It’s that time of year again when small business owners are preparing their tax returns and going over their paperwork with a fine tooth comb.
To help you with your EOFY preparations, Dynamic Business, spoke with Tax Counsel at the Tax Institute, Stephanie Caredes and Senior Tax Adviser at the Institute of Public Accountants, Tony Greco.
They had the following advice:
1) Keep good records: “Keeping good records is probably the most important aspect of making the tax return process easy,” Ms Caredes told Dynamic Business. “Besides a business’s financial statements, common records a small business might keep would include an asset depreciation schedule or meeting the substantiation requirements of a particular tax provision such as for car expenses.”
Ms Caredes said that having other documentation ready at hand, including bank and financial statements, would help when preparing your business’ tax return.
2) Keep your records secure: You will need to keep your records for five years, so preserving the integrity of your paperwork system over time is a necessity. “Records are required to be kept by the tax law and should evidence every transaction undertaken by the business that affects its tax position, for example if the small business CGT (capital gains tax) concessions have been claimed,” said Ms Caredes.
3) Be aware of changes: A new 2 per cent deficit reduction levy will take effect from July 1 for those on incomes of over $180,000. To avoid hitting this new threshold you might want to change your tax strategy.
“The only thing of significance as far as tax planning is concerned is that the deficit levy applies next year,” Mr Greco told Dynamic Business. “That sort of changes the strategy if you’re a small business person and you’re going to earn more than $180,000 this year.”
This could mean some small businesses would benefit from bringing forward any capital gains windfalls into the current financial year by selling off assets earlier. Similarly, deductions on bad debts or obsolete stock could be deferred until the new financial year to reduce taxable income to less than $180,000.
4) Defer income and bring forward your deductions: This is the normal strategy for businesses not in danger of crossing the $180,000 deficit levy threshold.
This approach will give small businesses the option of maximizing their prepaid expense entitlements to claim a larger tax deduction in the current financial year. This might allow one smaller operator to pay 12 months rent in advance, but claim the cost as a deduction against income earned during the current financial year. The same approach can be taken with employee wages.
5) Beware the instant asset write-off legal limbo! The new government has changed the rules on the previous concession allowing small businesses to claim an immediate deduction on assets of up to $6,500. As of January 1, this deduction was reduced to $1000, but the legislation has not yet passed.
While this means small businesses can technically still claim a deduction of $6,500, they may find themselves having to amend their tax return later at considerable inconvenience. “A lot of people still aren’t aware that those lower thresholds apply,” said Mr Greco. “Technically we are heading into tax season and the law still permits it. The ATO will be capturing that information… People will have to amend their returns if the law’s changed. This means that business owners will be expected to amend their returns and put the money back.”
6) Seek advice: It pays for small business owners to seek advice on how to reduce their liability. “They should be ringing up their advisors and just getting the lowdown of what’s changed,” said Mr Greco. “They should be used to the pattern of what to do before the end of the year.”