In the first of a four-part series on business tax planning, Mark Beyer passes on some end-of-financial-year tips.
EVERY good accountant will explain that tax planning should commence at the start of the financial year.
Nevertheless, there are some quick wins that businesses can obtain as they finalise their end of year accounts.
One of the simplest approaches is to review the timing of business transactions, to legitimately defer the receipt of income or bring forward deductible expenditure.
“You should consider whether it is beneficial and possible to defer income by considering the timing of contracts, or when sales are actually made,” CPA Australia WA director Justin Walawski said.
“For example, you may choose to defer any capital gains until the new financial year.
“Conversely, there may be benefits in crystallising some of your capital losses now to offset against capital gains.”
Mr Walawski said businesses should consider bringing forward expenses that were going to be incurred in the near future anyway.
However, the prepayment rules affect the extent to which businesses can benefit from payments made prior to June 30.
“The prepayment rules have been significantly wound back in the past three years or so,” Mr Walawski said.
“If the amount in question is less than $1,000 then it is deductible in the year it is incurred.
“When the amount is $1,000 or more there are special rules to be aware of.”
Horwath Perth partner Peter Moltoni said there were a number of common errors in respect to pre-payments.
Many businesses were unaware that all statutory levies, such as workers’ compensation premiums, were immediately deductible, and were not part of the $1,000.
Another common problem was failure to properly identify pre-payments.
For instance, annual rental payments or insurance premiums may be paid in, say, April.
The business needs to distinguish the portion that relates to the current financial year (which is immediately deductible) from the portion that relates to the next financial year.
Businesses that have elected to use the Simplified Tax System (which, in general, can be used by businesses with annual turnover of less than $1 million) have more flexibility with respect to prepayments.
Specifically, they can prepay some expenses up to 12 months in advance regardless of the quantum.
Expenses that can be prepaid in this manner include interest, lease payments and annual subscriptions.
An issue that all businesses need to assess is whether they have incurred any expenditure that can be written off over a five-year period.
This includes the cost of establishing a business, changing a business structure, raising equity or ceasing business.
Yet another expenditure category is building construction and capital improvement costs, which can be written off at the rate of 2.5 per cent.
The treatment of bad debts also requires close scrutiny.
If a business wants to claim for bad debts, those debts must be written-off before the end of the financial year.
However, Mr Moltoni said many businesses mistakenly believed they had to claim the entire debt as a write-off or none at all.
In reality, businesses are able to claim a portion of the outstanding debt if they expect to recover some of the money.
Mr Moltoni also reminded businesses to ensure that they claimed back their GST on any written-off debts.
He said all debts outstanding for 12 months were automatically deem-ed to be bad debts under the GST.
Therefore, businesses can claim back the GST on those debts, even if they have not written off the debt.
A further area where businesses can obtain deductions derives from the valuation of their stock.
There are several methods of valuing stock, with the main ones being cost, market value and re-placement cost.
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