As the end of financial year approaches, CPA Australia answers the tax questions most commonly asked by SMEs. Garry Addison reports.
There is no substitute for good financial planning and advice. Your accountant can do much more for your business than help you fill in a tax return. But here are the major issues business owners need to be aware of as they prepare to meet their tax obligations:
Do I have to keep a record of absolutely everything?
Records are normally required to be retained 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. Your accountant will be able to advise you further on this.
You should ensure your records are both adequate and complete to stand up to an audit review. Check you have all the relevant documentation for your business, such as bank statements, deposit books, cheque butts, cashbooks or accounting records—such as your general ledger, trial balance, profit and loss statement and balance sheet—for the full year.
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 whichever method you use.
What is the position regarding private company loans?
It’s important to ensure private company loans to shareholders and/or associates that extend beyond the end of the income year are properly documented, to ensure a tax liability is not triggered under the tax rules in this area. Adequate annual repayments of a properly documented loan are also required. In view of the breadth and complexity of these rules, you should see your accountant for full details.
I’ve got a couple of bad debts. Can I claim them as a deduction?
To make sure you get the full deduction for bad debts, ensure they are physically written off before June 30. To do this, the debt must have been brought to account as assessable income, and you must have given up all hope, and more importantly, all action for recovery. It is a good idea to have a recorded action, in the form of a minute, writing off the particular debt.
Will I be liable for capital gains tax?
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 that 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 50 percent exemption for individuals and trusts, and the small business CGT rollover relief and retirement exemptions, as they can save you a lot of money.
Why should I review my assets?
It’s too easy to carry assets on your books that have no real value, are obsolete, or have been scrapped. To get a write-off deduction for them, you’ll need to review your asset register and take the necessary action before June 30, 2006. 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.
It’s also worth noting that special advantageous depreciation rules apply to eligible small businesses that elect to be taxed under the new Simplified Tax System (STS) regime.
Should I elect to be taxed under the STS?
An optional STS regime is available for very small business taxpayers. Its key attractions are the $1,000 write-off rules and the accelerated depreciation on business assets. The regime is also becoming more attractive thanks to the recent extension to businesses that do their accounting on an accruals basis and the proposed reduction in 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 whether you qualify and whether to elect into the regime. To obtain the STS benefits for 2006, 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, 2006.
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 agri-forestry investments. However, individual non-business and STS taxpayers can prepay some expenses up to 12 months in advance.
Does fringe benefits tax apply to my business?
FBT 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. The grossed-up value of most fringe benefits must also be shown on an employee’s payslip.
Superannuation contributions
Employers must ensure they’ve made sufficient super contributions (currently nine percent) for each of their employees, including casual staff, on a quarterly basis throughout the financial year. Otherwise they risk incurring a penalty under the Superannuation Guarantee Charge (SGC) regime. It may be desirable for your accountant to review all superannuation payments made before year-end to ensure adequate contributions have been made for all employees, based on all their relevant wages and bonuses.
Also, superannuation contributions for the June quarter must have been paid by June 30, 2006 to be tax deductible and to avoid penalty. Book entries alone are not enough. Tax deductions are limited to contributions for employees based on age-related limits. Further, even if you miss the June 30 deadline for deductibility, you must make the payment by July 28, 2006 to avoid the SGC late-payment penalty.
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. The maximum deduction available is equal to the taxpayer’s age-based limit.
Income alienation
The tax rules on alienation may impact on contractors deriving personal services income but not carrying on a personal services business (PSB). In this event, income of a personal services entity may be subject to the PAYG withholding rules and also required to be included in the individual’s return. PSBs also need to be aware of the ATO’s strict approach to income retention and income splitting (with some exceptions such as for standard ‘mum and dad’ partnerships) and should seek advice from their accountant.
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.
Is there anything I’ve forgotten?
There is no substitute for good business advice and planning. Your CPA can help with all aspects of being prepared at tax time.
* Garry Addison is senior tax adviser for CPA Australia.
Called to account
If you’re an accountant, there are a few things you should be doing around this time of year
to prepare for the onslaught as the new financial year begins. Here’s a guide to what accountants should be doing:
• Write to clients before the end of the financial year to encourage them to review and, where possible, implement any of the (previous) year-end tax planning strategies that might be available.
• June should be regarded as a time to tidy up and get any outstanding 2006 returns in to the ATO, and also take some leave prior to the onslaught of individual returns in the early part of the new financial year.
• To ensure you’ve met the requirements of the ATO’s tax agent lodgement program during the year, and having regard to your own workflow planning, you should advise your clients as to when you expect to receive their tax information.
• Advise clients that if they don’t provide this information by the requested time then you can’t guarantee a timely lodgement of their tax returns, which may give rise to interest/penalty implications for affected clients.
• Based on your lodgement program and workflow planning, you should set monthly targets for work received and completed, and review any failure to meet such targets.
• You should aim to lodge up to 80 percent of your clients’ returns progressively and meet all final lodgement dates, with any lodgement extensions or deferrals restricted to less than five percent of all lodgements due.
• Best practice generally includes lodgement of returns electronically (such as via the tax agent portal), using the ATO website and other online tools for access to tax information, and using software compatible with ATO systems.
• You may need to have a set of criteria for assessing your ability to take on new clients (including resources and suitability to your practice and staff).
• Use of checklists, standard letters and so on can facilitate the smooth running of your practice.
• If you employ staff, do you apply staff training and/or monitor their performance, which may improve any staff recruitment problems in our tight labour market?
• Review clients’ cash flow budgets to ensure they are able to meet their tax and other liabilities when they fall due.
