15 tax tips from the experts
Here are 15 expert tips to help you through the trials of tax time.
1. Get your stock in order
If you're operating a retail business then you probably have some useless stock lying around. Use tax time to get rid of useless stock and write it off.
But Greg Hayes, director of Hayes Knight, says businesses can claim a deduction for stock that has lost value over the past year.
"The Tax Act says you can store stock at lower than commercial value. A company that carries a fair bit of trading stock can use this. If you have a particular product that is not sellable any longer, or perhaps is bought for $100,000 but can only fetch $10,000 due to circumstances beyond your control, this can be valued differently to take a tax write-off."
Companies have to prove the stock is obsolete, and there is a possibility of paying more tax in the next financial year, but you can gain some savings on this year's tax bill.
2. Write-off those bad debts
Writing off bad debts is probably one of the most common tax breaks used by small businesses during the end of the financial year. But Hayes says it's staggering how many SMEs don't actually use this benefit, or worse, don't even know it exists.
"You need to understand the requirements of writing off debts. There are a few different regulations relating to different types of businesses, and this all has to be completed before June 30."
"The number of times I sit down with a small business owner and identify their accounts, and then they say "I think there's a bad debt we could have written off" is staggering. It could have been three months ago and they've forgotten about it. This is something you need to remember."
However, businesses need to fulfil a few conditions. The debt must have been previously brought to account as assessable income in the current or former income year, the debt must be in existence at the time of the write-off and it must have been chased by the business in question.
3. Check for tax breaks when selling a business
Any taxpayers who have may have sold their business need to look at the CGT implications of that, these experts say. More specifically they need to consider whether or not any of the small business tax concessions are available to them as well, reducing their tax liability.
However, some thresholds apply here - $2 million for turnover, and $6 million for assets.
4. Superannuation tip 1: Caps and contributions
Superannuation is a hot topic, and you want to make the most of it before the financial year ends. First on the list should be contributions – have you made them?
The Government will continue $1 for every $1 you contribute, up to a maximum of $1,000. However, the amount will reduce by 3.333 cents for every dollar your total income is over $31,920 and cuts out at $61,920.
There are also superannuation deductions for self-employed entrepreneurs. You can claim 100% of the amount contributed provided you notify the fund of the contribution, receive a confirmation in writing from the trustee and a tax loss is not created. This is capped at $25,000 per year.
Additionally, contributions on behalf of a spouse are subject to income limits of $13,800 for the spouse. A rebate of $540 is available for people who qualify.
Finally, remember your caps – Peter Bembrick from HLB Mann Judd says entrepreneurs are often caught out by the caps and don't pay attention, landing themselves with extra tax on the excess.
Currently the concessional super contribution cap is set at $25,000, with the non-concessional cap set at $150,000. A transitional concessional contributions cap applies for over 50-year-olds during the 2009-10, 2010-11 and 2011-12 years, and is set at $50,000 per annum.
4.2. Superannuation tip 2: Paying your staff
Hayes says businesses need to make sure they are making their super contributions on time. By doing so you'll be able to claim some deductions.
"The June quarter SCG payments would normally by payable on July 28. Pay them by June 30 and you'll get a deduction for the year. Don't wait another two weeks – they need to be paid anyway, so just do them now. Really, it's just a timing thing but it's something a lot of businesses forget."
5. Get ready for a new R&D tax break system
Deloitte partner Craig Holland says businesses eligible for R&D tax concessions need to apply now. Changes are being introduced to Parliament next month, he says, so if you apply now you want to get the most out of your efforts.
The new scheme, which will replace the current R&D concessions, will work as a tax credit. Companies will have to prove that core R&D activities are experimental, with the outcome of these activities not known or determined in advance.
The new scheme will allow businesses with turnover under $20 million to claim a 45% refundable tax credit, while companies with revenue over $20 million can access a 40% credit.
The Government says over two million companies will benefit from the changes, as opposed to the eight thousand businesses currently covered by R&D provisions.
6. Rental property deductions
If you're investing in property there are a whole host of deductions you can claim, but Bembrick says a number of investors don't even know they exist.
"One of the things that can be overlooked is building depreciations. The point being that if the building is constructed after 1982, when this depreciation rule came in, there is a 2.5% straight line deduction for things like structural improvements."
"Certainly these structural improvements would extend to things like driveways and car parks. Also keep in mind that deductions travel from owner to owner as the property is sold, so there may be a whole number of things you aren't aware of."
7. Income protection tip
If business owners purchase income protection insurance prior to June 30, Brass says they are able to claim it in this year's tax return. He says a $650 premium for income protection will give someone earning $70,000 per year a tax reduction of about $204.75, including the Medicare levy.
