Paul Drum, head of policy at CPA Australia, recommends small businesses pay careful attention to loans made to directors at this time of the year.
Drum says it is essential for a business to have the correct arrangements in place if loans are being made to directors so as not to trigger the “punitive” Division 7A dividend rules, and Braine agrees.
“For any loans arising in the June 30, 2014 income year, you should consider whether you will repay this loan prior to your tax return lodgement date or whether you need to put the loan under a complying Division 7A agreement,” explains Braine.
“Where Division 7A loans are already in place, you should ensure you have calculated your minimum repayment and ensure the minimum yearly payment is made prior to 30 June 30, 2014 in order to mitigate any unintended Division 7A consequence,” he says.
Both Drum and Field says small businesses should be aware of the potential changes to concessions for asset purchases.
While businesses were previously able to claim instant write-offs for asset purchases up the value of $6500, the federal government has indicated its intention to reduce the concession rate to just $1000.
But here’s where it gets tricky. The legislation is still being considered by Parliament as it is tied to the appeal of the mining tax.
According to Drum, this means businesses that purchase an asset now, and claim the full $6500, may be required to submit an amended assessment down the track, depending if the new rules are backdated to the intended start date of January 1, 2014, or if they will be prospective.
Another area in which recent changes to government policy may affect your tax bill this year is the government’s proposed debt levy.
As previously reported by SmartCompany, the government announced in its budget a plan to increase the top marginal tax rate by 2% for taxpayers earning above $180,000 each year.
Braine says some shareholders in private companies may want to bring forward payments of dividends to the current financial year to ensure the income from the dividends is not subject to the debt levy.
“Under the current arrangement, highest marginal rate taxpayers pay top up of 23.57% on the cash component of dividends,” Braine explains. “This will increase to 27.14% next year and will further increase to 28.67% the following year after the reduction in the company tax rate.”
Braine says salary sacrifice arrangements may also help high-income taxpayers avoid the debt levy, as the fringe benefits tax rate is not increasing until April 1, 2015. He says individuals may also be able to use salary sacrificing to reduce their cash salaries to below $180,000.
“For example, a taxpayer on a salary of $300,000 per annum would not pay any debt levy and therefore save $2400 if they salary sacrificed $120,000 in fringe benefits,” says Braine.
All of our experts recommend small businesses write off any bad debts they have not been about to recoup in the current financial year.
But it’s important to document what the debts are and the efforts you have made to recover them, says Field.
“Bad debts must physically be written off before June 30,” says Field. “It is not sufficient to do this when doing your tax return several months later.”
“As always, some form of documentary evidence of the write-off prior to June 30 is good practice,” he says.
“This could be by way of accounting entries processed before year end or some other form of written record such as a minute. Another requirement is that the debt must have previously been included in your assessable income. If you’re a small business and only recognise income when you’re paid (i.e. cash basis) then you won’t previously have included the debt as assessable income and therefore won’t be eligible to write it off as a bad debt.”
If you have any obsolete stock, now is the time to get rid of it.
Field recommends writing off any old, damaged or obsolete stock by June 30, as the value of the write-off provides an immediate tax deduction. And for any stock that is now worth less than cost price, consider valuing it at a lower market value to reduce your tax bill.
“Many people do not realise that you have a number of options for valuing closing trading stock on hand,” says Field. “These include valuing it at cost price, market selling value or replacement value.”
“You can also change valuation methods from year to year and from item to item,” says Field. “By using different valuation methods from year to year you can increase or decrease taxable income, depending on your circumstances.”
Editor
Eloise is an experienced business journalist and editor, who has held senior editorial roles at SmartCompany since 2014. Prior to joining SmartCompany, Eloise was news editor at Books+Publishing, the trade press for the Australian book industry. Eloise has degrees in media and communications, marketing and business management, and political science. You can follow her on LinkedIn, and Twitter at @ellykeating.
