BUSINESS TAX CONSIDERATIONS
Financial planning practices should consider any strategies and approaches for their own business that could help manage their tax liability this financial year. Areas to review include:
Small business entity
Small businesses – those with an aggregate turnover of $10 million or less – can take advantage of a number of tax concessions. There are three ways to satisfy the $10 million aggregated turnover test:
- Aggregated turnover for the previous income year was less than $10 million
- Aggregated turnover in the current income year is likely to be less than $10 million (this test cannot be used if the business’s income in the last two years was greater than $10 million)
- Aggregated turnover for the current income year was less than $10 million, calculated at the end of the income year.
Any business that meets one of these criteria can access a number of benefits, including:
- Asset depreciation: There is a one-off deduction for assets that cost less than $20,000 (this concession will expire on June 30, 2017). Any asset over $1000 depreciates at 15 per cent for the year in which it was purchased, and then 30 per cent for each year afterwards (for assets with
an effective life of less than 25 years). Assets valued at less than $1000 attract a 100 per cent tax deduction. - Prepayments: Eligible businesses can claim an immediate deduction for prepayments, subject to the service period of the loan not being greater than 12 months
- GST: GST can be accounted for on a cash basis.
- CGT: May qualify for the small business CGT concessions even if assets are greater than $6 million (but only where turnover does not exceed $2 million – see below).
Small businesses should also review their pay-as-you-go
(PAYG) instalments and notify the ATO if the expected profit for this financial year is lower than previous years, so instalments can be varied accordingly.
Small Business CGT concessions
Business owners who are considering selling their business may be able to take advantage of the small-business (CGT) concessions, which can provide substantial tax savings.
To be eligible, businesses must either satisfy the $2 million annual turnover test outlined above or meet the net asset test threshold of $6 million. In many instances, any assets held by
a spouse are not included in the threshold, making it easier for businesses to satisfy this requirement.
It is usually more tax effective to sell shares in the business rather than its assets. Take an example of a business worth $20 million (based on the value of the assets) with three shareholders, each holding one-third ownership. Using this valuation, the business would not be eligible for the CGT concessions. However, if shares are sold, rather than the assets, then each shareholder may meet the $6 million limit (depending on their individual assets and liabilities)
and may therefore qualify for the concessions.
Loans from a business
If money has been borrowed from the business by owners,
a minimum repayment must be made by June 30. The amount of the loan will be assessable in full, and tax payable by shareholders, if the loan doesn’t meet the ATO’s guidelines.
Business losses
Business owners may find it worthwhile reviewing the non-commercial loss rules, as they may be able to claim business losses against other income. The loss can be offset against other income only if at least one of the following tests is satisfied each year:
- The assessable income from the business for that year
must be at least $20,000 - The total real property (or interests in real property) used
on a continuing basis in carrying on the business activity must be at least $500,000 - The total value of other assets used on a continuing
basis by the business must be at least $100,000 - The business must have generated taxable income
in at least three out of the last five income years.
If the business has a debt that is deemed ‘unrecoverable’ (as long as it is not a trade debt – see next paragraph) a capital loss can be claimed by formally releasing the debtor from their obligation. This may trigger implications for the debtor under the commercial debt forgiveness rules, which should first be taken into account.
With trade debts, a deduction can be claimed, provided the amount has already been recorded as taxable income, and it can be shown that reasonable steps have been taken to recover the debt. The debt must be written off in the books prior to June 30 but this doesn’t mean steps to retrieve the debt should cease, and if it is later paid off, then it is simply recorded as assessable income at that time.
Other considerations
- Dividend payments: Consider the timing of year-end dividend payments, particularly in light of the simplified imputation rules
- Trust election: If the business is a trust, consider whether
a family trust election should be made. Ensure that the trust loss provisions are considered if the trust has made losses - Superannuation: Ensure that superannuation contributions are made no later than June 30, so the deduction is in this financial year
- Log books: Check that the motor vehicle log book satisfies the substantiation requirements.
More areas to review
- Any expenses that are deductible at June 30, 2016, for up to 12 months, should be paid in advance, allowing the deduction to be claimed immediately
- Income protection insurance is 100 per cent tax deductible
- Work-related expenses, such as training courses relating to current employment or uniforms, can be deducted for tax purposes
- A tax deduction is available if interest is prepaid for less than 12 months
- Interest earned on term deposits that mature before June 30 must be included in income for this tax year
- For those without private health insurance who are earning more than $90,000 (or with a combined family income of $180,000) the 1 per cent extra Medicare levy surcharge is payable
- There are still approved managed investment schemes that enable investors to reduce their taxable income. Ensure the scheme has a current product ruling by the ATO, and that the investments are in accordance with this ruling.
Audrey Krause is a tax manager with HLB Mann Judd Sydney.
This is part two of a two-part article on tax planning from the June magazine. Professional Planner’s Friday, May 26, newsletter featured part one – There’s still time to help your clients with these tax tips. You can read it here.
