Other Tax Effective Strategies

If you are a small business entity (SBE), your income could be taxable at the lower tax rate (28.5% for a company, and a 5% discount for an individual capped at $1,000) in the 30 June 2016 year. From 1 July 2016, the company tax rate will be reduced to 27.5% for SBEs, which will include companies carrying on business, where their aggregated turnover is less than $10 million. From 1 July 2016, the discount rate will also be increased to 8% (capped at $1,000), with the turnover threshold also being increased to $5 million.

As such, businesses need to consider the timing of income, franking credit impacts and whether there are advantages in moving to a corporate structure post June 30, 2016.

1. Delay Deriving Assessable Income

Where appropriate, and if it will not adversely affect your cash flow, consideration should be given to deferring the recognition of income until after 30 June 2016. Please note, not banking amounts received before June 30 until after June 30 is not acceptable. The income is considered to have been earned when the money has been received or the goods or services are provided (depending on whether you are on a cash or accruals basis).

  • Cash Basis Income - Some income is properly taxable on a cash receipts basis rather than on an accruals basis (e.g. rental income or interest income in certain cases). You should examine whether income can be properly deferred in those cases.
  • Lump Sum Amounts - Where a lump sum is (or has been) received close to financial year-end, taxpayers should be examining whether any of those amounts can be delayed or spread over future periods.

2. Bring Forward Deductible Expenses or Losses

  • Prepayment of Expenses - In some circumstances, small business entities (SBE) and indviduals who derive passive type income (such as rental income and dividends) should consider pre-paying expenses prior to 30 June 2016. A tax deduction can be brought forward into this financial year for expenses like insurance premiums, subscriptions and memberships, travel, advertising and interest. A deduction for prepaid expenses will generally be allowed where the payment is made before 30 June 2016 for services to be rendered within a 12 month period.

There are special rules that relate to individuals and investors (who are not carrying on business) in relation to prepaying interest on loans to fund shares or rental property investments. If you are considering prepaying any expenses, please contact our office to discuss the strategy before making the prepayment.

  • Superannuation Guarantee Contributions - The deadline for employers to pay their superannuation guarantee contributions for the 2015/16 financial year is 28 July 2016. However, if you want a tax deduction in the 2015/16 year the superannuation fund must receive the funds by 30 June 2016. The Tax Office deems a contribution made by electronic transfer is not paid until the amount is actually credited to a super fund’s bank account. As such, don’t leave the payment to the last minute.

Failure to make the required Superannuation Guarantee Contributions (SGC) by the deadline of 28 July 2016 will mean you incur a non-deductible levy equal to the unpaid contributions together with a penalty. The SGC rate for the 2015/16 year is 9.5% of salaries. Note that there is no upper age limit for making super guarantee contributions for an employee. Removal of the limit is to encourage mature workers to stay in the workforce. This means you may need to make super guarantee payments for eligible employees aged 70 years or over.

Businesses should also consider:

  • Stock Valuation Options - Review your Stock on Hand before June 30 to ensure that it is valued at the Lower of Cost or Net Realisable Value. Any stock that is carried at a value higher than you could realise on sale (after all costs associated with the sale) should be written down to that Net Realisable Value in your stock records.
  • Write-Off Bad Debts – you should write off bad debts from your debtors system before June 30. A Bad Debt is an amount that is owed to you that you consider is uncollectable or it is not economically feasible to pursue collection. Unless these debts are physically recorded as a Bad Debt in your system before 30th June 2016, a deduction will not be allowable in the current financial year.
  • Repairs and Maintenance Costs – Where possible, consider bringing them forward to before June 30
  • Depreciation Claims - A review of the depreciation schedule may give rise to a number of opportunities, including the ability to scrap and write off amounts, self-assessing effective lives, or allocating assets to a low value pool. Furthermore, the small business concession may give rise to outright deductions for $20,000 on single assets.
  • Obsolete Plant and Equipment should be scrapped or decommissioned prior to June 30, 2016 to enable the book value to be claimed as a tax deduction.
  • Capital Gains or Losses - If you have assets which you intend to sell (and make a capital gain) and you have unrealised Capital Losses then consideration should be given to disposing of the assets before 30 June 2016. This will let you offset the losses against the Taxable Capital Gain for the year.
  • Bring forward Asset Purchases to before June 30 to take advantage of the new immediate write off for small business assets (costing less than $20,000) and to allow the immediate deduction of the balance of the asset pool if the balance is less than $20,000 over this period. More specific details of this concession are contained elsewhere in this newsletter.
  • Staff Bonuses - You may be able to bring forward staff bonus provisions if the policies are approved before year-end and are made unconditional.
  • Tax Losses - You may be able to offset prior year tax losses against taxable income. However, this can be subject to a number of carry forward loss rules, including the continuity of ownership test, the same business test, and the income injection test.    

Other 2015 Year End Tax Planning Opportunities

Disclaimer: This newsletter contains general information only. Regrettably, no responsibility can be accepted for errors, omissions or possible misleading statements or for any action taken as a result of any material in this guide. It is not designed to be a substitute for professional advice, as such a brief guide cannot hope to cover all circumstances and conditions applying to the law as it relates to these items.