Taxation Planning and Understanding Your Commitments
With 30 June 2020 less than 6 weeks away, now is the perfect time to review your situation and projected tax commitments to make sure that you take advantage of any planning opportunities and that your financial situation is maximised.
The last two months have been very difficult for business. As we emerge it’s more important than ever that we understand our cashflow. Taxation commitments are a major expense for businesses, so it is critical to understand the amount and timing of these commitments.
Therefore, I’m encouraging all business owners to project their taxation commitments for the next 12 months. The reason for this is as follows:
- Ensuring sufficient cashflow and reserves, and
- Determining what, if any, action is required before 30 June.
Any successful tax planning strategy centres around three themes:
- reducing income,
- increasing deductions and
- utilisation of the lower tax rates available.
Prior to any taxation planning it is important to calculate your projected taxation position for the year; in some cases, especially if your income is low, taxation planning opportunities may not result in significant savings.
The following is a list of opportunities that should be considered:
Business Income and Deductions
- Making Deductible Superannuation Contributions
Superannuation is deductible when received by the superannuation fund, superannuation contributions must be paid to, and received by, the super fund before 30 June and must be within the contributions cap of $25,000 per individual.
- Review and Write off any Bad Debts
You are entitled to a deduction in the year you write off a debt that a customer can’t pay and there is little or no likelihood of the amount being recovered; i.e. a bad debt.
- Review Timing of your Invoices
While it is always a good idea to prepare and send out interim invoices for work partially completed, care should be taken especially if an interim invoice is going to be raised close to 30 June and the work will be completed early July.
In this scenario, from a tax perspective, it may be prudent to invoice for the completed job in July and have the income assessed in the following financial year, rather than have part of the income assessed in the current financial year.
- Review your Inventory at Year End
Many businesses fail to review their inventory; in particular, obsolete or damaged items. These items generally have significantly lower values than current or undamaged stock, yet they are still valued at their full value. By re-valuing these items, you can create a further deduction for your business.
- $150,000 Instant Asset Write Off
If you purchase equipment up to $150,000 and motor vehicles up to $57,581 (for each item), you can claim a tax deduction in the year you purchased the item/s rather than depreciating it over a number of years.
Please note that this is not an extra deduction or a refund as some sellers of equipment are indicating.
How this translates is: if your taxable income is between $37,000 - $87,000 your taxation rate is 32.5%. Therefore spending $20,000 will result in a refund of $6,500 (being 32.5% of $20,000). We cover this concept in depth in our article “To spend or not to spend – why using the $30,000 business asset write off might be the wrong decision”
Personal Income and Deductions
- Document and claim all work-related expenses,
You can automatically write off $300 a year in work-related expenses. With documentation, it is possible to claim more.
One of the biggest things that I hear is that I spent money but have lost the receipt. The ATO’s requirements are “Documents that you are required to keep can be in written or electronic form. If you make paper or electronic copies they must be a true and clear reproduction of the original.” Therefore, take a picture of the receipt with your phone as a backup or if you have lost the receipt contact the place where you purchased the item to see if they can issue you a replacement.
- Maximise superannuation concessional(tax deductible) contributions
If you have the cash flow, it makes sense to make the most of concessional contributions to super without breaching the current $25,000 cap.
As superannuation contributions are taxed at 15% this can be significantly lower than personal rates of up to 46.5%, therefore, saving you a significant amount of taxation and increasing your wealth.
From 1 July 2017, if you are employed, you can now make a personal contribution to super and, provided that the total superannuation contributions including your employers is under $25,000, you can claim the contribution as a deduction.
- Pre-pay deductible expenses
Expenses such as premiums on income protection insurance and interest on loans can be paid up to 13 months in advance. This will reduce your income in the current year and in turn reduce your tax liability.
- Maximise property investment expenses
Make sure you take advantage of all the expenses you can claim from a property investment. For example, did you know that aside from rates and mortgage payments, you can also claim cleaning and pest control?
- Manage Capital Gains
If you've made a capital gain this year, review your portfolio to see whether it is worth selling any investments at a capital loss to offset the gain. Please note, you can't just sell an asset to trigger a loss, then buy it back. The Tax Office regards this as a form of tax avoidance, known as a ‘wash sale’, and has been focusing in recent years on targeting such sales.
- Motor vehicle deductions
If you have used your motor vehicle for work-related travel, you claim for travel based on how many kilometres you travelled up to 5,000 km. To calculate the claim, you need to prepare a summary of the amount of km’s you travelled for work and then multiply this by the ATO rate of 66 cents per km. As an alternative, if you have been using your car for a significant amount of work-related travel then you may well be able to claim a deduction for your total car running expenses to the extent you have used it for work. However, you must have a properly completed logbook.
- Deduct home office expenses
When part of your home has been set aside primarily or exclusively for the purpose of doing work from home, costs such as heating, cooling and lighting and depreciating your office equipment or professional library may be allowable.To claim the deduction, you must have typically kept a diary for at least four weeks of the hours you worked at home. This amount is then used to work out your total hours worked for the year and a deduction claimed at the current rate of $0.46 cents per hour. However, you can’t claim occupancy expenses such as mortgage interest, rent, and insurance and rates unless you conduct a business from your home.
- Prepay private health insurance
If you are expecting a pay increase which could put you into a higher health insurance tier (which will reduce the Private Health Insurance rebate that you will receive) then prepaying is well worth considering to ensure that your rebate is maximised.