Tax time & why it pays to be prepared

Daniel Arnephy

First published 05 June 2014, 1:00am

In just a few weeks it will be the end of June. Most of us will marvel at how quickly another half year has passed by but for those of us in business, or those who are just fiscally minded, it will it’s once again tax time.

Tax planning is constantly on the agenda for the tax professional but for others it’s a phrase that resonates with greatest clarity towards the end of their financial year. For most people this is 30 June.

Planning does not mean avoiding

Tax planning must also be distinguished from tax evasion or avoidance. Like most things, it should be done in moderation and it must be noted that the Australian Tax Office has powerful and wide reaching anti-avoidance laws to strike down any aggressive avoidance strategies.

The Australian Tax Office has powerful and wide reaching anti-avoidance laws.

The recent Federal Budget has thrown a bit of a curveball by adding the three-year temporary deficit levy of 2% to the top marginal rate of tax. Some of the tax strategies suggested will defer income to the following year, and it may be income that cascades down to someone on the top bracket which will be 2% higher than current year.

With that date looming on the horizon here are some end of year tax considerations.

Income

In some cases income can be deferred until the following year. Most businesses will not be assessable on their income until an invoice is raised for goods or services. Waiting until after June to issue accounts for finalised work or work in progress will, in many cases, defer the income until the following year.

Passive income such as interest, dividends and rent will only be assessed when it is received. However, trust distributions are assessable when they are declared by the trustee.

For capital gains it’s important to note that the taxing point is generally the signing of the contract.

For capital gains it’s important to note that the taxing point is generally driven by the signing of the contract, not the settlement of transactions. Therefore a contract that’s signed in May but settles in July is taxable in the earlier financial year, not the new one.

Deductions

One of the most important rules of business is to never spend money just to claim a tax deduction. Most businesses will have tax paid at 30%. Spending $100 to save $30 is simply not viable.

There are some deductions that can be claimed with a little house cleaning and no immediate cash outflow. These include:

Bad debts. To claim a bad debt it must be written off before the end of June. Merely making provision for it is not sufficient to claim a deduction.
Stock on hand. Another sound business practice is to conduct at least an annual stocktake. Slow moving or obsolete stock can be written down or written off completely, which will ultimately have the effect of lowering taxable income.
Fixed assets. These should be reviewed for any assets no longer on hand or ones that can be scrapped so that the balance of depreciable value is written off completely at the end of the year. It is common to see old assets lingering on asset registers for years longer than necessary. An example that always comes to mind is the asset register that in 2010 was still writing off a calculator from 1978 at $1 per year.

A couple of other things worth mentioning:

Superannuation contributions are only deductible when actually paid, not just when they are accrued and provided for. Paying some or all of the June quarter contributions before 30 June will allow a deduction. There are other superannuation issues to be taken into consideration.

Staff bonuses do not necessarily need to be paid to be deducted, but they must be committed to by the business and staff must be made aware of their entitlement. Again, mere provision is insufficient.

For other expenses and outgoings, consideration can be made mainly to consumable items and bringing forward some expenditure, such as planned or essential repairs and maintenance.

However there are prepayment rules that limit certain deductions, such as insurance premiums or annual interest expenses.

Care is required, though, as the cash may be used better for other things such as being kept for unexpected one-offs or to pay your own existing accounts.

The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced tax professional.

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