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With the end of the financial year fast approaching it is important that your business is prepared before 30 June. While there wasn’t much in this year’s budget, three big things to be aware of are:
Certainly, step one in tax planning this year is to understand what your corporate tax rate will be for the year. This requires you to consider the turnover of your business and any related businesses for the current year.
A summary of the tax rates and the year you will trigger them are as follows:
|30 June 2017||< $10 million||27.5%|
|30 June 2018||< $25 million||27.5%|
|30 June 2019||< $50 million||27.5%|
The tax rate for other companies remains at 30%.
Once you know in which year the tax rate will affect you, you can then consider whether deferring income or bringing expenditure forward is right for you.
Here are 14 ways to prepare your business for the end of financial year and take advantage of the changes in the tax rates:
For those businesses with less than $10 million in turnover, you can claim an immediate deduction this year for assets costing less than $20,000. This measure was also extended in the recent budget from 30 June 2017 to 30 June 2018.
Do you have any income that can be deferred until after 30 June? If so, you may wish to delay crystallising income until after 30 June. This strategy will be particularly effective for companies whose tax rate will reduce to 27.5% for the first time next year.
You need to bear in mind the cash flow impact of deferring income. However, the tax savings can be significant.
Do you have any one off expenses coming up that you can bring forward into June? This could be marketing materials, consumables or maybe your car needs a service. Spend the money now and get the deduction this year.
Keep in mind that passive investors (rental property or shares) and small businesses with a turnover of less than $10 million can claim an up-front deduction for prepaid expenses for 12 months or less. For other businesses, you will need to apportion any prepayments over the period to which they relate.
For the 2017 financial year the maximum concessional (deductible) contributions that you can make are:
The tax payable on deductible contributions to super is 15% for those earning less than $300,000 and 30% for those over $300,000. So with some careful planning where possible you should aim to fall below the $300,000 income limit.
From 1 July 2017 the maximum deductible contribution will be $25,000 per annum for all taxpayers and the income threshold where you will pay 30% on contributions will fall to $250,000.
A deduction can be claimed for a bad debt where you make a commercial decision the debt is no longer recoverable. So go through your debtors list by 30 June and write off anything you do not realistically expect to receive.
Importantly, this does not prevent you from continuing to chase the debt.
When was the last time you reviewed your asset register? Are there items that are no longer around? Where you scrap or no longer hold assets, you can claim an immediate deduction for any unclaimed depreciation.
Just as importantly, if you qualify as a Small Business Entity (SBE) you now get the following benefits:
Most businesses pay their June quarter super liability just before the 28 July deadline to maximise their cash flow. The problem is that you don’t get the tax deduction until the year that the super is paid. So if you have some spare cash in your business, why not pay your employee super obligations by 30 June. In doing so you will bring forward your tax deduction into this financial year.
If you considering giving your staff a bonus for a job well done why not bring those deductions into the 2017 year. To do this you will need to show that you are definitively and legally committed to paying the bonus by 30 June 2017.
For those businesses with unsold goods or stock on hand at 30 June, the value of the stock is not deductible in the current year. To ensure you are optimising your tax outcome you should give consideration to which valuation methodology provides the lowest amount for each individual item of stock. Stock can be valued at cost, market value or written-off altogether where stock has no value.
Have you ever considered if what you do in your business would qualify for the research and development tax concessions? The meaning of research and development activities can be quite broad and it is amazing to see the variety of businesses that are eligible for these concessions.
We can put you in touch with R&D experts to assess your eligibility.
If you are considering selling some of your investments or capital assets this year, be mindful that any capital gains tax liability will trigger when you enter into the contract. Consider delaying any contracts until 1 July in order to push any tax liability into next year. Conversely, if you have any underperforming assets consider selling those assets prior to 30 June in order to realise the loss this year. Any loss on these assets can be used to offset other capital gains this year or in the future.
It may seem counter intuitive to bring forward your top up tax on the retained profits that you have accumulated in your company. However, this is the last year you will be able to frank a dividend at 30% if you are under the $25 million turnover threshold at 30 June 2017. For businesses under the $10 million threshold, the franking rate has already reduced to 27.5% from 1 July 2016. What this means is that you will effectively pay an extra 2.5% in top up tax by declaring a dividend.
For businesses or investments held through trust structures it is vital that you make a valid distribution of income by 30 June. Thought should be given to the most tax effective way to distribute the income for the year. For instance, where the business owners are in the top tax bracket it may be prudent to distribute business income to a company to cap your tax at 27.5% or 30%. Conversely, in most cases capital gains should be distributed to individuals to access the 50% discount.
Importantly if you fail to validly distribute the income of the trust by 30 June you face paying tax on that income at up to 49%.
With the ongoing reduction in the corporate tax rate it may be worth re-thinking the structure that your business operates if it is not already incorporated. There are a number of rules within the tax act that can readily allow a trust or individual to change its structure to a company with no income tax or capital gains tax being paid. This may be longer range tax planning. However, re-investing your earnings into a growing business on the lowest tax rate will make sense for many businesses.
As you can see there is a lot to consider before 30 June, with the changes in tax rates for individuals and companies influencing these strategies. Take the time before 30 June to ensure that your tax affairs are in order so that you do not pay more tax than you have to.
Where you have any questions, simply touch base with any of our tax specialists here at businessDEPOT. If you are a client of ours, we will be in touch to discuss your tax planning needs before 30 June.