2009 Small Business Tax Planning

I just thought I would share some very generic tax planning tips applicable to small businesses.

Accelerate asset purchases and expenditure

As you may be aware, the Government has announced a tax bonus of 50% for any eligible purchases. So, if you are considering buying any new equipment (including new vehicles) in the next year - look at doing it before 30 June.

Please click the link here for more detailed information about the tax break (this will open a PDF file - don't freak out!)

Also consider bringing forward any planned expenditure such as repairs and maintenance etc to the current year.

Deferral of income

If cash flow allows, defer the derivation or receipt of income until the next financial year. If on a cash basis*, defer receipt of cash. If on an accruals basis, defer the derivation of income by holding back invoices if possible (i.e. date the invoices 1 July 2009 or after).

*Please check with your accountant or bookkeeper to see if you operate on a cash or accruals basis. Also you can look at your last BAS and it will tell you.

Conversely, if you have losses, you may wish to bring forward the derivation of income if possible.

Income received in advance

Consider whether income received is actually derived. Income received in advance may not be derived until the services are provided. Conversely, income such as interest, royalties, rent and dividends are usually derived upon
receipt.

Timing of expenses

Expenses are only deductible when incurred, i.e. there must be a presently existing liability to pay the expense. Many accruals and provisions (such as annual leave, bonuses and super - see below) are not deductible as they represent an estimate of expenses and do not relate to a presently existing liability.

Most prepayments now are not deductible until the period to which they relate (some exceptions apply), although small businesses* and individuals may be able to deduct some prepayments in the year paid.

*Small businesses are normally businesses with a turnover (sales) of less than $2 million. Also (previously) known as the Simplified Tax System.

Bad debts

Review your debtors and if any are unlikely to be recovered, physically write them off as bad before the end of the year. This may be especially relevant this year as many businesses have gone bust. Also be aware if you have a large amount of bad debts as an expense in your businesses tax return, this can easily trigger an ATO tax audit as it is one of the items they look at closely. Please discuss with your accountant.

Trading stock

Prepare for a stocktake on 30 June. Identify any obsolete or old stock and scrap it or write it down to its correct market value. Individual items of trading stock can be valued at cost, market value or replacement value for tax purposes. The tax value may differ to the accounting value.

Bonuses

Bonuses are only deductible when they are actually incurred, i.e. at 30 June the business must be committed to paying them and they are not subject to any discretion.

Depreciation

Assets purchased during the year can be depreciated using the diminishing value method at 200 per cent of the prime cost rate (e.g 200% divide 5 years expected life = 40% depreciation rate per year).

Consider whether to allocate assets costing less than $1000 to a low value pool to get a write-off of up to 37.5 per cent.

Also, check to see whether your business is eligible to utilise the Small Business Entity regime as this means you get an immediate write off for depreciable assets under $1000 and ones above $1000 can be depreciated at 30% per annum (15% in the first year, 30% in subsequent years). This is especially useful if your assets have longer effective lives.

This method also works on a period basis, rather than daily, so even if you buy something on the 30th of June, you get 15% as a deduction - not just 15% x 1 out of 365 days. Add the 50% tax break, and you get a whopping 65% deduction - for example if you bought a $30,000 ute in June, you would get a deduction of $19,500. That is $19,500 you are NOT paying tax on. At an average rate of tax of 30%, you just saved $5,850 in tax.

Do not forget to scrap all obsolete assets. Ask your accountant for your asset schedule/list and go through it and ensure he/she knows all the assets that have been replaced, stolen, scrapped, obsolete and now longer in use.

Superannuation

Ensure that superannuation contributions have been paid to your and your employees superannuation fund by 30 June to ensure a deduction this year.

If not paid by 30 June, it must be paid by 28 July to avoid the SGC implications. Ensure that the 9 per cent SGC limit has been met for all your employees.

The maximum concessional superannuation contribution for individuals is $50,000, or $100,000 for people aged 50 or more at 30 June. Since 1 July 2007, this is now a per person cap, not a per employer cap and age-based limits no longer apply.

These caps have been chopped in half from 1 July 2009 - so if you have a lazy $100,000 lying around, get it into super now!

Income splitting

The ATO and the Government have income splitting in their sights. This is basically a means of saving tax by moving profits / income to a person on a lower marginal tax rate. This item is too wide and too varied about in this post but it is something you should be looking at.

Trust distributions to minors

Due to the low income tax offset increasing to $1,200 for the 2009 tax year, a child under the age of 18 can receive $2,668 of income from a family trust / discretionary trust without paying tax, requiring a TFN (although this is changing next year I think) or having to lodge a tax return. So look at your kids and nieces / nephews etc and utilise them to reduce your overall tax liability.


These items are very generic tips, and by no way an exhaustive list of all the possible strategies your business can use. Every business is different so talk to your accountant.

Also see this article posted last year for more information.

Happy EOFY people

 

Thanks superman.

you said: "So, if you are considering buying any new equipment (including new vehicles) in the next year - look at doing it before 30 June."

I thought the last day would be 31/12/2009 (but I'm sure the 30% for assets over $1,000 ends by the end of June)

 

Hi Chris,

Australia's tax system is based on financial years which run from 1st July to 30th June.

Cheers,

Dan

 

ASXBroker

I just followed the link given above. http://www.treasury.gov.au/documents/1505/PDF/Frequently_Asked_Questions.pdf

Q&A No 11. "If you are a small business, you will be able to claim a bonus tax deduction of 50% of the cost of an eligible asset that you:
(a) commit to investing in between 13 December 2008 and 31 December 2009; and
(b) start to use or have installed ready for use by 31 December 2010.
and Table 1 and Table 2 give clearer explanation.

Cheers.

 

OK.

Good question.

My post was entitled "2009 Small Business Tax Planning" i.e. for the financial year ending 30 June 2009.

For me it is all about instant (or close to instant) gratification. You buy your new equipment in June, taking advantage of EOFY sales, lodge your return in July and get that slightly bigger and juicier refund cheque in August.

Next best option is to buy it before 31 December - but then you are waiting at least 6-7 months to July/August 2010 to 'feel' the tax benefit.

Hope this makes sense.