Tax­ing time for small busi­ness in 2016

Many of Aus­tralia’s three mil­lion small busi­nesses, which em­ploy 5.1 mil­lion peo­ple, are now fi­nal­is­ing their 2014-2015 ac­counts in ad­vance of im­pend­ing tax fil­ing dead­lines in May writes Mark Chap­man.

Business First - - CONTENTS -

B usi­nesses need to watch out for tax traps as they pre­pare their re­turns. There are im­por­tant new rules to be aware of which could save you tax but can add an ex­tra el­e­ment of com­plex­ity to the task.

Small busi­nesses, de­fined by the Aus­tralian Tax­a­tion Of­fice as those with an an­nual turnover of less than $2 mil­lion, are el­i­gi­ble for a range of tax breaks which can be ex­plored dur­ing the cur­rent tax sea­son.

In­stant as­set write off

Be­tween now and 30 June 2017, small busi­nesses can im­me­di­ately write off any as­set pur­chase cost­ing less than $20,000, but cau­tion needs to be taken when claim­ing the write-off.

To min­imise your chances of hav­ing the ATO chal­lenge the de­duc­tion, here are some key tips to be aware of:

1. Only small busi­nesses qual­ify. This might seem ob­vi­ous but you ac­tu­ally have to be in busi­ness to be a small busi­ness, not just a holder of an ABN num­ber.

2. Un­der­stand what the tax break is. It is not a cash hand-out but a de­duc­tion from your 2014-2015 profit. If you spend $20,000 from on a cap­i­tal pur­chase, you will

re­ceive a 30 per cent de­duc­tion (28.5% from 1 July 2015) which equates to a $6000 re­duc­tion in your tax and means you will still be out by $14,000 on the pur­chase. If it’s some­thing you were go­ing to pur­chase any­way, good luck and en­joy the ben­e­fit but if you’ve ac­quired some­thing, or are plan­ning to ac­quire some­thing, purely to save tax, you might want to think again. What you gain in the year of pur­chase will grad­u­ally be clawed back through re­duced de­duc­tions in fu­ture years.

The amount you can claim is GST exclusive. This is rel­e­vant if your busi­ness is regis­tered for GST and can claim an in­put tax credit on the pur­chase. The amount you can claim is the GST exclusive price.

The as­set must have been in­stalled and ready for use. This is par­tic­u­larly im­por­tant if you pur­chased the as­set be­fore the end of the 2014-2015 fi­nan­cial year. If you’d pur­chased it be­fore 30 June 2015 but didn’t have it avail­able for use un­til July 2015, you can only claim the de­duc­tion against your 2015-2016 re­sults.

Sec­ond-hand as­sets. You can claim a de­duc­tion for sec­ond hand as­sets.

Be­ware pri­vate use. To claim the full de­duc­tion, the as­set has to be used in the busi­ness and if there has been per­sonal use, the de­duc­tion needs to be pro-rated to re­flect this.

Trad­ing stock

The Tax Act pro­vides a set of sim­pli­fied trad­ing stock rules whereby if your trad­ing stock did not change in value over the tax year by more than $5000, you can in­clude the same stock value at year-end as at the start of the year. Ob­vi­ously, if you needed to do one, you’d have done a stock­take by now but this might be some­thing to be aware of for next year.

Pre-paid ex­penses

A small busi­ness can also re­ceive an im­me­di­ate tax de­duc­tion for cer­tain pre-paid busi­ness ex­penses that were made be­fore the end of 2014-2015. If a pay­ment cov­ered an ex­pense that has gone into the new fi­nan­cial year (like in­sur­ance pre­mi­ums, rent or mem­ber­ship of a trade or pro­fes­sional body) you can claim that de­duc­tion in the last fi­nan­cial year. Check your pay­ments for the pe­riod be­fore 30 June 2015 to see if any­thing qual­i­fies.

Help for cap­i­tal gains tax (CGT)

The spe­cial small busi­ness CGT con­ces­sions are in ad­di­tion to the 50% gen­eral CGT dis­count ap­ply­ing to in­di­vid­u­als, trusts and su­per funds (but not com­pa­nies).

There are four CGT con­ces­sions that may be avail­able to elim­i­nate or re­duce cap­i­tal gains made by a small busi­ness or its own­ers where it dis­poses of ‘ac­tive’ as­sets, like a trade or busi­ness premises but do not ex­tend to pas­sive as­sets such as an in­vest­ment port­fo­lio.

Don’t blur lines be­tween yours and the com­pany’s money

Many small busi­nesses get caught out by the so-called ‘deemed div­i­dend’ rules. Un­der tax law, loans and ad­vances to pri­vate com­pany share­hold­ers or their as­so­ciates are deemed to be tax­able un­franked div­i­dends for the share­hold­ers. The in­ten­tion of these rules is to stop the prof­its of pri­vate com­pa­nies be­ing dis­trib­uted to share­hold­ers as tax-free ‘loans’.

So, if you find your­self bor­row­ing money out of the com­pany of which you’re a share­holder, try to en­sure those bor­row­ings are re­paid by the time the com­pany’s tax re­turn for the year is due. If that isn’t pos­si­ble, de­clare a div­i­dend and treat the amount as in­come, in which case, the div­i­dend would be franked if ap­pli­ca­ble. The Golden Rule - Keep Records! Good record keep­ing is your best friend for ef­fi­cient busi­ness man­age­ment and will also make life eas­ier if the Tax Of­fice ask you ques­tions.

Tax law re­quires that records be kept for five years, and they should in­clude:

• sales re­ceipts • ex­pense in­voices • credit card state­ments • bank state­ments • em­ployee records (wages, su­per, tax dec­la­ra­tions). • ve­hi­cle records • lists of debtors and cred­i­tors • as­set pur­chases.

Records can be kept on pa­per or elec­tron­i­cally, but should be eas­ily re­trieved. In our ex­pe­ri­ence, busi­nesses of­ten stum­ble when asked by the Tax Of­fice to ver­ify trans­ac­tions by pro­vid­ing sup­port­ing records, with the con­se­quence that even ‘in­no­cent’ busi­nesses can find them­selves stung by the tax man where they are un­able to pro­vide the re­quested ev­i­dence.

And what about your de­duc­tions?

We all know you’ve got to spend money to make money and if you spend it to pro­duce ‘as­sess­able’ in­come, then your busi­ness will usu­ally be en­ti­tled to a tax de­duc­tion. Many busi­nesses trip up by in­flat­ing their de­duc­tions or claim­ing for some­thing they shouldn’t but a sur­pris­ing num­ber also miss out on de­duc­tions they could have claimed. In re­al­ity there are le­git­i­mate, not-to-be-for­got­ten de­duc­tions.

The ba­sic rule of course, to avoid the at­ten­tion of the ATO, is that you need to show you are ac­tu­ally ‘out-of­pocket’, and that the ex­pense has been in­curred to run your busi­ness. Here then are some tax de­duc­tions you may be able to claim: • Ad­ver­tis­ing and spon­sor­ship • Bad debts • Ex­penses in Bor­rowed money • Busi­ness travel • Car ex­pense de­duc­tions • Fringe ben­e­fits • Home work claims • In­sur­ance • Plant and equip­ment (de­pre­ci­at­ing as­sets) • Re­pairs, re­place­ment, main­te­nance • Su­per­an­nu­a­tion con­tri­bu­tions • Salary and wages • Tax agent man­age­ment ex­penses • Tele­phones – calls and rental • Losses from theft.

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