The end of the financial year is approaching and business owners should now be talking to their accountant about ways to legitimately reduce the tax bill for 2009.
Some tax planning techniques differ depending on whether the business is a “small business entity” and the most common strategies that should be considered prior to 30 June 2009 include:
Small business entity (SBE) tax concessions
The “small business entity” (SBE) tax rules provide access to a range of concessions that businesses can apply without the need to make a formal election in the tax return. A business can choose which one or all of the concessions to apply.
In order to be an SBE, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive.
The major tax planning concessions that are available under the SBE rules are:
• The choice to adopt the simplified depreciation rules whereby an immediate deduction
can be claimed for assets costing less than $1,000 GST exclusive. Depreciable assets
costing $1,000 or more GST exclusive are included in an asset pool. A full depreciation
deduction of 15% (30% thereafter) can be claimed for 2009 where the asset has an
effective life of less than 25 years regardless of when the asset was acquired during the
income year;
• Choosing whether or not to do an end-of-year stock take if the value of trading stock has
not increased or decreased by more than $5,000 over the income year;
• Claiming an immediate deduction for certain prepaid business expenses where the
payment covers a period of 12 months or less that ends in the next income year. Subject
to cash flow requirements, the most common expenses that an SBE taxpayer should
consider prepaying by 30 June 2009 include lease payments, interest, rent, business
travel, insurances, business subscriptions, etc;
• The ability to apply the small business capital gains tax concessions without the need to
satisfy the $6M net asset value test.
Deferring income & capital gains
• Businesses that return income on a cash basis are assessed on income as it is
received. A simple end of year tax planning strategy is to delay “receipt” of the income until
after 30 June 2009.
• Businesses that return income on a non-cash basis are generally assessed on income
as it is derived or invoiced. Income may be deferred in some circumstances by delaying
the “issuing of invoices” until after 30 June 2009.
• Realising a capital gain after 30 June 2009 will defer tax on the gain by 12 months and
can also be an effective strategy to access the 50% general discount which requires the
asset to be held for at least 12 months. The date of the contract is the realisation date for
capital gains tax purposes.
Valuing trading stock
Both SBE and non-SBE taxpayers have the option of valuing trading stock on 30 June 2009 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
For example, where the market selling price of stock items at year-end is below the actual cost price, the taxpayer can generate a tax deduction by simply valuing the stock at market selling value for tax purposes.
In situations where stock has become obsolete at year-end (e.g. fashion clothing), the taxpayer may elect to adopt a lower value than actual cost, replacement cost, or market selling value.
Maximising depreciation claims for non-SBE taxpayers
• An immediate deduction can be claimed for assets costing less than $100 GST inclusive
(e.g. minor tools).
• A tax deduction can be claimed for depreciable assets that are scrapped or sold for less
than their written down value.
• Assets costing less than $1,000 GST exclusive can be allocated to a “low value pool” and
depreciation claimed of 18.75% for 2008 (37.5% thereafter) regardless of when the
assets were acquired during the income year.
Claiming deductions for expenses not paid at year end
Both SBE and non-SBE taxpayers are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by 30 June 2009 including:
Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked but have not been paid until after 30 June 2009.
Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2009 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2009 year when the amount is actually received.
Staff Bonuses and Commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2009 where it is “definitely committed” to the expense.
Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2009 but not paid until the next income year.
Writing off bad debts
Where a taxpayer accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2008/09 so long as the debt is declared bad by 30 June 2009.
The business will need to show that it has made a genuine attempt to recover the debt by year- end to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a board minute).
Businesses can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.
Deductible superannuation contributions
The maximum superannuation contributions that can be claimed for the 2008/09 year by employers on behalf of employees is:
Employee below 50 years of age at 30 June: $50,000
Employee aged 50 and over at 30 June: $100,000
The above contribution limits apply equally to self-employed taxpayers who can claim a 100% deduction where less than 10% of the taxpayer’s total assessable income and reportable fringe benefits is from any employment income.
In order to obtain a deduction in the 2009 financial year, the contribution must to be received by the superannuation fund by 30 June 2009.