Are you paying more tax than you need to?
What can you do to reduce your tax and the tax paid by your business? The answer is quite a bit but it takes planning pre 30 June. Here are our top tips:
Timing is everything!
For businesses, if your cashflow is good, make the purchases you need before the end of the financial year to claim the deduction, particularly those with turnover under $10 million. The $20,000 immediate deduction was set to reduce back to $1,000 on 30 June 2017 however; the recent budget has extended this to 30 June 2018.
Delay income - One off opportunity for high-income earners
Taxpayers with assessable income above $180,000 face an additional 2% tax on every dollar above this level. The 2% ‘debt tax’ is scheduled to end on 30 June. The difference in timing between the reduction in the FBT rate that occurred on 1 April 2017 and the removal of the 2% tax on 1 July offers a one-off opportunity to reduce your taxable income through salary packaging and other planning initiatives.
If you are likely to have a one off spike in income, for example from the sale of a business or other significant assets, it’s worth seeing if you can delay the sale until 1 July 2017 to avoid paying an additional 2% tax. Just be aware of how the arrangement is structured. In many cases the sale is treated as having taken place for tax purposes when the parties enter into the contract, even if settlement occurs at a later point in time.
Money or debts owed to private companies
It’s common for business owners to take cash out of their business or for the business to fund some personal expenses through the year – these appear in the shareholder loan account. If this has occurred, it is important that these debts are either repaid by 30 June (you can declare dividends to pay any outstanding shareholder loan accounts) or a formal loan agreement (with specific conditions) is put in place. Without taking action, the ATO will treat any outstanding amount as a deemed dividend taxable in the hands of the shareholder at their marginal tax rate.
House-keeping for business:
- For companies, directors’ fees and employee bonuses may be deductible for the 2016-17 financial year if the directors pass a properly authorised resolution to make the payment by year-end (payment should be made as soon as practicable). Just be aware of the 2% debt tax for high income earners (see Delay income - One off opportunity for high-income earners).
- For Trusts, it is essential that decisions to distribute pre 30 June income are documented in writing.
- Write-off bad debts
- Review your asset register and scrap any obsolete plant
- Bring forward repairs, consumables, trade gifts or donations
- Pay June quarter employee super contributions now if cashflow allows
- Realise any capital losses and reduce gains
- Raise inter-entity management fees by June 30
- Consider contributing extra to your superannuation fund either directly (for those in business) or via a salary sacrifice arrangement (if employed) however always be wary of the contribution caps, in particular the cap on deductible contributions of $30,000 for those 49 years and younger or $35,000 for those 49 years and above. (Please also note that specialist financial advice should be sought if contemplating a superannuation contribution, don’t just take my word for it!)
- Also remember that these caps are set to reduce following the recent budget.
- Maintain a logbook for your car. This needs to be for a three-month period. This may allow you to use one of the other methods of claiming a vehicle and obtain higher tax deductions as a result.
- It’s also a good time for charitable giving, but remember to keep a receipt for every donation over $2.
What do you need to do – simple - You need to act now!
Tax Planning should be done through April to May every year. By doing this, we can identify the likely tax payable as everything stands now and then consider how to reduce that tax through various strategies. It is particularly advantageous when you have a significant increase in your income, whether this is a one-off, or ongoing increase.
If you have not already arranged your Tax Planning for this financial year then please contact the office. If your personal circumstances have changed and you believe you can benefit from tax planning outside of the simple strategies you can do yourself, then please call our office today on 03 8393 1000 and speak with us.
Ken Burk, Partner, Paris Financial
Follow me on Twitter @KenBurk3
Image courtesy of freedooom at FreeDigitalPhotos.net