Over the last months we have been busy reviewing our clients’ tax positions. The purpose of this is to assess the potential tax impost for the year so that action can be taken to minimise it if necessary or otherwise plan for payment by the due date with no surprises later in the year. It also enables you to vary your June 2016 PAYG tax instalment should there have been a drop on taxable income compared to 2015, thus preserving valuable cash flow.
Assessing what your average and marginal tax rates is a critical element of undertaking tax planning. These will determine the real cash flow savings from any tax planning strategy. Just because something is 100% tax deductible doesn’t mean that the amount spent comes totally off your tax bill. This will depend on your tax rate. For example, if a 100% tax deductible expense cost $1000 –
- At a tax rate of 40%, tax saved = 40% of $1000 = $400
- At a tax rate of 10%, tax saved = 10% of $1000 = $100
- At a tax rate of nil, tax saved = nil
For Small Business (including primary producers) (Turnover less than $2m):
- Asset/vehicle purchases less than $20000 GST Exclusive are 100% tax deductible (subject to % business use) – please note this is to be phased out 30 th June 2017.
- Tax rate for SBE companies is budgeted to reduce by 1% in 2017. Deferring of income from 2016 to 2017 or bringing forward expenses from 2017 to 2016 may result in a tax saving. Similar tax savings are available to sole traders, partners in partnerships and beneficiaries in trusts that are small business entities
For all businesses
- Superannuation for employees for June quarter, normally paid in July should be paid in June as superannuation is only deductible in the year it is paid. Ensure that the payments are made early enough in June for payments to clear into the superannuation fund bank account before year end. This also applies for superannuation contributions made for yourself
- Undertake maintenance of equipment/property.
- Defer invoicing
- Ensure all accounts payable owing but unpaid for June or earlier are recorded. Just because an account hasn’t been paid doesn’t prevent you from claiming a legitimate tax deduction
- Value stock on hand at either cost, replacement or market value. Each item of stock can individually be valued under either of the three methods. The lower the stock value, the lower the profit and therefore tax. In some circumstances a higher stock value may be preferred – all part of the informed tax planning process!
- Write off any bad debts considered uncollectible
For Primary Producers
- New fencing is 100% deductible
- Grain & hay sheds are written off over 3 years, a full 1/3 written off in the year of purchase
- Water storage and conveying capital expenditure is 100% deductible
- Redeem or deposit farm management deposits
Common errors in tax planning
The biggest mistake is thinking that if you have little left in your bank account, tax won’t be an issue. This can result in a major tax surprise later in the year – particularly if you lodge your tax return late. You need to recognise that the following outgoings are not tax deductible:
- Private drawings
- Loan principal repayments
- Asset purchases (not subject to special write off rules above)
- Payment of income/company tax
- Payment of GST
Also, generally, you are taxed on your share of profit, not what you actually draw out of a business. This simply means that if your profit is $100,000 and you draw only $50,000, you will still be taxed on $100,000. The cash might not be there for the 5 reasons above and/or you may have invested additional funds in receivables or stocks or reduced what you owe suppliers. Alternatively, if you draw $100,000 but your profit is $50,000, you will be taxed on $50,000 – but the catch here is that to do this you must have drawn off business working capital or borrowed money in the business to do it – which is generally unsustainable in the short/medium term.
So, our advice is and has always been – do your tax planning in a timely, structured and informative way and take control of your destiny!