End-of-year tax strategies for SME owners are dominated by the imminent halving of the annual caps on concessional super contributions, expectations for trading conditions to worsen and the showering of short-term boosts to business investment allowances.
In short, this is a time for business owners to move quickly, yet with extreme care, with their business and personal tax planning.
Our top strategies have been prepared with the assistance of leading tax, business and superannuation advisers:
This is a no-brainer. As announced in the Federal Budget, the Government proposes to halve the annual caps on concessional super contributions – these are salary-sacrificed, superannuation guarantee and tax-deductible contributions by the self-employed and eligible investors – from July 1.
This means that maximum concessional contributions for members over 50 will drop from $100,000 to $50,000 from the beginning of the new financial year. (And then again drop to an indexed $25,000 in three years time when special transitional treatment for this age group end.)
From July 1, the cap on concessional contributions for members under 50 will drop from $50,000 to an indexed $25,000.
Higher-income earners, in particular, will lose much of this lower-risk way of neatly cutting much of their taxable income.
“Making maximum concessional contributions was the low-hanging fruit of tax planning,” says Paul Banister, director of taxation services for accountants and business advisers Grant Thornton in Brisbane.
The halving of concessional contributions from 2009-10 is a powerful reason to “supercharge” your contributions by June 30 within the current caps, Banister suggests.
Depending upon the circumstances, overshooting contribution caps could end up with certain excess contributions being taxed at a staggering 93%.
Although the likelihood of excess contributions is magnified from July, when the concessional contribution caps are halved, it is already a danger.
Excess concessional contributions are subject to extra tax of 31.5% – in addition to the standard 15% contributions tax paid upon entering the fund, bringing the total tax immediately payable to 46.5%.
But wait! Excess concessional contributions automatically count towards the limit on non-concessional (after-tax) contributions of $450,000 averaged, over three-year periods.
Stuart Jones, author of the Australian Superannuation Handbook 2008-09, published by Thomson Reuters, points out that a fund member who contributes a $450,000 inheritance or a family law settlement, for instance, into super as a non-concessional contribution will pay a high price with any excess concessional contributions being taxed at 93%.
In an effort to reduce the impact of the sharemarket downturn, some long-term investors may falsely maintain that they are share traders, not investors, and claim ‘trading’ losses against their ordinary income. Be warned, the tax office intends to closely scrutinise such claims. (See here.)
The transfer will trigger CGT on past capital gains (or possibly capital losses) but any tax payable will be at a longtime low because the market has suffered so much. And as Sue Prestney, a Senior Partner with accountants and business advisers MGI in Melbourne stresses: “once in your concessionally-taxed super fund, future capital gains – which will come when the market eventually recovers – will be taxed at a maximum of 10%.”
This could be a particularly smart strategy if you believe the market is already in its recovery phase.
If you think your business will experience a sharp downturn in coming months, Sydney tax lawyer Robert Richards suggests that you maximise the writing-off of bad debts before June 30.
This is because your business may not have enough income next financial year to offset its losses. “There is a big difference [from a tax perspective] between writing-off a debt before or after June 30,” he says. This strategy involves really examining your debts.
“A bad debt is not deductible just because it is bad,” Richards adds. “It must be written off.
Under another Budget measure, deemed dividends will arise from July 1 for the personal use of private company assets for free or below-market rates by shareholders or their associates.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
