Thursday, May 3, 2012

17 Handy Tax Planning Tips for 2012

Welcome to my latest Blog post. With June 30 fast approaching, its time to look at your taxation position and plan to maximise your wealth.

Although the Government relies on the collection of taxes to balance its budget, it is critical as taxpayers to ensure that you do not pay any more tax that you have to. Or, as the late Kerry Packer once told a Senate enquiry “Of course I am minimising my tax- and if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”

So, it is important to ensure that you are doing all that you can to legally minimise your tax liability. Now, you need to recognise that this is not something done just before year end. It should be an ongoing process, taking into account changes in legislation as well as your own personal circumstances.

Tax planning can be undertaken at business level as well as at personal level and planning strategies need to be considered at each level to optimise your position.

Year end tax planning involves reviewing the interim results for the business to, say 31st March and extrapolating the result for the full year. From here, the taxation position and marginal tax rates for the business and/or the business owners can be established. This is particularly important for a number of reasons including:

·         Knowing your potential tax position prior to 30th June means that you can do something about reducing it or ensure that you have a plan to enable the tax to be paid when it is due, without any unpleasant surprises. Once year end passes, there is very little you can do to have an impact on your tax position.

·         You may have the 3rd Instalment of PAYG tax due 30th April and the 4th Instalment due by 28th July. If your estimated tax is less than your PAYG instalments paid and anticipated to be paid, then you can take action to reduce these instalments before they are due and preserve your cash flow - rather than waiting until after your tax return is assessed for your refund of tax overpaid.

With this in mind, let's begin:

1.                   Ensure that the business structure that you operate through is still appropriate. This is critical as the correct structure for your circumstances will ensure your taxation obligations are managed most effectively. It is important to realise that if your structure is not optimal, it doesn't matter what further tax planning strategies are implemented, you will not get the best result. That said, tax planning considerations are only one of the many factors that must be considered in determining the best structure for your business. Further, changes in structure can trigger capital gains tax so much care needs to be taken. And certain structures are less attractive from either income tax or capital gains tax considerations. Understand the pros and cons of the structure that you are in.

2.                   Understand that the balance of your bank account is in no way a reflection of your business performance or potential tax liability. There are many outgoings which are not deductible against your taxable income including personal expenditure, payment of income tax, loan principal, home loan payments and asset purchases. It is possible that you may have a substantial tax liability and no cash reserves to pay it!

3.                   Know your tax rate. It's important to understand what your marginal tax rate is. This is because the actual tax saving that any strategy will generate is directly related to the tax rate that you are paying. And you need to know what your after tax cost of any strategy will be. You should assess your position prior to 30th June and determine what your tax rate will be.

4.                   Ensure that whatever tax planning strategies that you implement are consistent with your medium to long term financial goals. Knee-jerk short term tax planning can play havoc with long term goals.

5.                   Beware of tax schemes that sound too good to be true - they usually are and always end up costing you much more than any tax saved

6.                   If  your business qualifies as a Small Business Entity (SBE), additional special tax benefits are available to you as compared to non SBE businesses. Put simply, an SBE is a business that turns over less than $2m per annum. Note that special grouping rules apply to ensure that those that have an interest in multiple businesses may need to add the turnovers of these businesses together to determine whether you have a turnover of less than $2m

The special SBE tax benefits include:

·         The ability to prepay up to 12 months of expenses in advance and claim a tax deduction for the payment eg if your Self Managed Superannuation Fund owns your business premises, you could prepay up to 12 months rent in advance. Other prepayments can include interest, insurance repairs, amongst other expenses. Note that prepayment of stock purchases would not be tax effective.

Non SBE businesses are not able to claim prepaid expenses in the year they are paid.

Remember that bringing forward expenses into the current year by prepayment may reduce available claims in the next or future years. Therefore, this strategy will be particularly effective in an income year in which the following year is expected to produce a lower profit, as could well be the situation in this financial year.

·         The ability to claim an immediate tax deduction for any equipment purchases costing less than $1000 in the year of purchase. Non SBE businesses would be eligible to claim depreciation on these purchases, effectively claiming the tax deduction over a number of years.

·         The ability to pool assets and depreciate them at accelerated rates. Two asset pools are relevant:

* General asset pool - these are assets with an effective life of less than 20
    years - depreciated at 15% in year of purchase, balance of pool
    depreciated at 30% per year

* Long life pool - these are assets with an effective life of greater than 20
    years - depreciated at 2.5% in year of purchase, balance of pool
    depreciated at 5% per year

7.                   Reduce personal, non deductible debt before any business or deductible debt. However, any reduction of debts will need to be made out of tax paid dollars.

