The end of financial year is one of the busiest times for businesses, with many scrambling together paperwork and ringing accountants to get their tax affairs in order.
Much like last year, the past 12 months have seen some big changes for SMEs in when it comes to tax time, from a changing company tax rate to an extension of the $20,000 instant asset write-off.
SmartCompany has conferred with some of our top tax experts and put together some of the best tips for SMEs ahead of July 1. So get your notepad out and make sure you’re across these 17 tax tips for this end of financial year.
For the 2016-17 financial year, the corporate tax rate for businesses under $10 million has been reduced from 28.5% to 27.5%. If your business turns over between $10 million and $25 million, you will be eligible for the lower company tax rate from the 2017-18 financial year.
Murray Howlett, a partner at accounting firm Pilot Partners, says businesses should be aware this rate change is applicable to the entire financial year, despite just being recently legislated.
The rate will continue to drop as the years roll on, with the government aiming to have the rate at 25% by 2026. Right now though, this could mean some savings for your business, with businesses telling SmartCompany in April what they were hoping to spend the extra capital on.
“Any profits we have at the end of the financial year we are reinvesting back into the business, which usually results in an investment around technology,” Tom Caesar, director of Positive Lending Solutions said at the time.
Along with the changing company tax rate, incorporated businesses should be aware of the changed franking credit rate advises Howlett.
A franking entity — a corporate tax entity — can record tax paid to members of the entity as a franking credit. The credit is equal to the amount of tax paid.
With the decrease of the corporate tax rate for small businesses, the maximum franking credit has also decreased from 30% to 27.5%.
“Whereas when the company had a 30% tax rate paid, the dividend for shareholders was a 30% franking credit. If the tax rate is 27.5% the value of credit to shareholder also fallen to that,” Howlett says.
“Shareholders will effectively pay more tax on dividends they pull out. If your tax rate is changing, paying dividends before 30 June means you can access credit of 30% rather than 27.5% percent.”
In the 2015 federal budget, the government introduced the $20,000 instant asset tax write-off scheme to overwhelmingly positive reception. The popular scheme was due to expire on June 30 this year, however, the federal government used this year’s budget to extend the scheme another financial year.
The accelerated depreciation scheme was initially only available to businesses with annual turnover of up to $2 million, but legislation passed earlier this year extended the tax break to businesses with annual revenue of up to $10 million.
This scheme allows businesses to claim immediate deductions for depreciating assets worth up to $20,000 as long as the asset is purchased and installed before June 30. More information on the write off can be found here.
Small Business Minister Michael McCormack said in the 2017 budget the 12-month extension “continues the government’s support for small businesses to pursue new ideas, invest in themselves and create more jobs”.
Tax professional at Perigee Advisers Lisa Grieg told SmartCompany “everyone” is keen to make use of the $35,000 concessional superannuation contributions before the limits change next year, labelling it “one of the big ones”.
“It’s a huge thing, everyone’s looking to max out their super so they’re at panic stations,” she says.
The contribution limits are changing next financial year, but up until June 30, individuals can contribute $30,000 in concessional contributions or $35,000 if they are over the age of 49.
In the 2017-18 financial year, this will drop to a flat $25,000 which will apply to everyone, regardless of age.
Getting your deductible expenses over the line before the end of the financial year is a common tactic for businesses around tax time, with costs such as rent, utilities or repairs often brought forward to claim deductions.
However, Grieg advises businesses to ensure all deductions are part of your assessable income, and recommends business owners to ask themselves: “Can you justify this expense?”.
“Businesses are always looking to make $300 deductions here and there, and some smaller deductions that businesses look for they’re actually not entitled to,” she says.
“Businesses also try to wrangle personal things through as business expenses, and that’s a no. Make sure it definitely has a business connection, or your bookkeeper will just pick it back out.”
The ATO has outlined some of the things it will be keeping an eye on when it comes to work-related tax deductions, including travel expenses, meals, and internet use.
Small businesses should be aware that starting next financial year, they will face stricter rules for capital gains tax (CGT), as flagged by the federal government in the May budget.
From July 1, the government will seek to amend the CGT concessions rules for small business so that business owners can only access the concessions for assets that are used in a small business or in relation to ownership interests in a small business.
Small business CGT concessions are available to businesses with annual turnover of up to $2 million, or with assets under $6 million.
“The concessions assist owners of small businesses by providing relief from CGT on assets related to their business, which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business,” the government said in the budget.
“However, some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.”
Small businesses should also consider how they value their trading stock as that choice can help minimise a business’ tax bill, as Theo Sakell, tax partner at Pitcher Partners, previously explained to SmartCompany.
“Where you hold trading stock, you can choose to value trading stock at year-end cost, market selling value, replacement value or obsolete stock value,” Sakell said.
“This can have the effect of either bringing forward deductions or shifting the amounts to the following year.”
Businesses can switch between the methods each year and can use different methods for different items. And if stock is old or obsolete, businesses should write it off in full.
Small businesses should also be looking to write off any bad debts that they have not been able to recoup in the current financial year. This involves documenting what the debts are and the efforts you have made to recover them.
Bad debts must be physically written off before the end of June — not a few months down the track when you get around to doing your tax return.
Business owners should also make sure the debt in question had previously been included in the business’ assessable income. This could be an issue for cash-based businesses that only recognise income when they are paid. In these circumstances, the debt would not have previously been included in assessable income and therefore the business would not be eligible to write it off.
Some business owners may be tempted to spend some extra cash before the June 30 deadline, however, Price says they should think carefully before doing so.
“Just because businesses have money in the bank they think they should spend it before tax time,” Price says.
“Don’t spend it unless you really understand your numbers, because it can leave you in a bad cashflow position.”
