Tax planning is about planning your affairs to legitimately make sure you don’t lose wealth to taxation. It should not be confused with tax evasion which is illegal. No strategy should be driven by tax outcomes alone– they are only a factor to consider.
Following is a range of discussion and suggestion points that are general in nature and should not be considered advice specific for your situation. To help tailor a tax planning strategy to suit your needs please contact our team on 1300 656 141.
Deferral of Income
Prima facie, deferring your income until a later tax year makes sense because you can hang onto your money for longer. However, it isn’t as straight-forward as that!
You need to take into account your expected future income level. For example, if you have lower income this year than you expect to have in later years, you may not benefit from deferring your income. Conversely, if you expect to have lower income in future (e.g. you intend to leave the workforce) deferring income becomes a good idea.
So, HOW do you defer income? In simple terms is can be everything from choosing to defer the sale of assets that will lead to the realisation of a taxable capital gain, to setting term deposits to mature in the next financial year.
N.B. In 2014, you will also need to take into account the changes to tax rates and Medicare Levy in the 2015 year. Deferring income this year will most likely result in that income being taxable in 2015 at 2015 rates.
Bring Forward Expenses
The result of deferring income is to bring forward expenses. If you are planning to spend money in the short term anyway, consider spending that money before 30 June 2014 especially if your income is higher this year than what you think it will be in future.
For example you can make donations to deductible gift recipients or carry out repairs & maintenance on investment property. You may also qualify for deductions for interest that is prepaid (subject to the terms of the finance agreement). If you are considering this strategy, please contact the BridgePoint Group team for tailored advice.
Capital Gains and Losses
Another way you can influence your taxable income between now and 30 June is to manage your capital gains and losses. If you have realised a capital gain in the 2014 financial year, review your other investments and consider realising capital losses that can be used to offset those gains. Alternatively, if you incurred a capital loss or have carried forward capital losses available, you may consider crystallising a capital gain, particularly if you expect your income to increase over time.
Making superannuation contributions
Subject to a number of rules, individual taxpayers may qualify for a deduction in respect of personal superannuation contributions up to the concessional contribution limits. The limits are $25,000 for taxpayers aged less than 59 (as at 30 June 2013) and $35,000 for taxpayers aged 59 and up (as at 30 June 2013).
Personal contributions are only deductible if the following conditions are satisfied:
– The contribution is paid into a complying superannuation fund
– If the contributor is an employee, he or she must earn more than 90% of his or her income, benefits and super contributions from sources other than employment
– The contributor must notify the fund trustee in writing of their intention to claim the deduction
For more information about superannuation deductions, please contact our team on 1300 656 141.
Write off bad debts
We all hate bad debts but at least make sure you get a tax deduction for them! To secure the deduction, the debt must:
– Be in existence (e.g. there has been no deed of release)
– Be bad (and not just doubtful)
– Be written off before 30 June
– Have been brought to account as income during this year or an earlier year.
Write off obsolete stock
You can claim a deduction for stock that is written off because it is old, damaged or obsolete. To secure the deduction, the stock must be written off before 30 June.
Write off scrapped assets
If you are carrying assets in the balance sheet that have been scrapped or disposed of, you should write them off. To the extent the asset has not been fully depreciated already, you will qualify for a deduction for the balance of the value of that asset.
Review stock valuations
There are three primary methods available to you for the valuation of stock -either the lower of cost, replacement or net market value. That means that if you are holding stock that is no longer worth what you paid for it, you can effectively claim a deduction for the difference by choosing to value stock at replacement value or net market value.
We also note that the decision on how to value stock is made each year and you should change methods from year to year.
Pay super before 30 June
Superannuation expenses are deductible only at the time the Fund has received and banked the contribution. Therefore, if you want to claim super deductions in the current year, they must be paid before 30 June. Allow enough time for the mail to be slow and for the recipient Fund to bank your cheque because they get very busy at this time of year! And as always, make sure your cashflow situation is strong enough to cope with paying super 28 days early.
Segregate unearned income
Businesses will sometimes receive income in advance of providing goods or services. Subject to the terms and conditions on which that income is received, it may be considered unearned income. Unearned income is a liability in your balance sheet. Importantly, neither is it taxed until earned. If you are ensure whether any of your income is unearned income, please call our team on 1300 656 141.
Bring Forward Expenses
You may wish to bring forward planned expenses in order to be able to deduct them this year. As always, you should consider your cashflow and the commercial sense of incurring the expense in the first place.
Small Business Entity Concessions
There are several concessions available to small business entities (those with aggregated turnover of less than $2 million).
These concessions include:
- Being able to deduct prepaid expenses (limited to prepayments for up to 13 months of service). Common examples are rent, IT monthly maintenance charges and of course, prepaid accounting fees.
- You can claim an immediate deduction for certain assets costing less than $1,000 provided you first used them or they were installed ready for use prior to 30 June 2014.
- Further, you can claim an immediate deduction for certain assets costing less than $6,500 provided you first used them or they were installed ready for use prior to 1 January 2014.
Warning regarding accrued bonuses and Directors’ Fees
The ATO issued an alert back in 2011 in relation to the declaration of bonuses and Directors’ fees that were not paid until sometime in the future. The ATO was concerned that businesses were able to access a deduction using the accruals method of accounting whereas the individual did not return income until it was actually received. The alert effectively put an end to this arrangement as an ‘after the fact’ tax planning opportunity.
To ensure that accrued bonuses and Directors’ fees are deductible this year, you should:
– Ensure that the decision to pay is documented before 30 June so you are legally committed to pay this obligation (e.g. minutes of Directors’ meeting, Directors’ resolution)
– Ensure that the intended recipient is notified before 30 June of their entitlement to receive the amount of the bonus/fee.
FOR TAX PLANNING ASSISTANCE CONTACT OUR TEAM ON 1300 656 141