8.                   Review your accounts receivable (debtors) - critically review all your accounts receivable. Should there be any debts that you have taken all reasonable steps to recover but are still outstanding, write them off. This way you'll be able to claim a tax deduction for them - and also if you have paid GST on the sale, you'll be able to claim back off the ATO the GST previously paid. Remember, the debt must be physically written off your debtors ledger before 30th June to enable you to claim the tax deduction - and you can still continue to pursue the debt should you choose to.

9.                   Ensure that you undertake a physical stock take at year end or have a structured physical stock take program such that all stock is counted during the year and stock control records updated accordingly. Be aware that the lower the valuation of stock used, the lower your profit will be and the lower the impost of income tax. When you are valuing your stock, the ATO allows you to use any one of three methods - and each item of stock can be valued under any one of the three methods. These are:

·         Original cost - what you paid for it when it was purchased

·         Replacement cost - what it would cost to replace the stock now

·         Realisable value - what you can sell it for now            

With changes in prices of certain drugs as at 1st April 2012, there may be an opportunity to utilise replacement cost or realisable value when valuing particular items of stock. This will have the impact of reducing your profit and therefore tax and will provide some relief from the financial affect of recent changes.
If you hold obsolete stock, this can be valued at nil, providing it is removed from your premises.

10.               Ensure your employee superannuation contributions for the June 2012 quarter are paid in June 2012. These can only be claimed when paid.

11.               If you have a service company or trust, ensure that the arrangement fits within ATO guidelines in respect of mark ups and margins and it has been administered in accordance with your service agreement

12.               Be aware of the ATO Business Benchmarks that may apply to your industry. These are benchmarks that the ATO have put together as part of their "cash economy project", with the aim of identifying businesses that may not be fulfilling their tax obligations. If your business benchmark is outside the key indicators according to the ATO, your business may become subject to ATO audit activity. The ATO benchmarks for pharmacies can be located by clicking here

13.               If you are renting your business premises from your Self Managed Superannuation Fund (SMSF), ensure that rental paid for the year is in accordance with your lease agreement and reflects market rent.

14.               If you are eligible, maximise your personal concessional superannuation contributions. For the 2012 financial year, your maximum concessional contributions are: if you are aged less than 50, $25000, if you are aged 50 or over (special rules apply if you are aged over 65 and under 75), $50000. Remember, after 1st July 2012, the maximum concessional contribution limit drops to $25000 so it will take longer to grow your superannuation balances. For some aged over 50, from 1st July there may be the opportunity to continue to contribute $50000 in concessional contributions. Seek advice here.

15.               Undertake any maintenance costs prior to 30th June. This should be part of a planned maintenance program. Generally, these costs need not have been paid for -just hold an invoice for the work done. Beware - do not confuse repair work with capital improvements. Repairs generally refer to putting the property back to its original condition. An improvement is where the appearance and/or function is totally different to its original form. An improvement will need to be depreciated, rather than claimed immediately and therefore are less tax effective than repairs.

16.               If you have investment loans for property or share investments, consider prepaying your interest for up to a maximum of 12 months

17.               Be aware of the tax changes for SBEs to apply from 1st July 2012. These include:

·         Immediate tax deduction for asset purchases costing less than $6500 (previously $1000)

·         Immediate tax deduction of first $5000 of a vehicle purchase - the balance to go into the general pool and depreciated at 15% in year of purchase, 30% subsequent.

·         Rolling of the existing long life pool as at 30th June 2012 in to the general pool on 1st July 2012. These assets are effectively depreciated at 30% per annum compared to 5% per annum as applied previously

In conclusion, tax planning is an important part of your financial, business and wealth creation strategies. However, it's always important to consider the commerciality of your planning and whether overall it is consistent with your business strategy and wealth creation goals. A decision made solely on tax grounds generally are decisions that result in a less than satisfactory result!


Clemencia said...

Reviewing your past year’s tax return can be very helpful, especially when there is no drastic change in your living conditions. Familiarize yourself with your reported income, adjustments, and deductions last year since these can be your guide.

- Clemencia Summers -

Elias Brasel said...

Tax planning gives you a better view of your finances - where it is going and how much you are earning. Doing so can help you calculate easier, analyze necessary deductions and adjustments, and lessen the possibility of mistakes. This is where the need for a professional accountant takes place. Plan with them, ask for their advice, and trust their expertise with this kind of matters.

-Elias Brasel @ OnCoreBookKeeping

Chris Foster said...

Thanks for your comments, Elias. It puts you on control of tax position before it's set in concrete - a very important thing to do!