30 June is just around the corner, which is a great time for businesses to think about the year end results. It’s not just about minimising tax, but also how to show a healthy profit at the same time. Below are some strategies to consider:
Asset write offs – For the 2015/16 financial year, the $20,000 ATO instant write off still applied for small businesses. The recent 2016 Federal Budget announced that the $20,000 write off is extended to businesses turning over up to $10 million from July 1. Businesses with less than $2 million turnover for FY16 will be able to access the instant write off, which is still set to end on the 30th of June, 2017. Whilst the asset is written off for tax purposes, businesses may still elect to depreciate the asset in the account, which will have the effect of a higher net profit result.
Superannuation – This is a great tax planning strategy, as superfunds have a lower tax rate than companies, and most individuals. Rather than leave the profits in a company, or paying it out as a bonus or wages, the payments can be made to Super up to certain contribution limits. If you’re aged 48 years or younger on the 30 June 2015, you can contribute up to $30,000 a year in concessional contributions for the 2015/2016 year. If you’re aged 49 years or older on the 30 June 2015, then you can contribute up to $35,000 a year in concessional contributions for the 2015/2016 year.
Also note that for employee superannuation payment to be deductible, it must becleared from the bank account before the 30th of June.
Prepayments – Another great strategy of increasing profit whilst minimising tax is to prepay expenses for up to 12 months. Examples of expenses you can prepay include insurance, interest, subscriptions and rent.
Deferring Income – If the business has a healthy cashflow, deferring the generation of invoices to customers until after 1 July can help reduce tax. However, this will also lead to a lower profit figure.
Stocktake – A stocktake needs to be done on the 30th of June each year. The stocktake has a direct impact on the company profit results. Higher closing stock values have an impact of increasing profit, whilst lower closing stock values decrease profit.
Also consider writing off any obsolete or damaged stock as this would decrease tax.
Bad Debts – Writing off bad debts has the effect of decreasing profit and tax. This should also be considered before 30 June.
Salary Sacrifice Arrangements – Consider salary sacrifice arrangements to save on personal tax, with things such as superannuation, motor vehicles and FBT exempt items.
Profit Distributions & bonuses – This would be a balancing act between how much to pay in wages, super, directors fees, or leaving the profits in the company. If you operate a family trust, the distribution allocations must be agreed and documented by 30 June.
Other tax issues to consider:
- Motor Vehicle Logbook – these last a maximum of 5 years, as long as the usage or circumstances haven’t changed from the last time it was done.
- Directors Loans (Division 7A) – If Directors have borrowed money from the company, ensure that the relevant repayments, interest and documentation have been actioned.
- Personal Services Income – Look at the rules surrounding this if you have a business or you have received payments from your personal exertion. Speak to us if you are unsure about your situation.
Article written by Ritchie Cruz, Outsourced CFO & Chartered Accountant. Ritchie is also Director of the Bedrock Consulting Group.
