6 Key Considerations for Small Business – End of Year Tax Planning
The timing and recognition requirements for income and expenses can have significant tax implications.
If you are expecting a higher taxable income during the 2017/18 financial year compared to that in 2018/19 you may want to defer income until after 30 June 2018. Alternatively, you may want to bring forward some expenses.
Major Assets and Capital Improvements
The instant asset write-off for assets purchased under $20,000 has been extended until 30 June 2019. This means there is still time to take advantage of the higher depreciation opportunities before it reduces back down to $1,000 on 1 July 2019.
The total cost of an asset also includes any additional transportation and instillation expenses. To claim a deduction the asset must be installed and ready for use by 30 June 2018.
Under the simplified deprecation rules any Small Business Pool opening balances below $20,000 will also be written-off.
Capital Gains and Losses
If your business is expecting to dispose of an asset in the near future it may be worth considering whether it should be sold before or after 30 June.
Should the sale of an asset result in a capital gain then consider delaying crystallising this gain until the 2018/19 financial year. By doing this it will allow you a full fiscal year to set in place options to offset the gain. For example it may be worthwhile selling an under performing asset and realizing a capital loss.
On the other hand, if the sale of an asset will result in a loss then crystallising this loss in the year where other assets have been sold and capital gains have arisen will mean the loss can be used to offset the gains.
Be mindful that it is the contract date and not the settlement date that will determine in which year the assets is disposed of.
Trading stock valuation is often an important area for consideration. By selecting the lower of cost, market selling or replacement value any profits will be postponed until the product is sold. You may want to reassess whether any stock has become obsolete or unsaleable and should be reduced to scrap value.
For tax purposes each item of trading stock can be valued differently.
Legitimate bad debts can be written off and transformed into a tax deduction. To be claimable they must be written off in your accounts by 30 June 2018.
To claim a tax deduction these debts must have originally been recoded as income. The debt must now be “unrecoverable” and not merely doubtful.
In some circumstances only a part of the debt may be deductible. For example, when a portion of the debt is secured by property.
If you have any questions regarding the ATO rules for claiming bad debts expense please call our office.
For further information please see our web article Bad Debts? Write them off at –https://www.evanshearn.com.au/staging/bad-debts-write-off/
Prepaid expenses can be claimed up to 12 months in advance by small businesses (those with a turnover of under $10 million). Larger businesses will generally be limited to prepaid expenses below $1,000. Common expenses that can be prepaid are lease payments, insurance and annual subscriptions.
Businesses operating on an accruals basis are able to claim a tax deduction for employee and director year-end bonuses that will not be physically paid until following financial year. The company must, before the end of the financial year, commit to the payment specific amount. The amount need not be quantified but the calculation methodology must be fixed (for example, a formula based on profits or revenue amounts yet to be finalized).
If your business has employees it is likely that you will be required to pay the 9.5% Super Guarantee by the 28th of July 2018. To claim a tax deduction in this financial year the funds must be received by the Super Fund or the Small Business Superannuation Clearing House by 30 June 2018.
Concessional Super Contributions
Employers and those who are self-employed are able to claim a tax deduction for personal super contributions up to a cap of $25,000.
Non-Commercial Loss Tests
Are you expecting a loss from your business activity this financial year? This loss can be used to offset income derived from other sources if one of the non-commercial loss tests and all income requirements are met. Failing this, non-commercial losses will continue to be deferred.
If Income is predicted to decline or the business is expected to be wound up in coming years it is possible that these carry forward losses will become unrecoverable. You may want to consider bringing forward or delaying income and asset purchases depending on your particular circumstances. Once the income requirements and test/s are met then all prior non-commercial losses become ordinary tax losses. To access the four tests the total of your taxable income, reportable fringe benefits, reportable super contributions and net investment losses must be below $250,000.
Primary production and professional arts are considered excepted activities. The non-commercial loss measures do not apply if income from other sources not relating to the business activity is below $40,000 and the $250,000 income requirement is met. Taxpayers can then use these business losses to offset their other income.
The Four Tests
- Assessable income generated from the business at least $20,000
- The business has produced a profit for tax purposes for 3 out of the last 5 years (this includes the current financial year)
- The value of, or interest in, real property (excluding private dwellings) was at least $500,000
- The value of certain other assets (not including cars, motor cycles or like vehicles) was at least $100,000
It is within the Commissioner’s powers to issue a product ruling or a private binding ruling to allow you to claim a loss for the income year.