We are just weeks away from the end of financial year so if you haven’t already had a tax planning session, it makes sense to implement some last minute tips to reduce your tax. An important thing to remember is that once 30 June has passed, it makes reducing your tax a lot harder so time is not your friend here.
This article is specifically focussed on small businesses but I’m putting together a follow up article for property investors.
Trustee Distribution Resolutions
If you operate via a discretionary trust, this could be the trading entity or an asset holding entity, and you have an estimated profit to distribute for the 2015-16 financial year, you would be mad to not prepare a trustee distribution resolution.
The courts and the ATO have recently cracked down on trustee distributions and require a resolution to be passed BEFORE 30 June nominating the respective beneficiaries who are entitled to the income of the trust.
Basically if you don’t do this or do it wrong, the profit of the trust could be taxed at 47%. We’ve already prepared a number of these for clients with one in particular being able to reduce their Capital Gains Tax bill to zero through some clever planning.
An important note to keep in mind this that you can only claim superannuation when it has actually been paid. So if you want to claim it as a tax deduction in 2015-16 it has to actually have been paid well before 30 June. With the recent Budget Changes on the agenda to come into effect, it may make sense to start maximising your super contributions as it will only get harder and harder to do so as the years pass.
Deductible thresholds are as following:
- <50 years old $30,000
- >50 years old $35,000
Check with your advisor if you are unsure which category you fit into and/or how much you have already contributed for the year as excess contributions can have adverse tax consequences.
What Do I Pay Myself
If you operate via a company structure, any drawings you have taken from the business in 2015-16 will need to be accounted for otherwise you’ll have to deal with something called Div 7a which I suggest you try and avoid. So how do I pay myself?
Let’s say you’ve drawn $100,000 from the business for the year and you want to clear the balance, you could do this by declaring a dividend (if that is an available option) or pay yours a wage or directors fee. Keep in mind that a wage/directors fee may attract superannuation obligations and Work Cover obligations.
This means that a $100,000 wage would not only need to pay the PAYG withholding tax by 28 July 2016, but also the superannuation of $9,500 to your complying super fund and Work Cover. If super is unpaid you could face penalties from the ATO in the form of a fine and payment of superannuation guarantee charge interest.
Delay Income / Bring Forward Expenses
A simple strategy is to delay any income to post 1 July and pay any expense pre 30 June. So say you have a big invoice you are going to send to the client near the end of June, it may make sense to hold off doing so until after 1 July this is pushed forward into the following financial year. Your financial statements will show a small amount of revenue but your tax will also be smaller so it comes down to which objective is more important for you and the business.
Bringing forward expenses means paying for item pre 30 June to ensure it is included as a deductible expense this current financial year, thus reducing your profit and reducing tax. Small Business have a threshold of $20,000 for immediate deduction on assets purchased for the business so don’t go out of your way to buy some for the sake of a tax deduction but if something is on the radar to be purchased quite soon and you want to decrease this years tax bill and you have sufficient cashflow (or a loan facility ready to go), it may make sense to purchase before 30 June and claim the deduction.
Note that anything over $20,000 will be depreciated as per the ATO’s guideline rates from the date of purchase. So if you purchased a motor vehicle for $30,000 on 1 June, using the diminishing value method it will depreciation at 25% as follows: (30/365) x 25% x $30,000 = $616. However if you purchased a motor vehicle for $19,000 you could claim $19,000 as a deduction as opposed to the above example of $616. Quite a significant difference which for a company is an addition $5,515 in tax savings.
If you have a business that holds stock (or inventory) then you have three options at year end as to how you would like to value your stock which will impact your profit figure and thus your tax payable figure. The three options are as follow:
- Market Selling Value
- Replacement Value
Also note that a small business does not have to complete a stocktake if it’s stock level have fluctuated <$5,000 over the course of the financial year.
What To Do
If any of the above strategies apply to you, what I want you to do is implement them now. The end of financial year is almost here and smart business operators are already implementing strategies like this to defer and minimise their tax for the year.
If you need a hand we are full swing in tax planning mode and are happy to help.