 12 months.
3. Prepay interest on investment properties If you are using negative gearing on an investment property, make sure you prepay the interest and claim it is an expense in the current financial year.
4. Just starting up? If you have a business turning over under $2 million per year, you are classified by the ATO as a small business and could be eligible for some tax breaks. In the income tax area, SME’s can access prepayments. For instance, you could prepay rent, prepay lease payments and take tax deductions in the current year. This is not available to a larger business.
There are also some new preferential depreciation tax concessions, where at the present time an SME can write-off assets under $6,500 and gain an immediate tax deduction of $5,000 on a work vehicle + the depreciation on that vehicle. This is only available until the 01/01/14. After this date the old rules of SME write offs apply (assets under $1000 can be written off - anything over that must be depreciated).
5. Time the sale of investments If you're planning on selling investments that will deliver a profit or make a loss, timing the sales of these investments could reduce the amount of capital gains tax you pay on the profitable sales, or cancel out capital gains altogether. Please be aware that any capital gains tax calculated is calculated based on the contract date entered into and not the settlement date of the transaction. This could bring forward a gain into the current financial year.
6. Home office tips Do you have a home office? If so, you need to get the most out of it by claiming as many deductions as possible.
Entrepreneurs looking to take advantage of their home offices should ensure they have logs and receipts available for computers, home phones, mobile phones and even the amount of time (electricity) spent in home offices. Whilst the claiming of utilities are allowed, the claiming of any capital component of your home office will result in a future capital gain being assessed on the sale of your own home. This is a tax free asset, so is this deduction worth a future tax bill?
7. Beware GST compliance crackdown
In the latest 2014 Federal Budget, the Government provided additional monies to help crack down on the cash economy and promote GST compliance. A lot more funding is being provided for GST compliance activity. This is just putting people on notice. It's nothing new, no new requirements, businesses need to be sure they have their records up to date and be able to substantiate all claims, and verify all incomes because they could face an audit.
8. Fringe benefits tax This is a complicated one. Businesses often give gifts to staff from time to time, but SMEs need to be careful about how often they given them, and the overall price, in order to avoid a tax liability.
9. Update your log books Keeping log books is essential if you want to cash in on some essential tax breaks. But there are a number of different things you need to keep in mind when keeping these logs up-to-date.
The most important log you can keep is for a company vehicle. These need to be filled out in detail and clamp down on staff who often ignore them.
But one detail often overlooked by employees, and employers themselves, are travel diaries. These need to be filled out where an employee is traveling overseas for more than five nights.
Without a travel diary, business owners face the risk the ATO will tax the entire expense, regardless of what you claim, which could result in a substantial amount of tax to be paid.
Additionally, travel diaries for domestic travel are only required for trips longer than five days. These are also not often maintained properly, or even at all, and can result in a huge expense.
10. Defer income One of the most common tax tips is to defer taxable income into the next financial year. Look at timing of income to maximise a benefit. If you are a small business enterprise then you can defer income received, and you should be deferring this until you actually receive it. If you aren't a small business, you can invoice some of your income into the new financial year so it's not bought into a taxable calculation.
Businesses need to pay strict attention to what income they are likely receive, and be hasty about moving that into the new financial year. However, only do this when appropriate.
11. Annual Payment Summaries (Group certificates) Most businesses would be aware group certificates, or payment summaries, must be handed out by July 14. But not many know about certain tax requirements that need to be stated on them.
There is a common misconception that group certificates can be given with minimal information, but salary sacrifice and fringe benefits tax details must be included on the summaries.
Also, if you get things wrong, there is a penalty scheme the ATO can enforce and that fine could be as much as $2,200 per employee. If you put a wrong number on that group certificate, it could end up costing you and your business.
12. Beware non-commercial loans Following regulations relating to non-commercial loans is crucial or you could end up facing a significant tax problem that could put your business in jeopardy.
A non-commercial loan is made when a business provides funds to a shareholder or associate. The rules are clear – if you don't make sure the required repayments are made before June 30, the loan could be classed as an unfranked dividend and your business slugged with a tax rate on the payments worth 46.5 cents in the dollar.
There is also a new requirement for shareholders and associates to pay market value "rental" costs for the private use of company assets, such as holiday homes, boats and other vehicles.
13. Be careful with non-commercial losses If you are an individual, operating either as a sole trader or within a partnership, and have a net loss then you must adhere to the ATO's non-commercial loss rules. These determine whether you can use a business loss to offset income from other sources.
There are certain requirements that must be followed. This include an exception for business losses solely caused by deductions claimed for the small business and general business tax break and a Commissioner's discretion for individuals who don't meet the income requirement.
Most significant, however, is the requirement for higher-income earners. Individuals earning over $250,000 will only be able to deduct expenses from non-commercial business activities against the income only from those activities. The changes are designed to stop people from renting out holiday homes for a few weeks and then claiming a $30,000 deduction for related expenses.