With the end of the tax year approaching, it’s time to take action to minimise the tax liability for your business. H&R Blocks’ Director of Communications, Mark Chapman in partnership with Officeworks has provided Small Business’ with tips to help prepare for the end of financial year.
Take advantage of the small business $20,000 asset write off
Two years after it was first introduced, one of the best tax breaks for small business remains the $20,000 instant asset write-off and with many businesses offering End of Financial Year promotions, now is the ideal time of year for businesses to take advantage by acquiring some much needed capital assets and, at the same time, reducing their taxable profits. The good news is that more businesses than ever are now able to take advantage of the tax break. From 1 July 2016, the definition of a small business was expanded to include all businesses with an aggregate turnover of less than $10 million (previously it was $2 million). As you need to be a small business to claim the tax break, tens of thousands of businesses qualify this year who didn’t qualify last year.
So, by way of a quick refresher, what are the key features of the instant asset write-off?
- Businesses can buy any items of machinery or equipment for use in their business provided the cost of the asset is less than $20,000. This could include motor vehicles, office furniture, items of technology like laptops, mobile phones and tablets and kitchen equipment. Head into your local Officeworks store where everything could be tax deductable and stock up on your stationery and technology needs ahead of June 30.
- Provided they are used for business purposes, for instance in work recreation areas or office receptions, it is even possible to claim items like TV’s, gym equipment, works of art and computer gaming terminals. If you’re claiming more left-field deductions like these, make sure you keep proper records.
- The relief is available for all eligible purchases right through until June 30 2017 but to maximise cash flow benefit, it makes sense to make purchases as close as possible to the end of the financial year.
- Only assets valued at $20,000 or less (excluding GST) qualify for the instant deduction. So, if the value of the asset is greater than $20,000, the asset will be depreciated over a number of years.
- The deduction is available for both new and second hand assets. The ability to claim for second hand assets is particularly useful for motor vehicles. Not many useable work vehicles – utes or vans for instance – would qualify for the relief when new, but plenty would qualify as second hand vehicles.
- Where multiple items are purchased and each costs less than $20,000, the whole cost of each item can be written off straight away.
- The relief works by reducing your taxable profit – this could reduce your small companies tax rate (currently 27.5%) or your personal marginal tax rate if you are a sole trader.
If you have invoices set to go out just before the end of the year, it makes sense to defer issuing those invoices until the start of the new tax year. This will move the tax liability on those invoices into the new financial year. From a cash flow perspective, that could be a useful boost.
Small businesses can get an immediate tax deduction for certain pre-paid business expenses. The basic rule is that a deduction is available for expenses that cover a period of no more than 12 months. That covers expenses such as insurance premiums, telephone and internet services, subscriptions to trade or professional bodies, rent or leasing charges and bookings for seminars, conferences or business trips.
Write off bad debts
No business wants to be in a position where they can’t recover outstanding debts but we have to be realistic and acknowledge that it does happen sometimes. The good news is that if your business has to write off a debt, a tax deduction is available for the amount of the debt written-off.
A debt that is unpaid and deemed to be a bad debt is an allowable deduction provided it was included as assessable income in the current or a previous income year.
At this time of the year, it makes sense to go through your debtors list and if there are any debtors on it who you believe can’t or won’t pay, write off those debts by 30 June to claim the deduction this year. The business must keep a written record to document that the debt has been written off.
Employers have to pay superannuation contributions for within 28 days of the end of the quarter. Ensure that all June quarter superannuation contributions are paid by 30 June to accelerate the tax deduction. Note that contributions must be actually paid, cleared in the business bank account and received by the employee’s super fund before 30 June for a tax deduction to be available. Any other outstanding amounts should also be paid before year end.
Get the right trading stock valuation
Trading stock can be valued using different methods for taxation purposes, either at cost, market value or replacement value. The only requirement regarding changing methods is that the closing stock value at the end of one tax year must become the opening trading stock value for the next year. The provisions allow a choice to be made for each individual item of trading stock. Changing the valuation method at year-end for tax purposes can either bring forward or defer an amount of taxable income so it pays to look closely at the method adopted.
Businesses with an aggregated turnover of less than $10m can also choose not to do a stock-take where the value of their trading stock has not changed, either up or down, by more than $5,000. In that case, include the same stock value at year-end as at the start of the year – that is as if not change had occurred.
Damaged and obsolete stock can be written down or written off entirely and a tax deduction claimed.
Pay employee bonuses
If your business is looking to pay bonuses, put in place a properly executed bonus plan by 30 June to claim the deduction this year. Typically, a deduction will be available for employee bonuses if the expense has been incurred before the year-end, i.e. if the company has definitively committed itself to the payment (for example by passing a resolution) or has incurred a quantifiable legal liability to pay the bonus. If the amounts of any bonuses are not calculated and authorised until after the end of the income year, no deduction is available.