There are still a number of legitimate strategies that you can adopt prior to 30 June 2014 to reduce this year's tax bill.
The first 2 strategies apply only to small business taxpayers, whereas the others apply to all businesses. A small business is defined as one where the turnover of the business, including connected entities and affiliates, is less than $2 million per annum (GST exclusive). The turnover for either the current financial year or the previous financial year can be used to determine if you qualify as a small business.
Strategy 1 - Instant asset write-off for assets reduced to $1,000 from 1 January 2014
Under existing law, a small business is able to claim an immediate tax deduction for "individual" assets (including motor vehicles) costing less than $6,500 (GST exclusive), including individual assets that form part of a set.
This immediate write-off applies equally to the purchase of new and second hand assets which are used in the business.
As part of the changes contained in the "mining tax repeal Bill", the Government has proposed that the instant asset write-off will be reduced from $6,500 to $1,000 for "individual" assets (including vehicles) "first used or installed ready for use" on or after 1 January 2014. It is unlikely that the above bill will be passed by the Senate and made law prior to 1 July 2014. There is therefore uncertainty as to whether the $1,000 limit will apply from either 1 January 2014 or 1 July 2014 when this change is eventually made law.
The ATO has recently released administrative guidance to assist business taxpayers preparing their 2013-14 tax returns.
According to the ATO, those business effected by the change can lodge their 2013-14 tax returns based on the existing law. Then when the law is finally enacted, businesses will need to seek an amendment to their tax returns to apply the new law. If the amendment is made within a reasonable time, the ATO will remit any shortfall interest attributable to the amendment to nil.
Strategy 2 – Claim deduction for pre-paid expenses
A small business can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. The most common expenses that you should consider prepaying by 30 June 2014 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc.
Note that your business must be able to make the prepayment under the relevant contractual agreement to get the immediate tax deduction this financial year - you cannot simply choose to prepay the expense.
Strategy 3 – Make superannuation contributions by 30 June
The maximum concessional superannuation contribution limits for the 2013/14 year are:
- Individuals aged 60 and over on 30 June 2014 - $35,000 contribution limit.
- individuals aged 59 and under on 30 June 2014 - $25,000 contribution limit.
Note that employer super guarantee contributions are included in the cap. Where a concessional contribution is made which exceeds these amounts, the excess is taxed to the fund member's account at an effective rate of 46.5%.
If you are self-employed and making a personal superannuation contribution, ensure you obtain the correct documentation from your superannuation fund to substantiate claiming the deduction before lodging your tax return.
In order to obtain a deduction in the 2014 financial year, the contribution must to be received by your superannuation fund by 30 June 2014.
Strategy 4 - Defer income & capital gains tax
- Businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay "receipt" of the income until after 30 June 2014.
- Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the "issuing of invoices" until after 30 June 2014.
- Realising a capital gain after 30 June 2014 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes. In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.
All businesses are entitled to an immediate deduction for certain expenses that have been "incurred" but not paid by 30 June 2014 including repairs, salary & wages, and staff bonuses and commissions. In order to claim a deduction, the business needs to be legally obligated to pay the expense (e.g. for a repair, a tax invoice dated prior to 1 July 2014).
All businesses have the option of valuing trading stock on 30 June 2014 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.
For example, where the market selling price of stock items at year-end is below the actual cost price, the taxpayer can generate a tax deduction by simply valuing the stock at market selling value for tax purposes.
Also, in situations where stock has become obsolete at year-end (e.g. fashion clothing), the business may elect to adopt a lower value than actual cost, replacement cost, or market selling value.
Strategy 7 - Write-off bad debts
If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2013/14 so long as the debt is declared bad by 30 June 2014.
Your business will need to show that it has made a genuine attempt to recover the debt by 30 June 2014 to prove that the debt is bad. It's preferable that this decision is made in writing (e.g. a company directors minute).
Your business can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.