Top tax planning Strategies
With 30 June just around the corner I thought it prudent to discuss some valid tax minimisation strategies.
All taxpayers are allowed to arrange their affairs in a manner that remains compliant but that minimises their taxation liabilities. So here are 20 ways to minimise the tax you pay and to leave a few dollars in your pocket, not the tax man’s.
What is taxable income? The trading profit of a business is often not the same figure as your taxable income. The latter is effected by tax laws that change the timing of when income is recognised and when deductions are allowed. On occasions, some expenses are permanently disallowed or alternatively some income is exempted from tax. These tax laws can work in your favour with some careful tax planning.
Taxable income in a tax year is usually the net of assessable income less allowable deductions for the year. If you can defer some of the income to a later year or accelerate planned expenditure so that it is claimed in this tax year, then you will succeed in reducing your current year’s tax.
Deferring income
Cash or accruals – Determine whether you should use “cash” or “accruals” tax accounting. On the cash basis, taxable income is the net of amounts that are actually received less amounts actually paid at year end. The proceeds of pre–30 June trading that have not yet been received are excluded from income for the current year. Consider banking June end of month trust account income in July, especially if you are planning on selling in the next twelve months.
Unearned income – Make sure that you exclude any income that you may have received but not yet earned. Defer the income until the next year.
Defer invoicing – If your cashflow can stand it, think about deferring your non trust account invoicing until after 30 June. A one month delay in billing will mean you pay tax on the income a whole year later. Mind you, your owners/body corporate might want you to bill pre-June so that they can claim the deduction.
Interest – For most taxpayers interest is only assessable when actually received. If you are lucky enough to have a few term deposits, arrange to have them mature after 30 June rather than just before.
Businesses deductions
Bad debts – Trade debtors (if any) should be reviewed prior to 30 June to identify and write off any bad ones.
Scrap assets – Review your asset ledger and write off all assets that have been scrapped or that have outlived their useful economic lives (like that old computer in the corner of the office).
Low value assets – Assets under $6500 can be written off immediately if you qualify for the small business depreciation concessions. In my experience a large portion of management rights businesses qualify for this concession.
Maintenance – The work car is due for a service or some new tyres, why not get it done pre-June rather than just after? For the sake of paying a few days earlier you accelerate the effect of the tax deduction by a whole year earlier.
Superannuation – Employees’ superannuation contributions must be actually paid before 30 June to obtain a deduction and to avoid the Superannuation Guarantee Charge.
Personal superannuation – You can claim a deduction for personal superannuation contributions if your salaries and wages income is less that 10 per cent of your total income. Again this must be paid prior to 30 June.
Capital gains tax
Small business concessions – You should consider the availability of the small business CGT concessions that have the effect of reducing or deferring a capital gain arising from the disposal of a management rights asset.
CGT discount – This is not available when you sell an asset that you have held for less than 12 months or for assets held in a company. Consider deferring the disposal of these assets until the 12 months threshold has past. Please note the 12 months is from contract date (purchase) to contract date of sale.
Retirement exemption – In some circumstances you can avoid paying tax on capital gains if you are older than your preservation age or you use some or all of the funds to make a personal superannuation contribution.
Roll gain into another active asset – In certain circumstances CGT law allows you to roll over a capital gain into a replacement asset, effectively deferring the tax on the gain.
Companies and trusts
Tax losses – Check to see if your entity has any tax losses carry forward from prior years. In most circumstances these will be able to be offset against this year’s income.
Distribute all trust income – You need to make sure that you effectively distribute all income each year otherwise undistributed income may be taxed at 46.5 per cent. Income resolution minutes need to be complete by 30 June.
What constitutes trust income – A recent High Court case has challenged the historic advantages of using a trust to reduce the rate of tax that you pay. Nothing has been outlawed; the rules for some have just changed a little. It all depends on the wording of your trust deed as the deed dictates how trust income is defined and whether capital gains are treated as normal income or not.
How trust income is assessed – When some accounting expenses are not tax deductible, the net income of the trust for tax purposes exceeds its accounting income. Recent tax law resolved that the distribution of the taxable income must align proportionately with the distributions made for the accounting income. This can create a problem if you want to limit the income of some beneficiaries to a set dollar amount (like children under 18).
Superannuation
Re-contributions – Currently, strategies exist that allow you to draw a pension from your fund and re-contribute amounts to the funds, reducing tax significantly, while maintaining your same net cash. Don’t leave it to the last minute to set this up though.
Contribution caps – Make sure that you don’t contribute more than the annual concessional contribution cap of $25,000 (2014 – $50,000 for those aged 59 years or older) or risk being subject to an excess contributions tax of 46.5 per cent.
The main point being don’t leave things to late June. The earlier you discuss and implement any of the above strategies with your accountant the better.
Jonathon Hanaghan has been a practicing accountant on the Gold Coast since 1996, establishing Jonathan Grant Accountants in 2004 with Grant Robinette. His focus is on assisting small businesses with a particular focus on management rights.
