The end of another financial year is approaching and as always, at this time every year, it is the most crucial time to review your financial position and start planning for the new financial year. By working with your accountant now, you will be able to implement beneficial tax planning strategies and ensure you minimise your tax for the year.
What is tax planning?
Tax Planning is a review process that is designed to identify the optimal tax planning strategies to suit your circumstances and ensure they are implemented before 30 June – you may actually end up paying more tax as a result of not seeking tax planning advice from your accountant! In addition, it allows you plan for the upcoming tax payments over the next 12 months – to avoid any nasty surprises!
Small Business Tips
Here are our favourite tips to assist your business this EOFY:
- Instant Asset Write Off– If cash flow allows and it is in-line with your business goals, then take advantage of the instant asset write-off, allowing business to claim an immediate tax deduction on what would otherwise be a depreciating asset. Remember this may cause a tax bill in future years when you sell the asset, as you will have claimed the full deduction this financial year. You also need to make sure you consider your cashflow when making the decision- (not just the tax deduction)
- Timing of superannuation payments– It is key to consider if your business should pay the June quarter superannuation before 30 June or after (but by the due date of 28 July to ensure it remains tax deductible). Which year does your business need the tax deduction? If you want a tax deduction in the 2021/22 financial year, the superannuation fund must receive the funds by 30 June 2022. The tax office doesn’t consider a contribution to be made until the amount is actually credited to a super fund’s bank account, so an electronic transfer to another bank account on 30 June is not necessarily considered paid. We strongly recommend you make the payment a week or so before 30 June.
- Perform a stocktake– Review your stock valuation and write off any stock that is damaged or obsolete. Complete a stocktake on or before 30 June and remember that stock can be valued at the lower of cost or net realisable value.
- Write off bad debts – Businesses can only obtain income tax deductions for bad debts where various conditions are met. Review your debtors and write off any unrecoverable debts. These debts will come off your income in the year in which you write them off, regardless of the year you invoiced them.
- Logbooks for motor vehicle– Updating your logbooks ensures you are claiming the most accurate amounts for your motor vehicle expenses. If your logbook is more than 5 years old (or you cannot locate it), we suggest you start a new logbook for a 12-week continuous period. For more information on keeping a logbook refer to the ATO website. https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Deductions-for-motor-vehicle-expenses/Logbook-method/
- Timing of expenses– Expenses are only deductible when incurred, i.e. there must be a presently existing liability to pay the expense. We suggest following up contractors and suppliers for all invoices to ensure they are recorded in your accounting software to ensure you obtain the tax deduction in the correct tax year.
- Entertainment expenses– The provision of entertainment by way of food and drink is generally not tax deductible, except in limited circumstances (for example, where you pay fringe benefits tax on the entertainment). Call it marketing, call it a business meeting, but really if it smells and feels like entertainment of a client then it is unlikely to be a business deduction. However, if you have a cup of coffee or a light refreshment with a client, then it is likely to be ok and tax deductible, especially if you have a home-based business or don’t have an office to have client meetings. So how do we determine whether it is entertainment or a meeting expense? There are 4 simple questions to answer: (i) Why – what is the reason for the meeting? Is it for refreshment or social? (ii) What was included? A simple light refreshment or a big meal with alcohol (the later less likely to be deductible)? (iii) Where did you go? (iv) When did you hold the meeting, was it during business hours or in the evening after hours? This is certainly a tricky area, and we suggest you chat with your Accountant to obtain further guidance on your particular situation.
- Trust Minutes– As always, trustees of discretionary (or family) trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the financial year by 30 June. Failure to do so will result in the trustee being taxed at the highest marginal tax rate (47%). It is important you have reviewed and documented the most tax effective distribution for the year.
If you would like to schedule a tax planning session, contact our office now as spaces are filling fast!