With the end of the financial year approaching, now is a good time to review the business’s financial situation and make sure it ends up with a bigger tax bill than is necessary.
Plant and equipment
If any plant or equipment is obsolete, write it off as scrap before 30 June. This allows a deduction to be claimed as long as the amortised value is greater than any proceeds received. However, keep in mind that equipment must be physically removed, not just left unused.
Trading stock
Any trading stock on hand at year end should be valued for tax purposes. This can be done one of three way – at cost, at market selling value, or at replacement value.
The usual method is to value stock at cost; however if the stock is obsolete, or there are other circumstances that mean that the market or replacement value of the stock is less than the ‘at cost’ amount, the lower value can be used.
Therefore, trading stock should be reviewed to see whether any should be written down or written off as being obsolete, thus resulting in a tax deduction.
Asset depreciation
For businesses with a turnover of $2 million or less, which therefore qualify for the small business entity rules, a number of tax concessions apply.
One of the most attractive is to do with asset depreciation.
Assets that cost over $1,000 can be depreciated at 15 percent for the year in which they were purchased, and then 30 percent for each year afterwards (for assets with an effective life of less than 25 years).
It’s a good idea to maintain a list of all assets and the date they were purchased, to help ensure the full depreciation is claimed at the right time.
Non commercial loss rules
Anyone carrying on a business, either alone or in partnership, needs to be aware of how the non-commercial loss rules may apply.
A common scenario is a loss-making business carried on by an individual with high levels of assessable income from other sources.
Assuming the business is not merely a hobby, the loss may still not be deductible in the current year unless certain tests are satisfied.
Also, if the individual has taxable income of more than $250,000, the only way to claim the loss will be to apply for a ruling from the ATO, and they have made getting such a ruling very difficult unless it can be shown that the business will become profitable within an industry-accepted timeframe.
Business loans
Anyone who has borrowed money from the business should be making minimum payments during the course of the year, and keeping detailed records.
Furthermore, the loan must meet the Australian Tax Office’s guidelines or else it will be assessable in full as a deemed dividend, and tax payable by shareholders, treating the amount of the loan as taxable income for the business owner. Therefore check that the loan is allowable to avoid an unexpected tax bill at the end of the financial year.
Dividend payments
Consider the timing of year-end dividend payments, particularly taking into account the franking rules that govern how distributions must be made.
Superannuation
Amounts deducted from employees’ wages as superannuation for the last quarter of the financial year should be paid to the superannuation fund by no later than 30 June so that the deduction for the payment falls in this financial year.
The ATO has ruled that cheque payments are treated as made when the cheque is received by the superannuation fund, not when the cheque was written or mailed, and electronic payments are treated as made when the amount is credited to the superannuation fund’s bank account. Therefore, it is generally advisable to make the payment at least a couple of days before 30 June to ensure that the tax deduction is available.
Deemed dividends
Any company assets used by shareholders and family members – such as real estate, cars and boats – should be treated as deemed dividends. It may therefore be necessary to pay rent for any personal use of such assets, and properly record these arrangements.
Tax structure
Check to ensure that the structure in operation for the business is still effective, bearing in mind the tax rate changes, capital gains tax discount and the small business CGT concessions. It can be costly and time-consuming to change the structure, but in the long run it may be a worthwhile exercise.
Peter Bembrick is tax partner with accountants and business and financial advisers HLB Mann Judd Sydney. www.hlb.com.au.
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