Financial strategies for small business operators
The start of a new financial year should encourage new strategies to be developed for the year ahead.
Currently all the key drivers are in place for success in small business, interest rates at historically low rates for now and the foreseeable future, relatively low unemployment and a moderate inflation rate. So why aren’t we outperforming in our business?
I suggest the one missing piece of the puzzle is consumer confidence. In the accommodation sector (particularly the leisure market) business lives or dies based on consumer confidence. Despite the recent political uncertainty arguably behind us, we are still operating in an environment of relatively low consumer confidence quite likely as a result of the contractionary nature of the recent federal budget.
However it’s never too early to focus on financial strategies in order to minimise tax, reduce risk and be prepared financially for the year ahead. Effective tax planning is something that should be considered year round and, by making it a priority, could result in you paying less tax and reducing the cost of doing business irrespective of the level of consumer confidence. By preparing and updating a forecast of income and outgoings, businesses can identify times when money may be short and plan accordingly.
Following are some fundamental guidelines that help ensure your business is prepared for the financial year ahead.
Managing CGT liability – Tax payers can reduce their tax liability at financial year end by deferring the realisation of a capital gain until after 30 June.
If you are thinking about selling an asset this year for a profit, you may want to consider deferring the signing of a contract until post 30 June. This could reduce the amount of capital gains tax you are liable for and in turn reduce the tax you have to pay.
Deferring the sale of an asset for potentially a relatively short period of time can delay your capital gains tax liability for up to a year and, in some cases longer. If you expect to earn a lower taxable income in the following year, the tax you have to pay on the realised capital gain in that year may decrease significantly.
For example, by deferring the sale of an asset until the following year when you expect to earn less income, your tax rate will change to a lower bracket, meaning you save considerably on tax. Some other strategies to minimise capital gains tax include:
Utilise the CGT small business and retirement concessions
Match gains and losses where possible to avoid carrying forward a capital loss
Defer a disposal to a subsequent income year
Defer a disposal to ensure the asset has been held for at least 12 months to potentially benefit from the 50 per cent discount
Maximising superannuation for over 50s – From 1 July 2014 the level of tax concessional superannuation contributions that you can make will be increased on the previous year.
For taxpayers under the age of 50 years their concessional limit has been increased to $30,000 per year. For taxpayers between the ages of 50 years and 60 years their concessional limit has been increased to $35,000. Now is the time to start planning how you can maximise your tax concessional contributions through different strategies if you haven’t already done so.
Commence a transition to retirement pension – from the age of 55 you can commence a transition to retirement pension from your superannuation fund. Delaying this transition could mean that you miss out on benefiting from the total franking credit refunds and the opportunity to convert taxable investment income in your superannuation fund into tax free earnings. If you are still working, the pension you initiate can be restricted to a retirement pension, or unrestricted if you have no plans to work again.
Withdrawal and re-contribution – if you have already started a pension, it may be worthwhile to consider a withdrawal and re-contribution strategy to enhance the tax fee component of your superannuation. This option provides advantages where you anticipate beneficiaries inheriting a portion of your superannuation.
Maximising your property claim – property investors could guarantee more cash in their pockets this end of financial year by maximising property depreciation deductions. A qualified quantity surveyor inspects a property and prepares a depreciation report that can then be used in a tax return. The property investor can claim the depreciation of the investment property against taxable income and in turn results in the property investor paying less tax.
There are two main elements to claiming a rental investment property deduction:
Plant and equipment (Division 40) – is part of the legislation that covers the depreciation of “plant and equipment”. That is, the removable fixtures and fittings within an investment property. Each plant and equipment item has an effective life set by the Australian Taxation Office and the depreciation deduction available on that item is calculated using this effective life.
Capital works deduction (Division 43) – also referred to as “capital works allowance” or “building write-offs”, Division 43 covers the deductions available to owners for the structural elements of a building and the items within the property that are deemed irremovable. Properties qualify for this allowance depending on their age and type, either 2.5 per cent or 4 per cent of a property’s historical construction cost or estimated cost can be calculated by a professional such as a quantity surveyor.
When these assets are not classified correctly, money is lost in the early financial years following the purchase. Often the obvious assets are classified as Division 40 and the more inconspicuous items are sometimes overlooked. This often results in them being combined with Division 43 and claimed at 2.5 per cent instead of the much higher rates based on their effective life. That may mean a significant difference in the deduction for the property investor.
Estate planning strategies – Estate planning is more than just having a will. It is about ensuring that a person’s estate is passed on to their beneficiaries in the most tax effective and financially efficient manner possible when they are gone.
Getting early advice on setting up an estate plan can help you to achieve peace of mind in knowing that your wealth will be passed on in the most tax effective way and ensure it is carried out according to your wishes, which is often a problem with a simple will. An estate plan maximises your assets and takes into account other non-financial matters, such as the care of dependent children, medical treatment and accommodation if you are incapacitated. It also considers your charitable, community and cultural requirements.
If you pass away without a will, your assets are distributed by following a standard statutory formula and it is likely that distribution will not play out the way you would have liked. For those who do have a will, it may only cover what to do with your personally owned assets and other considerations like superannuation, trusts and business assets may have been left out.
In developing an effective action plan for dealing with your estate, the following considerations should be made:
How will your business wealth be dealt with?
How should your superannuation be dealt with after your death?
Who is to receive your gifts and legacies, and when should they be given?
Who will be appointed executors of your will?
Who will control your non-estate wealth holding entities, including family trusts?
An estate plan is something that should be considered, no matter how young or old you are.
The information, recommendations, opinions or conclusions provided above are generic in nature and do not express individual advice.
You should always consult your professional representatives before taking any action.
