02 9683 5999“A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” – Author Unknown
As the end of another financial year approaches, it is important to remember that tax time is approaching. Now is the time for you to examine potential tax planning strategies that will assist in minimising your tax liability.
Defer Income
As long as your business cashflow permits, you may wish to defer raising invoices in the month of June and instead raise them on 1 July 2011. Most businesses operate on an accrual system where tax is paid on the value of invoices raised rather than cash received. By deferring invoices, this will defer the subsequent tax liability to the following tax year.
If possible, arrange for the receipt of investment income (eg. interest on term deposits) and contract date for the sale of capital gains assets to occur after 30 June 2011. The contract date is the key date for working out when a sale has occurred, not the settlement date!
Accelerate Deductions
Regardless of whether your business trades under a cash or accrual basis, the business can generally claim a tax deduction for an amount it has ‘incurred’ (or in simpler terms, entered into a legal obligation to pay someone else). The date it is incurred will generally be the date on the invoice issued by the supplier.
This rule can apply to most of the expenses commonly seen in businesses. One example is Staff/Director Bonuses which are deductible even if paid after 30 June as long as the decision to pay the bonus is made before year end (ie.. director minutes or employees contract), staff are notified of the bonus, and the amount of the bonus can be determined at 30 June. Please note deductions will not apply to the following:
- Superannuation owing for the quarter ended 30 June but not paid until after year end;
- Purchases of trading stock – they’re treated as an asset until sold; and
- Depreciating assets – must be depreciated based on their useful life and depreciation may only start once the asset is installed, ready for use.
NSW Payroll Tax
A reminder that all NSW annual payroll tax reconciliations are due for lodgement and payment on 21 July 2011. The payroll tax threshold for 2011 is $658,000 which includes the total of all wages, salaries, superannuation and fringe benefits provided to employees during the period. The current rate of payroll tax is 5.5% from 1 July 2010 which was reduced to 5.45% on 1 January 2011.
Bad Debts
Write off bad debts before year end. The debt must be bad, not doubtful and must have been previously included as assessable income.
Obsolete Stock
The year end stock-take should involve a review of all stock and a decision made in relation to its value from both a tax and commercial perspective. Obsolete stock may be scrapped or valued below cost subject to specific guidelines.
Buildings & Property
For any client who owns a building (or is looking to acquire a building) which was constructed or has made structural improvements to an existing building after 26 February 1992, you are entitled to claim a tax deduction of at least 2.5%pa of the construction/improvement costs in the owner’s tax return. If this applies to you, we would recommend having a depreciation schedule prepared by a qualified quantity surveyor. This may help add a significant tax deduction for depreciation. The cost is also tax deductible and helps substantiate any capital allowance claim you may have.
Prepay Interest
Many lenders will allow you to prepay your interest and this is an effective strategy to defer the payment of tax. Factors such as anticipated future income, interest rates and cash flow impact should be considered before deciding to prepay interest.
Superannuation – There Are Many Opportunities How ever Be Very Cautious
Contributing to superannuation can often provide significant tax and long term wealth creation benefits. Some of the contribution strategies outlined below can be combined strategically to maximise both tax and retirement planning positions.
Superannuation Co-contributions
The Government will contribute 100 per cent of an eligible taxpayer’s personal after-tax superannuation contributions during a financial year up to a scaled maximum. The calculated maximum is $1,000 less 3.33 per cent of any assessable income plus reportable fringe benefits that a taxpayer has above $31,920. Co-contributions reduce to $0 when income reaches $61,920.
Concessional Contributions
A self employed person, investor or individual under 50 years of age may claim a personal deduction for superannuation contributions of up to $25,000 per annum or up to $50,000 per annum provided the person has reached the age of 50 by 30 June in the financial year of the contribution.
Individuals aged between 65 and 74 must satisfy a ‘work test’ before making a contribution. To satisfy the test you must work at least 40 hours during a consecutive 30 day period in that financial year. Businesses may be able to claim a concessional superannuation contribution for a director or employee of either $25,000 or $50,000 per annum based on the relevant age of the person on 30 June 2011.
Note that employer super guarantee contributions are included in these caps. Where a contribution is made that exceeds these limits, the excess is taxed to the fund member’s account at an effective rate of 46.5%. Any excess contributions are then included as non-concessional contributions which are limited to $150,000 per annum however are not entitled to any tax deduction. Remember: If you have more than one fund, all concessional contributions made to all your funds are added together and count towards the contributions limit.
To claim a tax deduction in the 2011 financial year, you need to ensure that your employee superannuation payments have CLEARED your business bank account by 30 June 2011. We recommend that you arrange for a bank transfer or bank cheque made payable to your employee super fund prior to 30 June 2011. Any superannuation contributions made after 30 June 2011 will not be deductible until the 2012 financial year even though they relate to contributions for 2011. We stress the importance of this as it could impact on an employee’s concessional limits if not paid in the correct financial year.
Salary Sacrifice
Foregoing some salary for increased employer super contributions remains one of the best strategies for many individuals to reduce income tax while maximising future retirement benefits. Not only will contributors receive an initial reduction in tax, funds contributed will then be invested in a concessionally-taxed environment.
- Any salary sacrificed contributions count towards your contribution limits so it is a good idea to check your next payslip to ensure you are under the contribution limits as exceeding the limits can have very heavy tax implications.
Reportable Employer Super Contributions
Employers must report certain additional super contributions you make on behalf of an employee on their payment summaries. These contributions are now called ‘Reportable Employer Superannuation Contributions’. These are defined as:
- Any contributions where your employee influenced or could have influenced the amount of contribution.
- Contributions additional to the compulsory contributions you must make under either:
- super guarantee law (9%);
- an industrial agreement;
- the trust deed or governing rules of a super fund; or
- a federal, state or territory law.
If your employee enters into an arrangement with you to contribute more super than the applicable minimum compulsory contribution, this employee is considered to have a capacity to influence. Your employee will have a capacity to influence where they can directly negotiate, or have an option to negotiate, an additional super contribution. Salary sacrifice arrangements for extra contributions on behalf of your employee are reportable.
Generally, if you make a contribution on behalf of an employee and the amount would have otherwise been income, it is a reportable employer superannuation contribution.
Reportable employer superannuation contributions are added to other income for the purposes of assessing eligibility for a number of government benefits and schemes. It is essential that employers should take care to correctly report the required contributions. Overstating or understating reportable employer superannuation contributions could have an adverse affect on employees and the benefits they may be entitled to.
Pension Drawdown Reduction
A reminder that all self-managed superannuation funds which are in pension phase are required to make minimum pension payments by 30 June 2011.
The Government extended the reduced Pension requirements of withdrawing just 50% of your minimum income stream entitlement for the financial year ended 30 June 2011. The relief applies to account based pensions, transition to retirement income streams and market linked income streams. Pensions are calculated based on member benefits at 1 July each year and the minimum pension rates for account based pensions are listed in the following table.
Effective tax planning is a continual process. Whilst continuously changing tax laws can make planning a challenge, making it a priority by implementing wise strategies will see you reap the benefits that are available.
If you have questions about this newsletter or about your tax planning options please contact our office. Further, if you have friends or associates who might be interested in end of year tax planning information, please encourage them to contact us.
