With the end of the financial year fast approaching there is limited time to get financial affairs in order before it’s time for the taxman to pay a visit.
The deadline’s creeping up fast, even for the most organised amongst us, but inevitably there are last-minute strategies tax-payers can employ to reduce tax bills, boost savings and get all set for the year ahead.
Here are a few tips to look at to help get on top of everything and make the most of this time of year:
- Deduct revenue expenses
Most expenses occurred in running a business can be deducted from your tax bill, provided they are related to actually earning an income, and depending on the size and type of company you’re operating. The Australian Tax Office has a list of expenses you can claim in the year they are incurred — things like rent, stationary, salaries and fees. These are called revenue expenses, and are generally the costs related to the everyday running of your business.
- Immediate deductibility of start-up costs
If a small business began this year, it would be entitled to an immediate deduction of all start-up costs (e.g. lawyer’s and accountant’s fees) incurred in the 2016 income tax year. Note that pursuant to the 2016 Federal Budget proposals, from 1 July 2016, this relief would also be available for entities with less than $10 million turnover (currently there is a $2 million turnover threshold).
- Pre-pay expenses
Pre-paying tax-deductible expenses by the end of June will enable you to bring forward the deduction into the 2015-16 financial year.
You might want to do this if you have made a large capital gain this year, or, happily, have received a larger-than-usual bonus, and are staring down the proverbial barrel at a hefty tax bill.
Tax-deductible expenses include interest on an investment loan and income protection insurance.
Insurers will often offer discounts of up to 10 per cent if you pre-pay 12 months of income protection premiums, on top of which you can claim the tax deduction in the current financial year if you make the payment before June 30. You need to contact your insurer or adviser to get started on this.
Pre-paying property investment loans or margin loans is another common trick.
But, there is a potential downside. In order to do this, the bank will generally require you to agree on a fixed rate for the interest payment, so if interest rates fall during the year, you won’t benefit.
- Bad Debts and obsolete plant and equipment
Write off any bad debts before 30 June 2016. This means going through your debtors list and either collecting payment, taking action or writing it off. Debts should be written off when there is no chance it will be recovered. The debtor must be removed from your accounts receivable list to be eligible for a deduction.
If you account for GST on an accruals basis, you can make a GST adjustment when debt is written off and claim back the amount of GST previously paid on the invoice.
- Value trading stock at the lower cost, market value or replacement value
Resale trading stock at 30 June.
The valuation of trading stock at year-end may impact on the amount to be included in assessable income for the 2016 income tax year.
Since a lower closing value for trading stock may generally result in a lower taxable income, value the amount of trading stock on hand at 30 June as the lower of cost, market value or replacement value.
- Ensure that SuperStream does not catch you out!
Employers should make changes to their payroll to be ready for the SuperStream changes.
The ability for employers to meet their compulsory superannuation guarantee obligations by manually paying contributions at least quarterly to the superannuation funds of their employees is gradually being phased out with the introduction of SuperStream.
Pursuant to SuperStream, employers must meet certain obligations with regard to the electronic payment of superannuation contributions and the provision of contribution data to complying superannuation funds.
Broadly, if there are less than 20 employees, the employer should have been using SuperStream from 1 July 2015 and has until 30 June 2016 to be fully compliant with SuperStream. [Businesses having 20 or more employees were supposed to have been fully compliant with SuperStream by 30 June 2015]
- Use the small business instant write-off scheme if you can
But you may not have to wait years to recoup the money you spend on your new computer or printer. In a bid to spur investment in the economy, the government last year created an instant write-off scheme for small businesses with less than $2 million in revenue. Eligible businesses can claim back the purchases of new assets like computers and other tech on their next tax bill, rather than depreciating them over a number of years. This year’s budget extended it for another year, meaning from the 1st of July this year businesses with up to $10 million can partake in the scheme.
- Small business restructure rollover relief
Although this rollover is not relevant for the 2016 income tax year (i.e. this measure only comics from 1 July 2016), a small business may wish to hold off restructuring (e.g. changing the business structure from a company to a trust or from a sole trader to a trust etc) until after 1 July 2016. [The relevant legislation, the Tax Laws Amendment (Small Business Restructure Rollover) Act 2016 received Royal Assent on 8 March 2016 and applies from 1 July 2016].
This is because pursuant to this small business restructure rollover, the legal structure of a small business should be able to be changed without any tax consequences (i.e. no tax consequences on transferring depreciating assets, revenue assets, trading stock or CGT assets between the different restructured entities).
With limited information available at the time of writing (e.g. only the 2016 Budget papers), uncertainty exists whether the proposed $10 million threshold would also apply to the small business restructure rollover that will apply from 1 July 2016. More information from the Government is awaited on this issue.
- Income
Document monies you have received for deposits on work yet to be completed as it’s not taxable this financial year. Record as income in advance.
Identify any invoices you have issued for sales that will take place next financial year, so the income and tax is deferred until then. Record as income in advance.
Also, don’t raise an invoice for work in progress before 30th June and defer receipt of debtors until after 30th June, as this help out if you are on a cash basis.
- Report payments made to contractors in the building and construction industry
Businesses in the building and construction industry must report the total payment they make to contractors on a taxable payments annual report by 28 August 2016. The report must specify the supplier, the supplier’s ABN (if known) and the total payments made to the supplier.
- Structure
It’s a good time to review the structure you’re working under, to make sure it’s the best option for asset protection and flexibility for the distribution of profits in the most tax-effective manner.
- Superannuation
This year, it is more important than ever to ensure that you have exploited your pre-tax super contributions limits, assuming you are in a position to do so.
