FocusOn - Year end tax tips
 With
the end of the financial year rapidly approaching we provide below a list of
things you might consider to reduce your tax bill.
Prepay expenses
Prepaying expenses before
year end can be a great way of reducing your current tax liability. It can
be particularly beneficial if you expect to be on a higher tax bracket this
year than next year. Additionally, if payments are due early in the next
financial year, payment may get you the tax benefit much earlier.
The rules differ
depending on whether the taxpayer is an individual, small business entity (SBE)
or other business entity. Broadly, an SBE is a business entity that has
turnover of less than $2 million.
Individual taxpayers such
as employees and investors can claim a deduction for a prepayment of up to
12 months of expenses. Typically, this includes subscriptions, memberships
and interest paid on investment loans.
Business taxpayers who
are in the small business entity regime are also entitled to these
deductions. Non SBE businesses can claim deductions for prepayments, only
if the prepaid amount is less than $1,000.
If prepaying interest,
make sure the financial institution is aware of what you are doing.
Otherwise they might use the payment to reduce the principal and no
deduction will be available.
To be deductible, a
prepayment must be incurred. Before making rent, insurance, interest or
lease payments etc. for the purpose of claiming a prepayment deduction,
check your contracts to ensure they can be made. Advance voluntary payments
may not be deductible.
Taking advantage of super
Deductible contributions
If you are self-employed
or do not have employer superannuation support, a very effective way to
reduce your tax liability is to make a deductible contribution into your
super before 30 June 2010. There are limits and rules associated with these
contributions but we would be pleased to advise you on how these affect you.
Generally, contributions
up to $25,000 made by an employer are deductible. For over 50’s, $50,000
is the deductible limit. The same limits apply for personal deductible
contributions for self employed taxpayers. The total of contributions from
employers (both compulsory and salary sacrificed contributions) and
deductible member contributions (if applicable) must not exceed the
applicable $25,000 or $50,000 limit.
Non-Deductible contributions
Contributions that are
not tax deductible (either to you or your employer), known as
non-concessional contributions, have a limit of $150,000 per year. It is
possible to bring forward two years’ entitlement and transfer up to $450,000
in one year. Non concessional contributions can be useful in moving your
personal wealth to a superannuation fund which has a 15% tax rate, and in
building your retirement funds. If you are considering a substantial
contribution to superannuation we suggest that you discuss this with us to
ensure that the contribution is in line with the current requirements.
Government co-contributions
Consider making an
after-tax payment (up to $1,000) into your superannuation and the government
will contribute $1.00 for every $1.00 contributed by you if your income is
less than $31,920. This co-contribution gradually decreases and ceases once
your income reaches $61,920.
You can contribute as
little as $20 to a superannuation fund to take advantage of the
co-contribution. Remember, your superannuation contributions are locked
away until age 55, so the level of your contributions should be decided
after considering your personal cash requirements.
Remitting employee superannuation
If an employer wishes to
receive a tax deduction in the current year for superannuation contributions
in respect of their employees, the contributions will need to be received
into your employees' super funds by 30 June 2010 so make sure you mail the
cheques or attend to the remittance in sufficient time.
Salary sacrifice arrangements
You should check that
salary sacrifice arrangements that are already in place will fall within the
concessional contribution caps (particularly for transition to retirement
pensions).
Salary packaging
The financial year end is
an opportune time to review salary packaging. There are still worthwhile
advantages to be gained from salary packaging but it is a complex area.
Fringe benefits that are
fully taxable and are provided as part of a salary package to employees who
pay less than the top marginal tax rate are less tax effective than if they
were not packaged and simply paid out of after tax salary. However, certain
concessionally taxed benefits (such as an employer-provided car) can be
worth packaging, as are exempt fringe benefits (such as a notebook computers
used primarily for business, airline lounge memberships, professional
association memberships etc.)
Tax free minor benefits
Employers can provide
minor and infrequent benefits, valued less than $300, to employees. Why not
consider a gift voucher instead of a performance bonus? This is tax free to
the employee and is exempt from FBT.
Stock and consumables
Businesses pay tax on the
value of stock at the end of the financial year, so now is the time to move
any slow moving stock, by sale or disposal, so that it is not counted at the
year end stocktake. Similarly any assets which are on the business’s
balance sheet that are obsolete should be disposed of by year end. This
commonly applies to old computer equipment, printers and similar items which
may have been retained, but have no further use in the business.
Consumable items can be
purchased before 30 June to enable a deduction in the 2010 financial year.
For example photocopier paper and supplies purchased on June 30 will
decrease the tax payable on 2010 income, but the same item purchased on July
1 has no impact on tax until one year later. Other items to consider are
stationery, cleaning products, repairs & maintenance.
Bad debts
Bad debts should be
written off before year end to enable a tax deduction in the 2010 income.
The write-off entry must be processed in the ledger by 30 June and we
recommend that this also be recorded in the minutes of the business.
Income deferral
Where possible invoices
should be deferred until July 1. In many cases income is not recognised
until a bill is produced, so this can be an effective way of deferring
income, and tax, another year into the future.
Shares, capital gains and losses
If you have a capital
gain that has emerged in the 2010 year, any capital loss in the same year
will reduce the tax payable on that gain. It may be wise to look at your
non-performing shares to see if any shares should be sold before June 30 so
that the capital loss is available to offset the capital gain.
Similarly if you are
intending to sell shares which will realise a capital gain, consider
deferring the sale to July to defer the tax payment by another year.
Published : June 2010
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