Tax season is fast approaching with only 2 weeks to go before the end of another financial year. Many business owners are now tempted to make quick financial decisions that are driven by last minute tax minimisation goals.
Although tax minimisation is an important part of a business/investment strategy, it should be a measure planned as part of an overall yearly strategy, rather than a quick fix action put together during the last few days leading up to the end of the financial year.
Part of tax planning includes knowing how your business is performing against the goals you set out to achieve.
Ideally, you will have regularly been monitoring the Key Performance Indicators (KPIs) you defined last year and have adjusted your strategy all year long. You know where your business is going and can plan your tax minimisation strategy to not only improve your tax position, but also fit your goals and growth model as well as avoid putting a strain on your cash flow.
Perhaps your New Year’s resolutions fell to the side and you might have just been freewheeling a tiny little bit for the last 5 months as far as your business’ financial monitoring and planning is concerned. Well, it is never too late to start again! As we are now coming closer to the end of another financial year, now is a good time to set KPIs for the year ahead.
The concept of KPIs is a simple one:
You can only manage what you can measure.
KPIs mean you know where you stand at any given moment and can therefore adapt your strategy as you go along. They allow you to measure all aspects of your business, from Human Resources, Finance and Sales to Customer Care. How can you know what relevant tax planning your business requires if you have no idea how your business has measured up? Take action now.
For those that the end of year has arrived with little warning, you can take a few actions as we approach the end of the Australian Financial 2011/2012 year. Before making any decisions, you will need to determine what kind of taxpayer you are, as this affects the steps that you can take from a tax perspective:
Under the current tax system, taxpayers often fall into the following:
- Individual Investor/Employee
- Small Business Operator with a Turnover of less than $2,000,000
- Medium Business Operator with a Turnover of greater than $2,000,000
- Self Managed Super Fund
- Cash Based / Accrual Based End of Year Tax Reporting (i.e. how do you report Income & Expenses in your tax return cash or accrual basis?)
In this article, we will focus on what deductions are available to Small and Medium Business Operators.
Steps that can be taken before 30 June that can save on the final tax bill, without draining your cashflow:
- Review your stock – obsolete stock can be written off
- Review your depreciation register for assets that have long since been thrown out, but still appear on the depreciation schedule – balance can be written off if not part of pooled assets
- Raise a commitment for those end of year Bonuses to Staff (you need to document this and set out amounts that will be paid, to whom and when they will be paid)
- Bad Debts, make sure you have exhausted all avenues and can prove that, if you operate on the accrual basis consider claiming as a Bad Debt in 2012
- Account for remaining staff wages to 30 June, if applicable
- Consider deferring Sales Invoices to July, though assess the impact this will have on your operations and in particular cash flow
- Consider paying Staff Superannuation for the June Quarter before 30 June (can only claim superannuation as a tax deduction when paid irrespective of cash or accrual tax reporting)
In addition to the above, exclusive to Small Business are the following deductions:
- Access to Prepayments up to 12 months (pay for expenses in advance up to 12 months and claim a tax deduction at time of payment)
- Immediate tax deduction for equipment less than $1,000
- Access to Pool Depreciation for Plant, Equipment (15% first year irrespective of date acquired during the year)
- Ability to choose cash or accrual reporting of income and expenses
A reminder that some rules for asset deduction change come 1 July 2012 for Small Business Taxpayers. It may be more beneficial to defer capital purchases such as cars or plant and equipment to the new 2012/13 year. For assets acquired after 30 June 2012, the following deductions are available:
- Immediate tax deduction for assets acquired that have a cost of less than $6,500 (it must still meet the taxable purpose test)
- The first $5,000 on a motor vehicle can be claimed in the year acquired with the remainder of the motor vehicle value is pooled in the general pool
Home Office Deductions
For those operating business from the home, a few tips to help you determine if and what you claim.
Do your activities fall within the context of a place of business or merely a home study? For example, if your activities are performed normally at your clients’ premises but for convenience you also have a study setup where you also undertake some business activities, then it is more likely to be viewed as a home study than a home office activity.
On the other hand, if you are for example a self-employed architect and are running your practice from home, it is likely that it will be viewed as a home office. It is important to look at your circumstances and determine if in fact your setup at home is merely a home study or a home office.
A common test is: do business associates and clients visit your home office? Is the area of the home used exclusively or almost exclusively for income producing purposes?
Depending on your answer, you may be able to claim Occupancy Expenses along with general running expenses.
ALERT: Review the impact of claiming Occupancy Costs, as this could result in future liability for capital gains tax should you sell if you own the place claiming occupancy costs, no impact if rented premises.
What can you claim under Occupancy (often these are determined on floor area basis) and Running Expenses:
- Occupancy – Rent, Interest on Mortgage, Council Rates, Building Insurance, Repairs to Home Office, Maintenance of Property
- Running Expenses – Heating and Lighting, Phone, Internet, Equipment, Furniture, Repairs to Equipment, Cleaning of Office Area.
Remember, like everything in business, the key is planning.
When you first started out, you had a plan; it could had been as simple as I will Start a business tomorrow, now you are at the stage that planning needs to be taken into deeper territory. When securing the success of your business, you need to PLAN, and though many of us may not understand how tax works, it is a key factor when you are operating a business.
Tax can have the power to wipe your profit margins and/or your cash flow. So take this time as we enter a new financial year to review your operations, put in place KPI’s and above all plan for how taxes will influence your business in the coming year. Though it has not been mentioned above as it is a subject that requires it’s own article, review how the introduction of the Carbon Tax come 1 July 2012 will impact your operations and margins.
Wishing you all a successful and prosperous 2012/13!
