At tax time, it’s easy to overlook small but important details and to become so consumed by the deadline that you don’t use the process of mopping up this year’s tax bill to plan for the next. Cameron Cooper gathers tips from experts for getting your tax bill right.
Memo to the good people at the Australian Tax Office: this is not an article about cheating on tax. There are ways, however, that small and medium businesses can legally cut their tax bill.
While the introduction of GST has forced many SMEs to become more organised through quarterly Business Activity Statements, financial rigour is still required to ease the end-of-financial-year pain.
Susan Wahhab, managing director of accounting and business advisory firm, The Winner Partnership, says businesses often forget small, tax-deductible items that add up: $50 a week equals $2,500 come June 30. For example, the receptionist may buy coffee, tea and milk, but not get a receipt or put it in petty cash.
"At the end of the year the bookkeeper has not updated those receipts, so businesses actually miss out on claiming them or reconciling them into the system," she says. "This is about not having good enough accounting systems in place to capture every single expense. It is so important to be disciplined."
Wahhab cites some other often overlooked examples:
• Check your luggage: if you are travelling for business, you can claim the luggage you purchase;
• Put overtime on the menu: if a business provides a takeaway for employees who work more than an eight-hour day, they can claim a meal allowance of up to about $15 per employee;
• Take stock: retailers should do a stocktake before June 30 and consider getting rid of excess or low-value stock so that it’s not accumulating as part of the business’ income;
• Get motoring: if you are using a logbook for motor vehicle claims, remember that records must be renewed every five years and should log car activity for at least 12 weeks.
For SMEs on an accrual system—that is, transactions are recorded when a product or service is delivered regardless of when the money is received—Wahhab suggests deferring June invoices until the next financial year if the aim is to reduce immediate taxable income.
Chris Carra, a director of Carra Tax Consulting, adds that businesses can consider pre-paying major expenses to bring forward deductions. "Within the Simplified Tax System, you could pre-pay anything up to 12 months in advance—leases, rent, motor vehicle payments—and get a tax deduction upfront," he says. "It’s a wonderful thing."
Most businesses neglect this option because, while they may be profitable, they are often not cashed up. "It’s about having cash to pre-pay," he says. "But they could use credit cards and set the cash aside for July or August repayments."
Carra notes that the STS allows small cash-method businesses with less than $1 million annual turnover to take advantage of $1,000 write-off rules and accelerated depreciation on business assets. If businesses buy items in June that are under $1,000, they are 100 percent tax deductible under the STS system. By not entering the STS, however, they can only claim a percentage of the items on a pro-rata daily basis.
Other strategies from Carra involve taking advantage of government tax breaks. For example, an Entrepreneurs’ Tax Offset is available to candidates with turnover of up to $75,000. Those with $50,000 turnover or less can receive a full 25 percent discount on their tax liability.
He also advocates off-the-shelf accounting packages for clients so they can more easily record daily transactions and better understand their business. "Then they have a finger on the pulse and they know about their liquidity, their profitability," he says. "Clients using Excel spreadsheets have no idea—they’re tracking what their bank account says, not what their receivables are going to be."
It is important to note, too, that SMEs often claim deductions that are not permitted, or they fail to properly account for expenses. For example, business owners may claim wine and drinks as "in-house catering" but it is a fringe benefit and should be treated accordingly. And some account for office renovations or fit-outs as repairs when they are actually an asset and should be claimed through depreciation.
Accounting body CPA Australia also warns businesses to be mindful of interest earned on bank accounts, cash deposits and income from other sources, as well as a schedule of non-business deposits. "All these should be declared, as must ‘other expenses’, such as cash payments, including the nature of the payment and how the funds were provided," the CPA states.
Tax Advice & Planning
While crunching the numbers is crucial at tax time, it is also important to find a tax adviser with whom you feel comfortable. Felicity Rodgers, director of fashion business Showing Style, a Carra client, considers trust, good advice, and accessibility to be essential factors when choosing a tax consultant.
"Numbers are not my forte, unfortunately," says Rodgers, who prefers to focus on her core business. "I’m too busy trying to please my clients, from production to all the things that make my business tick."
Rodgers took Carra’s advice to hire a bookkeeper to manage day-to-day accounting tasks and to use an accounting software package such as MYOB. The arrangement has given Rodgers peace of mind, whereas previously she found tax time stressful.
"We do pre-tax planning in April so I can see how I’m situated and get an idea of liabilities so I can plan for it," she says. "That’s been a really big thing—to do that planning and know roughly what the numbers will be. It’s obviously not 100 percent accurate but it’s pretty close."
Michael Dirkis, a senior tax counsel at the Taxation Institute of Australia, agrees that planning is the key ingredient at tax time. "There’s been a tendency to say the end of year is about getting rid of surplus profits and things," he says. "But it is crucial to use this time of year for planning for the next financial year.
"If they are to have a meeting with their accountant in May or June, it should be about what they’re going to do next year, not what they can squeeze in before the end of the year."
