End-of-year tax tactics for your business

There are legitimate ways to go about minimising your business’s tax liability, and some simple tactics to achieve this. These may not suit every business, so check with your tax professional to ensure they are applicable. As plans of action invariably take a while to put in place, some of the strategies may be too late to initiate now, but can certainly be given consideration to make 2012-13 a better tax year.

And one practical tip; note that June 30 is on a Saturday this year, so make sure any last-minute banking or financial transfers are finalised with enough time to allow the transaction to complete. The Tax Office can be pedantic about following the letter of the law, even given that its own deadline is not on a business day.

Can you delay buying certain assets?

Business owners could consider deferring the purchase of assets, including new motor vehicles, until next financial year because much larger immediate deductions will be available. From July 1, 2012, eligible small businesses can instantly write-off assets costing up to $6,500 – a jump from the previous limit of $1,000. Also, small businesses can claim an immediate deduction of $5,000 for motor vehicles.

In a similar vein, if an asset can be depreciated, consider waiting until after June 30 before purchase — so you will have a full year over which to get the full benefits of depreciation.

Pay now, claim later

If your business’s cash flow is robust enough, consider pre-paying certain costs to cover the first quarter of 2012- 13 (July to September 2012), such as rent, interest on a business loan, or any expense for which you can claim a tax deduction.

Some financiers will allow you to package the interest on a loan, and pay the coming year’s interest in advance. There may be a charge for doing so, but the resulting tax deduction could still render this tactic worthwhile. Depending on your circumstances, even arranging short term finance to meet the impost of pre-paying costs (to allow for a tax deduction) can still be beneficial – although you have to get the calculations spot on.

Not everything can be paid in advance, so you need to check (a) that a cost can be pre-paid, (b) that there will be a tax deduction available for it, and (c) that the full deduction will be available up-front.

Take an internal audit

Review your business asset register to determine if any furniture and fittings, plant and equipment items are obsolete, can be scrapped, sold or are accurately valued.

Time your losses, or your gains, if you can

If your business is due to sell some assets which will realise a capital loss, try to crystallise these losses before June 30. Losses can be offset against, and therefore reduce, taxable income. If however the sale will produce a capital gain, delay crystallising this gain until the 2012-13 income year so that you will have a full fiscal year to get in place options to offset that gain.

And if there are potentially capital gain producing assets on your register, this could help your decision about which capital losses to realise. It may even be worthwhile for you to sell an underperforming asset, and realise a loss, if this suits your CGT circumstances.

Small business CGT concessions

If you are a small business entity (turning over less than $2 million annually), there could be several CGT concessions available, such as being able to defer a capital gain in relation to a replacement asset (‘CGT rollover’ concession), a possible 50% discount on active asset gains, exemption for gains made on assets owned for 15 years or more, and a ‘retirement’ exemption.

A business with annual turnover of more than $2 million may still be eligible for the small business CGT concessions if the combined value of the net assets of the business, any connected entities, any affiliates and any entities connected to the affiliates, is less than $6 million.

Cut off customers who owe you money

If it seems that some invoices will never be paid, cut your losses and write them off as bad debts and claim a deduction (they must be written off in the same income year as the deduction is claimed).

If you have paid goods and services tax (GST) in relation to the amount written off as uncollectable, don’t neglect to claim back the GST credit in your June BAS. If the debt is settled later, record this as assessable income in the period it is paid.

Consider delaying issuing some invoices

If your business revenue is assessable when invoiced rather than as cash arises from the transaction, try delaying invoicing clients until after July 1. This tactic will disrupt cash flow of course, but in recent times average payment days have been edging up anyway.

Stocktake time equals decision time

If you conduct your stocktake at the end of the financial year, determine what has no chance of moving and get it out the door before July, either by heavy discounting or promotions. The value of closing stock goes towards profit, so whittling down the stockpile can have a tax benefit.

R&D Tax Credit

The new Research & Development Tax Credit provides a 45% refundable offset to businesses with an annual turnover under $20 million for eligible R&D expenditure, and a 40% non-refundable offset to all other eligible entities. The new rules narrow the definition of eligible R&D but allow for holding intellectual property offshore, and businesses must separate their ‘core’ and ‘supporting’ R&D activities.

Employee bonuses & director fee bonuses

Many businesses are entitled to claim a tax deduction for an expense in the year in which the business has committed to the liability. If you have committed to pay employees end-of-year bonuses, the accrued expense can be claimed as a tax deduction even though it is physically paid next financial year (provided the employee is not an ‘associate’ of the business entity — such as a shareholder of the company).

A company can also claim director bonuses in the year the expense is accrued in the same way. For a company to claim a deduction for a director bonus without physically paying the money, the company must, before the end of the financial year, commit to and document the payment of a quantified amount.

Deductions that can slip into a black hole

There are the standard deductions for businesses — travel, vehicle expenses, rent, loan interest and so on. But an area often overlooked are deductions termed ‘black hole’ expenses. Broadly, these are items of capital expenditure not included in the cost base of a CGT asset. In other words, it is expenditure that is not generally covered by other income tax laws.

An example of a black hole deduction would be the cost of setting up a business structure. Taxpayers are allowed to deduct particular capital expenses, over five years, where it is not otherwise taken into account elsewhere in tax provisions, and where the deduction is not denied by other provisions.

The black hole expenditure rules can be complex, and therefore it would be prudent to obtain professional advice.

‘Deemed’ dividends & Division 7A

Make sure you don’t have money loaned to shareholders or their associates, because this could be deemed to be a dividend. Under Division 7A rules, loans to private company shareholders or associates may be deemed as dividends unless a formal loan arrangement satisfying particular principal and interest repayment requirements is in place. The intention of the measure is to stop profits of private companies being distributed to shareholders as tax-free ‘loans’.

And also watch for unpaid distributions from trusts to companies (unpaid present entitlements). The Tax Office issued a ruling that these may be treated as loans, and caught under the same Division 7A provisions.

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Welcome to the InterActive Tax Consultants’ news – part of our personal and easy to understand approach to taxation. We are committed to working with you to achieve the best results for your business. If you have any question or would like more information on any of the articles please contact us.