8. Directors' fees and bonuses
A number of companies will pay bonuses and fees for executives and directors, but Hayes says not many know about the tax advantages that can be claimed if they simply note this will be paid ahead of time.
The benefit is that a deduction can be claimed even if the bonus isn't paid in the current financial year.
"Declaring the dividends brings forward the tax deduction. Always worth doing because if the company did not make a profit in the 2011 year then the bonuses paid would create a tax loss and they would have to wait for a year where future profits were realised to get the tax benefit."
9. Get the paperwork in order
Most businesses wouldn't necessarily think about getting all the tax paperwork in order, with that job delegated to the bookkeeper or accountant. But PKF director Matthew Field says that for smaller businesses, having the necessary paperwork for tax collected in one accessible place is a necessity if the ATO knocks on your door.
"You need to have your documentation in place for everything. Whether it be loans for private company assets, any type of GST documentation or anything like that. All of this documentation needs to be proper and prepared."
"This would usually be the case for many businesses, but some often don't have things organised quickly enough. It's important to keep this on hand if the ATO wants an audit to be undertaken."
10. Beware overseas workers
Do you have employees working overseas? If so, be very careful to determine what exact benefits they have received from the company. Deloitte partner Frank Klasic says new provisions brought in from July 1, 2009 mandate overseas expenses must be subject to fringe benefits tax.
"Changes indicate that if you have an employee overseas, and they are an Australian resident for tax purposes, any benefit they receive over there can be subject to FBT in Australia."
"So if you have an employee working for a parent company, but remains a tax resident, and receives things like a driver for a car, accommodation, etc, all of these are subject to FBT in Australian returns. Previously this was exempt – this is a big change and businesses need to pay attention to it."
11. Depreciate where possible
These experts warn not to forget about depreciation benefits. Small business concessions allow SMEs to immediately write-off depreciating assets costing less than $1,000. Other assets can actually pool together to reach over $1,000, and can then be depreciated at accelerated rates.
While the Tax Office provides depreciation rates for different kinds of assets, there is scope to use your own rates if you have sufficient grounds, such as industry figures or any other relevant evidence.
12. Salary sacrificing advice
Klasic says many businesses have salary sacrificing arrangements in place, but not many have actually organised them through official processes.
"You need to make sure these salary sacrifice arrangements are proper agreements. The absence of a salary sacrifice agreement means the whole thing can fall apart and result in taxable salary for the employee if things aren't checked out."
"There needs to be an upfront formal request from the employee, usually done in the form of a letter, and the acknowledgment of that request needs to be put in writing by the employer. If you don't have that in place, the ATO will not necessarily say the agreement is effective, and it therefore becomes normal salary."
13. Trusts – it's a whole new game
These tax experts say careful attention should be given to trusts, especially in the wake of the High Court's Bamford decision.
Although a trust may not have any income to distribute, that may not stop from taxable income actually being accumulated. If this is the case, the trustee will be subject to a 46.5% rate on the taxable income, and would not receive a 50% discount on capital gains.
The crux of the Bamford decision was that a trust deed determines the income associated with the trust, and determines what members of the trust are entitled to income.
Essentially, Bembrick says, all this means is that people need to read their trust deed and make sure it represents the agreement they feel they've signed into.
"The important thing for people here is to simply read their trust deeds. The Bamford decision relates to how the trust defines income, and so people just need to read their agreements and make sure they reflect the right things."
14. Partnership splits
The rules for partnerships are similar to those for trusts. Bembrick says the basic rule the ATO lives by is that the income distribution stated in the partnership agreement essentially represents the ownership of the agreement.
"If you have two partners who go in 50/50 each, the income from the partnership is distributed on a 50/50 basis," he says.
"If somebody is looking to distribute more money to one partner than another, because you have one active partner or whatever, then you need to have a partnership salary agreement in place and make the arrangements. If not, the ATO goes by the default method of judging income."
15. Share schemes – still complex
The Government's proposed changes to employee share schemes have been the stuff of controversy over the past year, but a recent ATO ruling should clarify matters for most businesses. The ruling essentially states executives can defer payable tax on shares, provided a few requirements are met.
Employees can defer tax associated with shares and options provided by an employer for up to seven years, but if only there is a risk they could lose those shares for one year.
Also, employees can defer any tax associated with shares or options as long as there is a risk of losing those shares or options for at least six months after they have been granted.
"A condition imposing a minimum employment period of 12 months is considered to give rise to more than a 'mere' or 'rare' possibility of forfeiture and to be a condition genuinely directed to retaining employees and aligning their interests with the interest of the company," the ruling states.