Dirkis says some SMEs that have had a profitable year get hell-bent on cutting their tax bill and consider strategies such as asset disposal or managed investment farming schemes. "Ultimately, you’ve got to look at any of these transactions and say ‘am I likely to make a worthwhile gain out of it’. There’s no point chasing a tax deduction if my marginal tax rate is 30c in the dollar and it’s costing me 70c to get the 30c deduction."
Dirkis says there is a perception among many SMEs that spending money on accountants is a waste of money. "The difficulty is then that people tend to make decisions without necessarily being fully informed."
Super & Reforms
Hot tax topics of the moment are superannuation and reforms that will kick in on July 1. The ability to contribute up to $1 million in post-tax contributions before July 1, 2007 into superannuation has led to many small business owners discussing the best way to finance contributions.
Some experts are sounding warning bells, however. Brad Twentyman, a senior manager at accounting and advisory firm, Pitcher Partners, says if you are moving business property, shares or cash into superannuation to take advantage of transitional contribution limits "be aware of associated costs, such as capital gains tax, stamp duty or brokerage".
More small business owners are likely to qual
ify for CGT concessions under the reforms. Small business assets will continue to be exempt from CGT if the business and the assets have been owned for at least 15 years
In any case, Twentyman says there is no need to panic. "Very few people will have access to money or assets in the order of $1 million. But this doesn’t mean you are destined to struggle through your retirement years. You still have the ability to contribute after June 30 this year. It is not $1 million, but people under age 65 can contribute up to $450,000 in any three-year period plus deductible contributions of up to $100,000 per year under transitional rules applying until 2012, for those over 50 years of age."
The Tax Institute’s Dirkis says people selling property or borrowing to top up super should exercise care. "They’ve actually got to look at their complete financial circumstances, and for some people (topping up super) will be a very good idea. For others, depending on how their business is geared and what assets they have, it may not be a good idea."
In essence, Dirkis says tax time is about ensuring you are looking to the future, but with an eye on the present. "The warning is to make sure you’ve dotted your i’s and crossed your t’s. It’s just about making sure that what you’re doing is correct."
Planning, discipline, and choosing an accountant wisely, are essential starting points for any SME. You will never beat the tax man, but there is no law against giving him a run for his money.
Mark Pizzacalla lists his top 25 tips for year-end tax planning.
There are a number of end-of-year tax planning issues and strategies all businesses should consider between now and June 30. Taking action before the end of the financial year can save a business considerable tax. So, here are 25 points to check. But the most important is to see your tax adviser who can relate the various opportunities to the particular circumstances of your business.
• Timing issues. Generally, it is advantageous to defer income until after the year end, and to claim deductions in the current income year.
• Dividend payments. Consider the timing of year-end dividend payments, particularly in light of the new Simplified Dividend Imputation rules.
• Loans. Minimise the possibility of having a loan received from the business deemed to be a dividend.
• Simplified Tax System. Small businesses should consider becoming a Simplified Tax System taxpayer.
• Prepayment. Consider the application of the prepayment rules which can give a business a tax deduction in the current year.
• Investments. Consider the commerciality and key issues of any investment arrangements made by the business, and if there is a Product Ruling.
• New plant. Review the ‘effective life’ of new plant and consider self-assessing effective life.
• Obsolete plant. Review the status of all plant to see what is obsolete and what can be written off.
• Expenditure. Review classification of expenditures between asset acquisition and maintenance items.
• Asset disposal. Consider the timing of asset disposals to utilise capital losses and defer possible assessable gains.
• CGT concessions. Consider whether recent changes to the small business CGT concessions apply to any capital gains.
• Trust election. If the business is a trust, consider whether a family trust election should be made.
• Trust losses. Ensure that the trust loss provisions are considered if the trust has made losses.
• Non commercial losses. Determine whether the non-commercial loss rules apply.
• PSI measures. Review your operating structure and ensure that the PSI measures have not been breached.
• Superannuation. Ensure that superannuation contributions are made by no later than June 30, 2007, so that the deduction is in this financial year.
• GST. Make appropriate adjustments to GST already paid or credits claimed.
• Intra-group transactions. Review intra-group transactions as there may be a liability to pay GST (e.g., management fees, commercial rent etc) charged to another group entity.
• General Value Shifting. Consider whether the new General Value Shifting rules apply to your company or trust.
• Tax Consolidation. Consider the benefits of entering the Tax Consolidation regime.
• Thin Capitalisation. Review your Thin Capitalisation position as the measures now apply to both inward and outward investments.
• Bad debts. If you have business debts that may be written off as ‘bad’, ensure that you satisfy the relevant criteria for bad debt deductibility.
• Logbooks. Check that your motor vehicle logbook satisfies the substantiation requirements.
• Statute barred loans. Consider how your company will address any statute barred loans prior to year-end.
• Debt/equity rules. Review the application of the debt/equity rules to the company.
* Mark Pizzacalla is a partner with accountants and business and financial advisers, HLB Mann Judd Melbourne.