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
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
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.
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!
3 comments:
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 -
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
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!
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