Reducing / deferring your assessable income is a widely used and effective means of minimising your taxation liability.
Some of the areas to consider include:
1. Determining whether your business should be assessed on a cash or an accruals basis.
2. Consider deferring your issuing of invoices until after 30 June (if assessed on an accruals basis) and your business is able to absorb the potential reduced cash flow.
3. Capital Gains. If you are considering selling an asset that is going to produce a capital gain, deferring the sale date until after 30 June will place the gain into the next financial year.
4. Consider the revaluation of trading stock.
5. Trade Debtors. You may be carrying some trade debtors that won’t be collected. These would have been shown as income during the financial year and should be written off.
6. Are cash receipts actually income? Consider the Arthur Murray Principal. Review contracts for the provision of services to determine whether income from such contracts can be regarded as only being derived as and when the services are rendered.
7. Defer the receipt of interest.
8. Defer the receipt of dividends.
Diverting income is another widely used and effective means of minimising your taxation liability.
Using a Discretionary (Family) Trust can prove to be very effective business / investment structure, for diverting taxable income to beneficiaries that are in a low or lower tax environment.
A discretionary trust means that the beneficiaries are discretionary. Therefore the trustee has flexibility when it comes to making the distributions as the distributions are not fixed.
Note that it is important that the trustee of the trust make the beneficiaries entitled to the trust’s income by way of a resolution by the end of the financial year.
Increasing your deductions or tax offsets is another widely used and effective means of minimising your taxation liability.
Some of the areas to consider include:
1. Bad Debts – This will be relevant if you operate your business on an accruals basis. Review you debtor’s ledger for any customers / clients that have and will not pay. Writing these off will reduce your assessable income and may even reduce your GST liability.
2. Scrapping Fixed Assets – Review the asset ledger to see if there are any assets that have a NIL value or perhaps don’t even exist.
3. Stock Valuation - Stock can be revalued down from the purchase price / cost to a lower replacement value it applicable. Further any obsolete stock can be written off.
4. Superannuation – To claim superannuation payments for employees, the actual superannuation must actually have been paid before the 30 June.
5. Director Fees can be accrued and claimed in the same financial year with payment been made in the following year. Super is only required to be paid upon the actual payment of the Directors Fees. Taxation Ruling No. IT 2534.
6. Black Hole Expenditure - s 40-880 of the ITAA 1997, allows for the deduction of certain expenses that have not been deductible under the other provisions of the various tax acts.
Using the right accounting / taxation structure can have a dramatic effect of the amount of tax you will pay and how protected your assets are.
When it comes to making and investment of starting a business, typically the following structure are available:
1. Sole Trader
http://www.mcnamaraandcompany.com.au/blog/what-are-the-advantages-and-disadvantages-of-operating-a-business-investment-as-a-sole-trader
2. Partnership
3. Company
4. Trust
5. Superannuation Fund (for investing only)
Each of the above has its advantages and disadvantages.
Under the Governments new budget it will now be possible change structures providing that you are a Small Business Entity without having to worry about capital gains tax issues.
From a tax perspective consideration must be given to the marginal tax rates and how they interact with the company tax rate. The company tax rates may seem attractive to those on high incomes, but Division 7A will in most circumstances cause additional tax to be paid at the marginal rates.
Superannuation has the most generous tax rates, particularly when members are in pension phase. However, access to funds (a condition of release) is generally on available at age 55.
The marginal tax rates https://www.ato.gov.au/Rates/Individual-income-tax-rates/
Company tax rates https://www.ato.gov.au/Rates/Company-tax/
Division 7A https://www.ato.gov.au/Calculators-and-tools/Division-7A-calculator-and-decision-tool/
Superannuation tax rates https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=26#Other_super_rates_and_thresholds
Managing the timing of a capital gain event can defer the tax payable on the event for a substantial period of time. It may also reduce the amount you even have to pay, making it a very effective tax planning tool.
When considering selling an asset that will trigger a capital event thought should be given to the following:
1. How long you have held the asset for.
2. Small Business Concessions – What concession are available:
- 15 Year exemption
- 50% active asset reduction
- Retirement Exemption
- Small Business Rollover
3. CGT Discount.
Reviewing your accounts receivable / debtor’s ledger, i.e., people that owe you money and writing off any amounts that you won't be able to collect is an effective tax planning tool.
Provided you are assessed on an accruals basis for income tax purposes, writing off bad debts will reduce your taxable income. The same will also be true for GST.
Please note that you can only claim a deduction for bad debts if the debt is:
1. Written off as bad before the end of the financial year; and
2. Has previously been included in your assessable income.
As you must maintain written records as proof that debts have been written off as bad before year end of the financial year, many entities prepare a minute / resolution detailing the bad debts to meet this obligation.
The value of your trading stock is used to calculate you assessable income / deductions.
Where the value of closing stock exceeds the value of opening stock, the amount of the excess is assessable. Where the value of opening stock exceeds the value of closing stock, the amount of the excess is deductible.
Therefore – the higher the value you place on your closing stock the higher your taxable income will be and the lower the value the lower your taxable income and therefore the lower your tax liability.
Whatever the basis adopted in valuing trading stock for accounting purposes, for tax purposes a taxpayer may adopt any one of three bases for valuing trading stock, including live stock.
The three bases are:
1. Cost;
2. Market selling value
3. Replacement value
A different basis may be adopted for each class of stock and even for each individual item of stock. The basis adopted for any one item may also be changed at will each year.
Division 70 Income Tax Assessment Act 1997
By reviewing your fixed asset register, you may be able to increase the amount of your depreciation / capital allowance deduction.
Review your asset for the following:
1. Assets that no longer exist or have been scrapped;
2. Review the current effective life of your assets. The ATO permits you to recalculate the effective life of an asset if the current effective life is no longer relevant, i.e., the circumstances relating to the nature of the asset’s use have changed.
For some of the assets it may be possible to re calculate their effective life. The shorter the effective life, typically the greater the deduction in the current year.
If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
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