Any successful tax planning strategy centres around three themes; reducing income, increasing deductions and utilisation of the lower tax rates available.
Below are some of the more common strategies employed to assist in Tax Planning.
Making Deductible Superannuation Contributions
This can be done either by a salary sacrifice arrangement, (if an employee) or claimed as a tax deduction by a self-employed person. As your superannuation fund only pays 15% tax on the contribution you have effectively shifted a portion of your business profits into a lower taxed environment.
There are limits however on the amounts for which you can contribute and claim a deduction. In 2013/14 those under 59 years of age at 30 June can only contribute $25,000 and those over 59 can contribute $35,000. Exceeding these amounts could result in an additional tax being levied on the excess, so care needs to be taken.
Review and Write off any Bad Debts
As you are entitled to a deduction in the year your write off a bad debt, identifying bad debtors and writing them off is an easy, cost effective strategy and should be done on a regular basis.
However, in order to receive the deduction, there must be no prospect of recovering the outstanding debt and if it is later recovered, it must be included as assessable income.
Review Timing of your Invoices
Whilst 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, it may be prudent from a tax perspective to invoice for the completed job in July, (and have the income assessed in the following financial year) rather than have a 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 for either 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 revaluing these items, you can create a further deduction for your business.
Small Business Concessions
For business with an aggregated turnover of less than $2 million, there are various concessions available relating to deductions you can claim, in particular:
Trading Stock Rules: If the change in value of stock from the previous year is less than $5,000, there is no requirement to record this as income in the current financial year, providing an opportunity not to record an increase in stock values if it is less than $5,000.
Prepayments: By prepaying expenses which are for the next twelve months now, (e.g. insurance, subscriptions, registration etc.) you can claim a tax deduction for the entire expense in the current financial.
These are just some of the more common tax planning strategies available. Any strategy undertaken should be done in consultation with your accountant to ensure that it fits with your overall goals and objectives.
Please contact Altitude Advisory for more information.