This is because under changes unveiled in the May budget, the annual pre-tax, or concessional contributions caps, are likely to fall from July 1, 2017 to $25,000, giving savers only the remainder of this year and next year to make use of the current higher limits.
In 2015-16 and 2016-17, individuals can inject up to $30,000 into super if they are under the age of 50, or $35,000 if they are 50 and over.
Contributions can be made in two ways. The self-employed are able to make a lump sum contribution and claim a 15 per cent tax deduction. If you are an employee, you will need to contact the payroll office and see if you can make a contribution by salary sacrificing. Assuming you earn less than $300,000 a year, you will pay just 15 per cent on the amount you pump into your super account, while at the same time boosting your retirement savings.
You will need to ensure that the money actually hits your super account before June 30. If it doesn’t, it will throw out your plans to maximise the higher contributions limits while they still last.
Elsewhere on the super front, if you earn less than $50,454, you will be eligible for a government co-contribution payment. Under this scheme, if you make an after-tax contribution of $1000 into super before June 30 the government will make a contribution of up to $500. Happily, you don’t need to apply. All you need to do is to make the injection and the money from the government will turn up in your super account automatically.
If your spouse earns less than $13,800 a year, you could bolster their account through a spouse contribution. Under this scheme, if you place $3000 into their super account before the end of the financial year you will be eligible for a tax offset of up to $540.
One tip worth remembering is that from July you will be able to hand over up to 85 per cent of your pre-tax super contributions made in the current financial year to your spouse’s account, as long as your partner is under 65 years of age and not yet retired. This could help provide super benefits earlier by splitting contributions to the older spouse and pay for insurance premiums for a non-working or low-income spouse.
Still on the super front, savers should avoid exceeding the annual pre-tax concession limits of $30,000 or $35,000, depending on age. Employees should be able to check how much they have put into super so far in 2015-16 by contacting the payroll office or retirement fund.
For business owners, pay all employee super before 30 June 2016, including June 2016 quarterly contributions. As tax deductions are only allowed when the payment is made, pay well before 30 June so you can claim it as a tax deduction in this financial year. Remember, all compulsory contributions are due no later than 28 days after the end of each quarter, but you only get a tax deduction when paid.
- Self-managed super funds
Self-managed super fund members who are also self-employed can employ a rather clumsily worded strategy called a contributions reserving strategy. It allows them to double the pre-tax contribution limit that applies to the current financial year.
The member effectively brings forward the tax deduction from the following financial year to the current year and so is able to claim two years of tax deductible contributions without breaching the rules.
It is a neat strategy for individuals who have realised a particularly large capital gain in the current year. But remember, you must be eligible to make a personal contribution in order to use the strategy.
Also, self-managed super fund members should have a checklist of items to go through before the end of June, such as ensuring that the trust deed is up to date, the investment strategy is relevant, and binding death benefit nominations are current.
- Private pensions
Ensure that, if you have a full super pension, you have met the minimum drawdown rules this year. Depending on your age, you need to withdraw between 5 per cent and 14 per cent of your pension savings each year.
If you are under 65 and have a transition to retirement pension, you must withdraw a minimum of 4 per cent and a maximum of 10 per cent from your account in 2015-16.
- Shares
There are two key strategies around shares. The first is that, particularly if you have made a large capital gain this year, you might like to realise a loss by selling shares whose value has plunged and you think is unlikely to recover.
Alternatively, if you are harbouring losses on a stock in your personal name but think it is worth holding on to, you could “contribute” that stock as an “in specie” transfer into a self-managed super fund, or indeed some retail funds. This will enable you to maintain exposure to the stock through your super fund, but realise a capital loss in the current financial year in your personal name. The loss can be offset against this year’s tax, or be carried forward indefinitely until a time when you sell an asset and make a capital gain.
Experts add it is a strategy that makes particular sense if you are intending to retire within the next five years, because the stock will become capital gains tax free when it is transferred to a private pension.
- Charity
It is the time of the year to think about making charitable donations, which can be offset against your tax. But, make sure first that your chosen charity actually has charitable status. The ATO website has a list of eligible charities.
- Workplace expenses
Purchasing work-related items, such as professional body memberships, magazine subscriptions or tools, is a common end-of-financial year strategy,
But by the same token, buying unnecessary items makes no sense, as you are not going to get rich by chasing tax deductions.
Pre-paying for a short course that you are planning to take in the next financial year could be worth considering, as long as it is related to your day job. The course fee can be deducted against this year’s taxable income.
- Deduct capital expenses
For items that last longer but also have a limited life — think computers, electrical tools and cars and other gear valued over $1000, you have to depreciate them over a number of years — claiming back a small portion of their value over their lifetimes. You can generally figure out the “lifetime” of an asset yourself — taking into account how long the asset will contribute to your business, given reasonable wear and tear and maintenance. The ATO also has a handy page of formulas and an online calculator to help you figure out how long your asset will last and how much you can deduct per year.
- Deduct home office expenses
If you’re business operates out of your home, or you work from home, there are other deductions you can take to invest back in gear. Running expenses like electricity and cleaning, the decline in value of fittings and carpet, and even the room itself can all be claimed on your tax. So can assets like computers, printers, software and routers — they can be deducted immediately if they’re worth less than $300, otherwise you need to work out how much you can depreciate just like a normal capital expense. If you use these items for work and pleasure, you may need to keep a diary of your useage — if 40% of your laptop time is for work then you can only claim 40% of the depreciation of your computer. Again, the ATO website has all the formulas and calculators you might need to work out what you can claim.
For any queries of questions about any of these areas, you can contact us on 9267 0108 and 9743 3600 to book a consultation, or visit our website at http://www.exemplary-financial.flywheelsites.com/ Our team of experts are only too happy to help.