Price advises pre-EOFY spending of surplus cash should be limited to “vital equipment” that can directly increase a business’ revenue, such as a photographer buying a new camera. For businesses looking to spend any extra cash, Price says a wage bump should be considered.
“If I had extra cash to spend I’d pay myself a higher wage. I’d rather put it in my back pocket than spend it on something I don’t really need.”
For people who are running their business through trusts, you need to ensure you your have distributions decided and documented before the end of the financial year, advises Howlett.
“Going back many moons it was not uncommon for the distributions to be made with an accountant when doing tax returns, but for the last four to five years, it had been the case the ATO will scrutinise decisions around trust distributions made before EOFY,” he says.
Similarly, if you are a beneficiary of a trust, ensure you take into account the expected tax distribution you receive from a trust, instead of the expected accounting or cash distribution.
In a situation Howlett says happens “all the time”, businesses are reminded that superannuation payments for staff are only tax deductible if they are paid during the current financial year.
“You’re required to pay super, and if it’s not paid by 30 June, no deduction,” he says.
“I’m forever seeing people surprised they don’t get the deduction when they haven’t paid their super by the end of the financial year. Super needs to be paid to staff 28 days after the end of each quarter.”
“For any quarter you miss that deadline, it’s not tax deductible.”
Grieg warns businesses should be on top of what documentation they have provided to authorities such as the State Revenue Office come tax time, warning “you can’t tell one authority one thing, and one the other”.
“Remember what you put in your BAS [Business Activity Statement and FBT [fringe benefit tac] return and income tax return, as they are all going to be scrutinised by the ATO, and a lot of disclosures are matched,” she says.
She warns there is a lot of data matching between bodies such as SROs and the ATO, specifically around GST on properties.
Howlett agrees, saying businesses are “continuing to see the tax office better utilising technology to highlight discrepancies between tax returns and other available information.”
SMEs were warned in 2014 that the ATO would use data-matching technology to crack down on residential and commercial property sales.
“No one should underestimate the sheer volume of data the ATO now collects and with the ever-increasing sophistication of techniques to analyse and ‘slice-and-dice’ that data, the tax affairs of Australians will come under closer scrutiny,” tax writer Terry Hayes said at the time.
Another one of the “big things” commonly misunderstood are motor vehicle expenses deductions, says Grieg, who says even if a car is bought for a business, there’s “always going to be some private use”.
“To claim GST, make sure you have a substantiated and documented recording method that correctly discloses the private use component of the car,” she says.
“Keep documentation current. If you don’t keep receipts, keep a logbook diary which shows you attended this meeting at this time, and include parking records. Too often people muddy the waters between personal use and business use.”
The ATO advises businesses can “generally claim expenses for a motor vehicle owned or leased by your company or trust as long as the expenses are incurred as part of the everyday running of the business”.
“These expenses can include the costs of providing a motor vehicle to an employee (or their associate) as part of their employment,” says the ATO.
Businesses were warned in early March the ATO is keeping tabs on people’s social media accounts, with Howlett telling SmartCompany at the time that the ATO was “very concerned about tax avoidance and making sure people are doing the right thing, so they’re trying to get better at looking at what’s publicly available.”
“They’re looking for inconsistencies in what people are reporting, and what their social media reveals their lifestyle to be like.”
At the time, the ATO revealed it has been “investing in data collection analysis to find cases of people’s declared income not matching their lifestyles”.
Additionally, Grieg says things like travel substantiation and work-related expenses “always get a guernsey”. The ATO has recently issued a warning to SMEs around work-related expenses, stating it would be keeping an eagle eye on areas such as meals, phone use, and self-education expenses.
Keeping strong and regular records can give SMEs peace of mind even if the ATO does choose to take a look at your books, with Howlett advising businesses “strong and reliable” systems are a must.
“If you have the right systems and processes in place, any time the tax office is having a look at your business, you are able to answer quickly and show you’re making no mistakes and it’s not a problem,” he says.
“If you don’t have those systems and processes you need to get them in place.”
The ATO also has a number of tools available for business owners to track their expenses, including the myDeductions app, which is now available for sole traders.
For business owners with student loans who are looking to increase their salary come tax time, Healthy Business Finances accountant Stacey Price warns an often overlooked factor is the HECS repayment threshold, which could mean less money in the pockets of those with outstanding student debts.
The current taxable income threshold for repayment of the HECS-HELP scheme is $55,000, however, the government plans to lower this threshold to $42,000 in 2018.
“For business owners with a HECS debt who are looking at changing their salary, be aware you could be putting yourself in a bracket where you have to start paying it back,” Price told SmartCompany.
“Upping your wage could mean less money in your pocket thanks to HECS.”
Many businesses may be guilty of only seeing their accountant once a year around May and June, but Grieg stresses the relationship needs to be ongoing.
“One of my main messages is that you shouldn’t see your accountant just once a year, it has to be an ongoing relationship,” she says.
“If a small business has an accountant and you’ve not touched base with them at least a few times over the past few months, then you’re not doing the right thing to make sure you’re in a good position come tax time.”
While hearing the words “plan ahead” just days away from June 30 may not be the most helpful of advice, it’s never too early to start planning for next year, and it could save you some peace of mind.
A survey from June 2016 showed that two-thirds of business owners found tax time daunting and stressful, and with 10% saying they ran out of time to submit tax returns.
“When it comes to the end of the financial year, its not just the last few weeks [business owners] have to look at, it’s the whole 12 months of their business,” Price told SmartCompany at the time.
Price recommends business owners should get in early to reduce stress, saying “people leave it really late, you should not start planning your tax on June 30”.
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