It’s been a big year for tax. With new laws on trusts, unpaid entitlements, and fringe benefits, entrepreneurs can’t be blamed for feeling a little dazed and confused about their new obligations.
Tax experts agree. According to Crowe Horwath national tax director Tristan Webb, “this is the first year in quite awhile where traditional tax planning techniques will be thrown out the window”.
With this in mind, SmartCompany has spoken to a panel of experts to get you through this hectic season and into the next financial year.
Here are 15 tax tips to get you started.
For any manufacturing or retail business that holds on to a lot of stock, now is the time to get a benefit from any unused stock.
“Write off any obsolete stock and make sure your inventory is valued by one of the acceptable methods as deemed by the ATO,” PKF partner Sharon Burke says.
There are a number of different methods used for valuing stock, such as the market valuation method or the replacement value method. From a tax planning perspective, Burke says you may want to value your stock at the higher level because it will be more tax effective in the New Year.
“You need to check to make sure you’re using the best valuation for your particular circumstances.”
If you’re paying out living away from home allowances, Deloitte partner Frank Klasic says you need to be extra careful about how you calculate payments – the ATO will be watching closely this year.
“This is being looked at very carefully, and in fact there is a survey going out about the allowance, and specifically at the structure of payments and if they are complying with FBT rules.”
Klasic says employers need to check with the Tax Office and make sure allowances are being paid within the right rates and thresholds, as they change every year.
“You need to make sure you are updated for the new thresholds so you don’t underpay your allowance,” he says.
HLB Mann Judd partner Peter Bembrick also warns employers that workers should only be receiving the living away from home allowance if they intend to leave after their visa period has expired.
“This is tricky because it depends on intention. It’s very common for people to want permanent residency, and there isn’t a guarantee of what workers will do. So you need to be clear in what the workers’ intention is,” Bembrick says.
A simple tip, but essential: investors need to calculate if they’ve made any capital gains over the last year, and then check other investments to see if it’s worthwhile to realise a capital loss to offset the gain.
Now is the time to be deciding whether you have any bad debts and if you can write them off. But be careful – you don’t want to make a mistake.
“There are formalities when it comes to bad debts,” says PKF’s Sharon Burke. “This also occurs where there is a change of ownership in the business and you take on bad debts.”
“The ownership test applies in some situations as well, so be mindful of that if you’ve bought another business with a bunch of debt.”
An entrepreneur set to recognise some non-commercial losses should be aware that new rules mean that if their adjustable taxable income is more than $250,000, they cannot claim that non-commercial loss.
“This can be a real trap,” Burke says. “It’s designed to target those higher paid who have a hobby farm and are generating a loss.”
“There are only a few exemptions, and one of them is if you’re affected by a natural disaster. But apart from that, you are no longer eligible.”
Many businesses are able to claim a deduction if they award bonuses to employees or directors before the end of the financial year, but actually pay them in the following financial year.
But Pitcher Partners partner Ray Cummings warns while this is a good tool to gain a deduction, the business needs to ensure they actually pay the bonus within a few months of declaring it.
“The directors of the company have to make a resolution they will pay out those bonuses, and then determine when it gets paid. It should be a few months afterward, such as in September or October,” Cummings says.
“It is critical that the business gets minutes in place before this happens.”
Entrepreneurs have been in a bit of a bind this year as the ATO cracks down on the use of unpaid entitlements. Pitcher Partners’ Cummings says while these arrangements are still allowed, the Tax Office will require a bit more paperwork than usual.
“The ATO is basically saying that business owners can still do this [make a distribution and keep the cash for investment purposes], but they want to see a sub-trust or an investment agreement in place,” he says.
These provisions were made last year, after entrepreneurs cried out when the ATO released guidelines that would crack down on trustees using unpaid entitlements to minimise their tax.
