May and June is the time for tax planning as 30 June looms down on us. Accountants love 30 June and celebrate like New Years Eve. But the lead up to the end of June is very important for all businesses.
Many of our clients have now completed reviews of their figures and have now been informed of the likely tax obligations for their business.
The background to the process involves taking the year to date data from record keeping systems such as MYOB, Xero and Banklink and then including adjustments for stock, depreciation and finance interest to arrive at the taxation profit year to date. Then with client input as to the anticipated sales and purchases we work out the projected taxable income. After inclusion of non-business items we arrive at the individual taxpayers’ taxable income and likely tax on that income.
Now the fun begins when we look at the likely tax per dollar of additional income and expenditure. With this we can start using a number of strategies to in most case reduce the overall tax position. I say in most case as there are times when a business sustains a loss that we may want to bring more income into a financial year to lessen any future impact.
Here are a few tax planning strategies which we commonly utilise:
- Superannuation: Makings a concessional contribution for a taxpayer which allows them to claim the amount as a tax deduction in their own tax return. Be aware of the contribution caps and if you are eligible to claim a personal concessional contribution. You also need to ensure the superfund receives the money before 30 June, so don’t leave it to the last minute!
- Farm Management Deposits: For Primary Producers only, these are taking cash and putting it in a special FMD Term Deposit. You receive a tax deduction in the year you put it in and the funds must (in most cases) remain for a minimum of 12 months. When it is withdrawn it becomes taxable income again, which in its own right requires a strategy.
- Pay all bills before 30 June: If being taxed on a Cash Basis, ensure all June and prior purchases are paid before the end of June to ensure you receive a tax deduction this year. If taxed on an Accrual basis, you simply need to insure all accounts payable are bought to account in your tax returns at year end, they need not have been paid.
- Pre-payment of expenses: If your turnover is less than $10m you are in the Small Business Entity system (SBE). If this is the case you can make a prepayment of business expenses to be used within the next 12 months. This is useful to pay inputs such as fuel and repairs to be completed or used in July and future months and claim the expenses in the current financial year.
- Be aware of un-earned income: If you have received funds in advance of providing a service to a customer this is not taxable income. Examples of this are Builders receiving a deposit on a house which is yet to be started or a business receiving pre-payments from customers for goods.
- Review Debtors lists: If on an Accrual basis for tax, review your debtors list and write off before 30 June any debtors owing you money that you anticipate as un-recoverable.
- Do a stocktake: Review your stock levels and write off obsolete stock and account for stock losses. In most cases you are supposed to complete a stock take anyway, so the time is perfect to move on and make space for items you can sell in future.
- Stock sold and funds not received: This is particularly for Cash Based taxpayers such as Primary Producers. If you have sold grain and not yet been paid for it, it is neither stock on hand and not included as sales until received. Be aware of June sales in particular and the timing of expected receipt for payment.
These are a few of the main strategies that are used in our tax planning meetings and this is assuming you are in the right structure to start with. The business structure is important to ensure flexibility of who receives the income of the business to ensure the family as a whole is paying the least amount of tax. It is also a common discussion we have at tax planning meetings as the best date to change in 1st July, so timing is perfect in May and June.
If you require assistance with your tax planning, time is fast running out but not altogether too late. Get in touch with your accountant and have a chat.
If in the past you have not considered reviewing your position before end of June, next year it may be the time to get in early and start.