Small business: Decisions for your end-of-year planning

There are a variety of decisions that are required to be made at year end to manage your tax bill.  Your choices will be based on your businesses activities, both past and future, and also when you are looking to exit.

The general rule is that you can claim deductions for expenses your business incurs that link to making or trying to make income. Many of these deductions are obvious – rent, materials, and supplies are common examples. This year, small business owners could benefit from the increase in the instant asset write-off amount (to $20,000) announced in the Federal Budget.

There are also some often overlooked and not so obvious tax deduction tactics you may be able to take advantage of. These may not suit every business, so check with us to make sure they are applicable to your situation.

Interest on loans

You can deduct interest charged on money your business borrows, including interest paid on business loans, overdrafts and other finance facilities. But there are some other aspects related to interest deductions that can easily be overlooked.

  • Any interest that is accrued on a business loan but not physically paid by June 30 may be deductible in that year.
  • Many sole traders fund some business activities through their personal credit card or a personal loan. Despite the interest costs not being incurred under the business name they may still may qualify to be claimed as a deduction. This is because the tax of a sole trader’s business activities is dealt with through the personal taxes of the business owner.

Manage the value of your trading stock

Tax time is a good opportunity to do a stocktake on your business to see if you can uncover any deductions from your trading stock that you have on hand.

  • If your stock level changes by more than $5,000, you must take into account the change in value of your trading stock when you work out your taxable income. If the value of the trading stock is higher at the end of the year than at the beginning, the rise counts as part of your assessable income. But if your stock is worth less (or worthless), that decrease is an allowable deduction.
  • There are three different methods of valuing stock; you can choose which you use for which piece of stock, providing you the opportunity to maximise your deductions. You can also write down the value of any damaged or obsolete stock (potentially to nil) that hasn’t been sold.
  • Also, even if your stock levels change by less than $5,000, you can still chose to revalue your trading stock.
  • You should always keep records of the reasons that you have valued or written off your stock.

A CGT tactic

Consider whether you are sitting on a CGT gain for the current financial year or you have prior year CGT losses carried forward, and look at offsetting these gains or losses.

  • If your business is due to sell some assets that will realise a capital loss, try to crystallise these losses before June 30. Losses can be offset against taxable capital gains that you may make on selling other assets. If however the sale will produce a capital gain, delay crystallising this gain until the 2015-16 income year so that you will have a full fiscal year to get an offset that gain.
  • If there are assets that may produce a capital gain, this could help your decision on the timing of making any capital losses. It may even be worthwhile for you to sell an underperforming asset, and realise a loss, if this suits your CGT circumstances.
  • As a general rule, the disposal of a CGT asset occurs at contract date — this could help in your planning if you sell an asset where settlement and/or payment takes place in 2015-16 but the contract is executed in 2014-15.

The good news about bad debts

It’s a problematic fact of running any small business on credit that sometimes customers simply fail to pay for the goods or services you’ve sold them. But you can claim a tax deduction for the bad debt.

  • It might pay to go back through your outstanding invoices to identify any doubtful debts to determine whether they have actually gone bad and write them off before the tax year ends on June 30.
  • Also, if you calculate your GST on an accrual basis, you should claim a refund for the GST you paid to the Tax Office when you issued the original invoice on your June BAS. If the debt is settled later, record this as assessable income in the period it is paid.

Commit to employee bonuses and 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 regardless on whether it is actually been paid.

  • If you have committed to pay employees end-of-year bonuses and followed the appropriate steps, the accrued expense can be claimed as a tax deduction, even though it is physically paid next financial year.
  • A company can also claim director bonuses in the year the expense is accrued in the same way.

Take advantage of the $20,000 depreciation cap while you can

Small businesses shouldn’t forget to claim for depreciation. New rules for small businesses mean that you can get an immediate tax write off for any asset costing up to $20,000.

  • This immense leg-up applies for assets acquired from Budget night (7:30pm AEST, 12 May 2017) and is set to expire on June 30, 2017. So if you’re planning to buy any assets for your business, consider making the purchase before then to take advantage of the new cap.
  • Most importantly, any assets bought before June 30 can be included as a write-off in this year’s tax return.
  • Also note that the depreciating asset must be first ‘used’ or ‘installed ready for use’ before 30 June– it is not sufficient for an order to be placed and paid for before year end.

(At this stage, the Bill to enact this measure is currently before Parliament; however, it may not be enacted until the end of this month. Caution should therefore be exercised.)

Instant asset write-off also applies to cars

The introduction of the $20,000 instant asset write-off in this year’s budget also means there’s never been a better time to consider purchasing a vehicle and getting an immediate deduction. Under the rules, a $14,000 car would attract a deduction on that whole amount. But note that it starts from Budget night and runs out on 30 June, 2017, so you’ll have some time to consider your options.

Planning for this year due to budget changes coming next year

Immediate deductibility for start-up costs

If you are considering starting up your own enterprise, it could pay to bide your time.

  • Small businesses starting out from the 2015-16 income year will get to immediately deduct a range of professional expenses associated with starting a new business, thereby improving all important cash flow straight away.
  • Legal and accounting costs are included. For example, ask us for advice in this area and our fees will be immediately deductible!

Tax rate changes

The 28.5% small business tax rate cut — assuming it’s passed into law — comes in June 30, 2016. You’re paying more tax now, so any savings you can make may be potentially worth more if you deduct them in the 2015-16 year rather than after.

Dividends

Dividends will continue to be franked at 30% even though the tax rate will be 28.5%, so going forward make sure you have enough tax paid to fully frank your future dividends. Ask this office for a review of your franking account.

FBT changes for work-related electronic devices

If your business provides its employees with more than one qualifying work-related portable electronic device — even if the devices are similar in utility (e.g. a laptop and tablet) — you can get an FBT exemption on those devices from April 1, 2016.

CGT roll-over relief for changes to business structure

This year’s budget included a CGT rule change for small businesses that change the type of business entity under which they operate.

  • From the 2016-17 income year onward, small businesses with an annual aggregated turnover of less than $2 million will be able to change legal structure without attracting a CGT liability at that point.
  • If you are considering changing structure, also consider whether you can wait a year to do so and save on that possible future CGT.