The issue at the time was that the ATO considered unpaid present entitlements loans – even if they weren’t described as loans – and thus categorised them as dividends. Now, a practice statement means entrepreneurs in this situation can keep their current UPEs by using a sub-trust or re-invest the UPE in an income producing asset.
“The ATO is saying that you need to have investment agreement terms in place with a sub-trust or other arrangement… but you can still do it.”
This recommendation has appeared on SmartCompany’s previous tax tips lists, and with good reason – some people actually forget to max out their super. But this year’s contributions are even more important – if you are over 50 this is the last year you can contribute $50,000 without being penalised, with thresholds to drop in 2011-12.
There’s another aspect of superannuation some entrepreneurs ignore. While the DIY super fund is a popular choice among business owners, many don’t have one at all – and Burke says that’s a mistake.
“You need to maximise your self-managed super contributions. If you’re handling quite a bit of money, say over $400-500,000, and you don’t have a DIY fund, then now might be a good time to consider one.”
DIY super funds provide some significant benefits for entrepreneurs. If you’re not operating one right now, look at whether you should be, to possibly relieve your tax burden.
One of the biggest tax changes included in this year’s Federal budget was the revision of fringe benefits tax, specifically for vehicle use.
Right now, FBT is calculated by multiplying the statutory rate by the cost of the car. But this will be replaced with a flat rate of 20% despite the distance travelled.
Frank Klasic says business owners will now need to reassess the way in which vehicles are provided, and review whether they need to get rid of a vehicle or two.
“With the new rates they’ve proposed for motor vehicles, you need to look at how you’re giving out vehicles. And if you’re salary packaging, make sure you’re doing it tax effectively,” Klasic says.
“You can also assess whether the logging method will give you a better result. You need to be mindful of that, and for many businesses the FBT will go up under the rules.”
And while we’re on the subject of FBT, Klasic says business owners will need to consider which method they use to calculate the tax: the 50/50 method or register method.
The 50/50 split method sees the total taxable value of meal entertainment equal 50% of the business’s total expenses, but property benefits exemption and the minor benefits exemption do not apply if this method is used.
Using the 12-week register method, the total taxable value equals the total amount of expenses, and then multiplied by the “register percentage”. Klasic says entrepreneurs need to look at both methods to see which is cheaper.
“Business owners just need to review which method they use, and it’s a good opportunity to see if you can lower your tax burden. Different businesses can save with either method.”
Organising paperwork can be a hassle at the best of times, but organising everything in the lead-up to the end of financial year period can be hell.
But these experts say organising your paperwork can save you a lot of hassle in the long run. If you’re hit for an audit by the Tax Office, they want to see everything: receipts, logbooks, and any forms you use to claim deductions or rebates.
Get your paperwork all organised and put together now – it will save you plenty of trouble in the long-term.
Missing any stationery? Now is the time to buy office supplies, as you can write-off most of them for tax purposes. Invest in everyday items like pens, paper and staples, and you’ll receive some quick tax relief.
This rule can also be applied to repairs within your office itself, as long as they are not categorised as a capital improvement.
Every year for nearly the past decade, businesses have been told to bring forward some expenses to reduce their tax burden. But now, HLB Mann Judd tax partner Peter Bembrick warns this may not be the best course of action due to the flood levy.
“We’ve gone from tax rates going down every year, but now next year tax rates are going to be slightly higher because of the levy. Your idea of prepaying expenses to get a cashflow advantage is still viable, but as far as actually getting a tax saving, it may not work.”
“Obviously here we’re thinking about sole traders, and not corporates, as they are not taxed under the levy.”
Plenty of businesses offer salary sacrificing arrangements for staff on a number of different benefits, but Frank Klasic says you really need to review these each year. As a business grows, some salary sacrificing arrangements may not be as profitable as they once were.
“You do need to review salary sacrifice arrangements, and then amend them. You may need to update them to see if they’ve changed under different tax laws, and to make sure they are still tax efficient for your business.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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