The definition of a Small Business Entity (SBE) has been widened from 1 July 2016 to include entities with turnover up to $10m. Previously, the threshold was $2m (this is a combined threshold for connected entities rather than a strict turnover threshold for each separate legal entity).
This means that companies with a turnover of less than $10m in 2017 can access the reduced company tax rate of 27.5% and the SBE concessions. The main SBE concessions are the ability to claim accelerated depreciation including the instant asset write off for assets costing less than $20,000, the ability to claim prepaid expenses and immediate deductibility for business start up costs.
Here are some year end planning tips for consideration:
Prepaying certain expenses before year end can reduce your current year tax liability. If payments are due early next financial year, a pre-payment may entitle you to the tax benefit much earlier.
The rules differ depending on whether the taxpayer is an individual, small business entity (SBE) or other business entity. As mentioned above, an SBE is a business entity that has turnover of less than $10 million.
Individual taxpayers such as employees and investors can claim a deduction for a prepayment of up to 12 months of expenses. Typically, this includes subscriptions, memberships and interest paid on investment loans.
For other businesses, prepayment of consumables and other recurrent expenses will reduce your income, however, prepayment for stock will not reduce your income as this is not deductible until sold.
If prepaying interest, make sure you contact your financial institution and arrange the prepayment treatment. Otherwise the payment could be treated as a reduction in the principal of the loan, which is not tax deductible.
Business start up costs
Commencing from the 2015/16 financial year, new businesses can deduct their formation expenses (ASIC fees, company formation costs, legal and accounting fees) as a 100% deduction in the first year. These costs were previously written off over 5 years.
Paying employee superannuation
If an employer wishes to receive a tax deduction in the current year for employee superannuation contribution, the cash will need to have been received by the fund by 30 June. Make sure you allow yourself sufficient time for contributions to be processed (we recommend the mid-June to allow plenty of time).
However, make sure that the employee is aware of the timing of the payment so as not to adversely impact their concessional contribution cap. All businesses (small business from 1 July 2016) should now be paying and reporting superannuation using a SuperStream compliant system.
Superannuation Contributions Caps
The superannuation contributions caps will be changing from 1 July 2017. For concessional contributions, the caps prior to 30 June 2017 are $35,000 for those aged 49 or over and $30,000 for those under 49. From 1 July 2017, the concessional contributions cap will be $25,000 regardless of age.
For non-concessional contributions, the cap prior to 30 June 2017 is $180,000 per year for those aged between 65 and 74 or $540,000 over a three year period for those under 65. From 1 July 2017, the non-concessional contributions cap is reduced to $100,000 for those aged between 65 and 74 or up to $300,000 over a three-year period for those under 65 (depending on their total superannuation balance).
There are complex rules and many factors around superannuation contributions and so we recommend speaking to a financial adviser before making these decisions
If you are planning on paying dividends out to shareholders before the end of the year, it is worth reviewing the company’s franking account to ensure that the company has paid sufficient tax to enable the dividends to be fully franked. This may mean paying ahead of scheduled payments in an arrangement with the Taxation Office. For assistance with calculating your franking account balance, please contact us.
PAYG payment summaries for employees
Payment summaries should be provided to your employees by no later than 14 July. The PAYG payment summary statements need to be lodged with the ATO by 14 August with the "ATO original" payment summaries.
Don’t forget to include reportable employer superannuation payments and reportable fringe benefits if these are relevant to your employees.
Reportable payments to contractors
The reporting system for the building & construction industry for payments made to contractors is in place. These need to be reported to the ATO by 28 August.
Stock and consumables
ATO rules require that stock be physically counted at year end unless there is a perpetual stock record system. Stock take records should be retained as part of the business records. SBEs can be exempt from conducting a yearly stock take if the value of stock has moved by less than $5,000 during the year.
Businesses pay tax on the value of stock at the end of the financial year. It may be worthwhile to consider selling or disposing of slow moving stock, so that it is not counted in the year end stocktake.
If you expect to purchase consumable items such as office supplies and cleaning products in the coming months, consider purchasing them before 30 June 2017. This will enable a tax deduction to be claimed in the 2016/17 financial year. ATO guidelines generally state that the purchase of office consumables to be used over a 3 month period is reasonable.
Bad debts should be written off before year end to enable a tax deduction in the 2017 income year. The write-off entry must be processed in the ledger by 30 June. We recommend recording this in the minutes of the business after ensuring that all reasonable steps have been taken to recover the debt. There are a number of bad debt deduction provisions that apply to companies and trusts, particularly for large bad debt write offs, so you should ensure that you discuss this with your tax advisor to ensure that everything is in order.
Under $20,000 asset write off
For businesses that are small business entities (turnover under $10m) depreciable assets purchased in the 2016/17 financial year can be written off in the year of purchase if the cost (GST exclusive) is less than $20,000.
This concession is currently scheduled to end on 30 June 2017 and therefore it may be worth bringing forward capital expenditure if you were thinking of doing it over the next six months. However, the Government has announced in the 2017 Federal Budget that they intend to extend this concession until 30 June 2018. This extension will need to be passed as legislation through both Houses of Parliament.
Tax exempt minor benefits
Employers can provide minor and infrequent benefits, valued less than $300, to employees. Gift cards (excluding entertainment related gift cards, eg movie tickets, restaurant vouchers etc) of less than $300 (ie $299.99) are tax exempt to the recipient, deductible and FBT free for the employer. Gift cards should be not used in place of remuneration, but more so as a discretionary benefit.
Motor vehicle log books
To reduce your Fringe Benefits Tax or to maximise your vehicle deductions, it is important to keep a log book if you haven't kept one in the last five years. A log book must be maintained for a continuous 12 week period and is valid for five years. For example, if you have not maintained a log book since the 2012, you will need to start recording prior to 30 June 2017, even where the three month period does not finish by 30 June.
Businesses receive a deduction for donations to Deductible Gift Recipients. For companies (taxed at 27.5% or 30%) greater tax benefit will be obtained by the business owner making the donation personally if the business owner has income greater than $37,000. If you are planning to make a donation, consider making it before June 30 to receive the deduction in the 2017 year.
Trust distribution resolutions should be put in place by June 30. If you are considering making a distribution to a new beneficiary in 2017 you will also need to report the tax file number to the ATO by 28 July.
Also, if a distribution is to be made to a beneficiary who has turned 18 during the year, the tax file number of the beneficiary will need to be reported for the first time. Beneficiaries who are lodging a return for the first time or previously prepared their own tax return, will need to be added to a Tax Agent’s Lodgement Program by 31 October in order to access the lodgement extensions available to tax agents.
A trustee making a distribution to a charity needs to either pay or advise the recipient of the distribution amount to the charity during the financial year, or no later than two months after the end of the financial year. Failure to do so has significant adverse tax consequences.
Record keeping and accounting software
June 30 is a good time to reconcile the business bank accounts and update your software for the next financial year. You may be considering a move to cloud accounting or upgrading your existing software to a higher version. Also, June 30 is the best time to move from cash accounting to accrual accounting for GST purposes where you have the choice and if this was beneficial depending on your average accounts receivable and accounts payable balance.