Seven Tips to Prepare for Tax Time 2014
The countdown to the end of the financial year is now on. And that means you need to focus on your end of year position and the planning that is appropriate for you. Either no decision or a rushed decision can lead to an unsatisfactory outcome. Here are seven issues to get your thinking started.
1. Basics
There are lots of little things which can be considered but these can save lots of tax. These include:
- write off bad debts before 30 June
- count stock at 30 June and use the appropriate valuation for each item (lower of cost, market or replacement)
- declare and minute bonuses' and directors fees (accrue at 30 June but pay early in new financial year)
- prepayments of expenses (rentals, insurance, business trips, interest)
- employee superannuation paid by 30 June
- deferral of income to July
- maximise depreciation claims, write offs of new items, and scrap old items
- superannuation (see following)
- trust resolutions to distribute income (required by 30 June )
- accrued expenses (we will ask about these when you bring in your records) for those costs incurred before 30 June - wages, bonuses, commissions, rent, interest, telephone, etc.)
2. Superannuation
There have been more changes this year; note, super contributions are deductible only if they are received or paid into the fund before 30 June.
- The maximum deduction is $25,000 per person, but $35,000 if 59 or more on 01/07/2013
- A non-concessional deduction of $150,000 can be made if planning to have more assets in super. If under 65 at 30 June this can be increased to $450,000 but no further contributions can be made for two years (note, this increases significantly in 2014/15)
- Look back at contributions too over the previous two years, as excess contributions in previous years can impact on the current year amount, and the penalty is 46% of the excess contribution
- Trusts need to pay a salary to the principals if superannuation will be claimed by the Trust.
3. Look for the Bigger Opportunities
There are special claims in this year, we'll ask you about them when you're in, but start to think about them:
- Motor Vehicles - special write off of first $5,000 of cost (only up to 31/12/13)
- Equipment - total write off of items under $6,500 (only up to 31/12/13)
- Entitlement to R&D tax concession - maximise the claim this year for a deduction of 150% of R&D expenditure (must exceed $20,000 to claim)
4. Capital Gains
A special tax, and full of rules and complications. To use the concessions it is necessary to be a 'small business entity' (in business, turnover under $2m for taxpayer and connected entities)
To calculate CGT and the Concession, we require:
- Date and cost of acquisition, improvements made or further investment in the asset
- Contract of sale and settlement details
- Ownership - whether trust, company, partnership or individual
- If a sale of a business, some Concessions require a transfer to super within special time limits
- Other income earned during the year (approximately, as the CGT rate is based on total income).
5. Consider Cash Flow
This is essential, as some options require you to spend money or to defer income. These have cashflow implications and you need to ensure that creating a better tax outcome does not cause a short-term cashflow problem. Talk early to the bank, and be realistic as to how long you will need assistance for.
6. Risks and Other Considerations
Keep in mind there other issues to consider at year end. Tax benefits need to stack up on the risk-to-reward matrix. Quantify the benefits and assess any downside too.
- The tax office may do an audit and review the actions at year end - bad debts written off before 30 June, stock count and valuation methods, accrual and payment of director fee and bonuses, superannuation contributed by due date, trust resolutions, right to Small Business Concessions for capital gains, record keeping and systems in order
- Lodge PAYG Withholding forms by the due date, sub-contractor reporting is required from those in the building and construction industry by 21 July
- The ATO will again be chasing super for individual subcontractors, so ensure you have agreements in place, preferably company to company, if you do not consider super is required
- The ATO is now using Benchmarks it has developed and proposes to adjust income in returns where the records are not either sufficient or unreliable to prove the tax return is correct
- If you are applying for loans for say a new home or investment, be aware of lending guidelines and to qualify the lender may require a higher income to show in tax returns
- If your income next year is likely to exceed $180,000, consider deferring expenditure to claim in next year, and avoid the 2.5% special levy
- Trusts must Minute distributions of profit by 30 June (if not, it could be taxed in the trust at 50% or even 60%). (Minutes will be sent shortly for signature).
- Companies must document loans to shareholders and associates to avoid those loans being taxed as an unfranked dividend under Division 7A (we prepare with tax returns).
7. ATO Audit/Hit List in 2014
- Superannuation Guarantee obligations (especially for directors)
- Small business Benchmarks to determine business income
- Contractors and superannuation, and employment or business.
Finally, if you are not sure, take advice. It could be just a telephone call or email. Superannuation and Capital Gains are critical to get right and should always be checked.