The end of the financial year may not be your favourite season, but it doesn’t need to be a nightmare or even a headache if you’ve got the right information – Garry Addison answers the questions small business owners need to be asking at tax time.
Small business owners are looking for ways to legitimately reduce their tax burden. Here’s a guide to what you must do to keep the taxman happy, and how to make it work best for you.
Do I have to keep a record of absolutely everything?
You are normally required to retain records for tax purposes for at least five years, but special requirements apply in some areas such as capital gains tax (CGT), fringe benefits tax (FBT), and the substantiation rules. You should ensure that your records are both adequate and complete to stand up to an audit review. Check that you have all the relevant documentation for your business, such as bank statements, deposit books, cheque butts, cashbooks, as well as your accounting records.
Can I just make an estimate of my stock?
It’s not sufficient to simply make an estimate of your stock, or to take a guess. Each year you need to include a value in your accounts of stock-in-hand and work-in-progress at June 30. Closing stock can be valued at cost, replacement or market value or less if obsolete, but you have to document which method you use.
What is the position regarding private company loans?
It is important that you make sure private company loans which extend beyond the end of the income year are properly documented, to ensure that a tax liability is not triggered under the tax rules in this area. Adequate annual repayments of a properly documented loan are also required.
I’ve got a couple of bad debts—can I claim them as a deduction?
If you want to claim for bad debts, remember they must be bad and written off before the end of the financial year. To do this, the debt must generally have been brought to account as assessable income and you must have given up all hope and, more importantly, all action for recovery.
Will I be liable for CGT?
CGT may apply to any gain made on the sale of certain assets (such as shares or property) purchased since September 19, 1985, so assets purchased after this date must be fully documented for CGT purposes. For capital losses, make sure you keep a record so they can be carried forward to offset against future capital gains. You should also be aware of the special CGT concessional rules that apply to certain small business capital gains—including the general 50 percent discount for individuals and trusts and the special small business CGT rollover relief and retirement exemptions—as they can save you big bucks.
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How much substantiation do I need to provide for travel and vehicle costs?
Substantiation rules may apply to motor vehicles and travel expenses. So log books and odometer readings should be kept, as well as other records itemising travel expenses.
Why should I review my assets?
It’s too easy to carry assets on your books which have no real value, are obsolete or have been scrapped. The only way to get a write-off deduction for them is to review your asset register and take the necessary action before June 30. The asset register is the list you should be keeping of all plant, equipment, furniture, fittings and any other assets, including all items bought, sold and disposed of during the year. Also note, special advantageous depreciation rules apply to a small business which is taxed under the simplified tax system (STS) regime.
Should I elect to be taxed under the STS?
This is the fourth year of the STS, which is a special regime for very small business taxpayers. Key attractions are the $1,000 write-off rules and the accelerated depreciation on business assets. However, the Government is moving to make the regime more attractive by extending it to businesses that do their accounting on an accruals basis, and by reducing the audit review period for such taxpayers from four to two years.
If you are not already in the STS, you may wish to consider if you qualify and whether to elect into the regime. To obtain the STS benefits for 2005, the necessary election must be lodged with the ATO when you lodge the income tax return for your business for the year ended June 30, 2005.
Prepayments
Most business taxpayers must pro-rata the deduction for prepaid expenses over the period to which the expenditure relates. Restrictions also apply to prepayments by investors in certain agro-forestry investments. However, individual non-business and STS taxpayers can pre-pay some expenses up to 12 months in advance.
Does fringe benefits tax apply to my business?
Fringe benefits tax may be applicable to entertainment expenses (from business lunches to tickets for sporting events), company motor vehicles, some directors’ loans, or a host of other benefits received by employees and directors. So details of all such benefits should be recorded.
The grossed-up value of most fringe benefits is also required to be shown on an employee's payment summary.
Superannuation contributions
Employers must ensure they have made sufficient superannuation contributions (currently 9 percent) for all employees on a quarterly basis throughout the financial year to avoid the risk of incurring a penalty under the Superannuation Guarantee Charge (SGC) regime.
Eligible superannuation contributions for the June quarter must be paid by June 30, 2005 to be tax deductible and to avoid penalty. Book entries alone are not enough. Even if you miss the June 30 deadline for deductibility, you must make the payment by July 28, 2005, to avoid SGC penalties.
Annual contributions can be made by self-employed people on their own behalf with a full deduction up to $5,000 and a deduction for 75 percent of the amount above this. As for employees, the maximum deduction available is equal to the taxpayer's age-based limit.
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Personal Services Income (PSI)
The PSI measures are designed to limit the level of deductions available to certain contractors whether operating as a sole trader or through a company, trust or partnership, and to also extend the PAYG withholding rules in such cases. A taxpayer who meets certain specified tests such as the ‘results’ test, will be treated as carrying on a personal services business and will be able claim a wider range of deductions, but the ATO may still seek to limit the taxpayer’s ability to retain income in a company or split income between lower income beneficiaries.
Non-commercial losses
For a business to be commercial under these rules, it needs to meet certain prescribed tests. If the tests are not met, any losses arising from the activities will have to be carried forward and offset in a later year against future income from the same type of source.
Consolidation regime
If you have entered the tax consolidation regime, you should note that the Government is moving to extend the time for making or revoking certain elections that may impact your business to December 31, 2005.
Is there anything I’ve forgotten?
A commonly overlooked item is interest earned on bank accounts, cash deposits, and income earned from other sources, as well as a schedule of non-business deposits. These should be declared in your return. You should also remember the new carve-out for ‘at call’ loans which was covered in the May issue of DSB.
For further assistance with the year end tax process and ongoing tax planning, you should consult your accountant.
*Garry Addison is a senior tax adviser with CPA Australia.
Communication: key for super choice
By Michael Davison, superannuation policy adviser, CPA Australia.
Employers must ensure that their workers have access to choice of superannuation funds on July 1, 2005 if they are entitled. To make choice work effectively, communication is the key.
Employees are eligible to choose their own fund, providing they’re not covered by a state award or agreement, federal certified agreement or Australian wor
kplace agreement that specify a superannuation fund.
Employers have the option of selecting a default fund for their employees (from an existing staff superannuation fund or new fund). To be eligible, the default fund will need to provide a minimum level of insurance cover to be set by the Government. However, existing funds will have until July 2008 to satisfy this requirement.
The key to ensuring super choice runs smoothly for all parties concerned is communication and for all to follow correct procedures in a timely fashion. Employers should clearly communicate to employees the process they must follow in order to choose a fund. Just as importantly, they need to communicate to ineligible employees why they can’t choose a fund.
Employers must provide the standard choice form to all eligible employees by July 28, 2005. Any new employees must receive the form within 28 days of starting work. The standard choice form is available from the Australian Tax Office.
It is important that all employers ensure they have adequate systems to receive and record employees’ choice of fund and to check their choice is valid. They must also ensure their payroll system is equipped to pay contributions to multiple superannuation funds.
