End of financial year business tax tips
At the end of the financial year we often get asked the best way to get the most out of the financial year end. Whilst often we hear a lot of people pushing expenses forward or deferring income its not often something we recommend as it disrupts cash flow and detracts from running a business. To be clear in certain circumstances it may be beneficial but most likely its a lot of effort to net out in the same position in the long run. We take the approach that the year end is a good time to maintain compliance obligations and spend the additional time working on the business and performing business planning and health checks to ensure the business operates well into the future.
1. Spend money where its needed when required
We get asked a lot if you should spend money to save money. To us it sounds crazy to spend a $1 to save 27.5 cents. We would recommend spending money that either improves your business or adds capital value that can be written off. A good example of this would be expenditure on capital assets that will produce income in the future yet can be written off now up to $150K. A bad example of this is spending a whole bunch of money on consumables that are not required like office works.
2. Check what record keeping and other tasks to complete
Some of the yearly tasks you need to do as a small business owner may include:
review summaries of your record of debtors and creditors
collating records of asset purchases or expenditure on improvements (to - calculate depreciation expense claims and for capital gains tax)
completing and lodging your income tax returns
lodging yearly reports or returns for pay as you go (PAYG) withholding including finalising income statements for single touch payroll
the taxable payments reporting system
meeting superannuation requirements
making digital copies of any paper records and backing them up
3. Find out what tax deductions and concessions you can claim
You can claim deductions for most business expenses, as long as they directly relate to earning your income. For example, you may be able to claim deductions if your business:
has set up a website
has motor vehicle expenses
uses diesel fuel
operates at home
has travel expenses
uses machinery, tools or computers
You must have records to prove the expenses that you claim as business deductions.
4. Check ownership structure if using losses
Broadly, tax losses brought forward can generally only be used against current profits if the business is owned by the same entities that made the losses.
Check ownership changes if planning to use brought forward losses in companies or trusts.
Using tax losses in the current or subsequent tax years means making sure control or ownership changes in loss making entities are reviewed before tax returns are lodged. If control changes can be deferred past 30 June 2020, this may ensure losses can be used in later years and are not lost.
6. Approve and evidence directors’ bonuses and fees
Companies paying bonuses and/or directors’ fees can claim a tax deduction.
Approve directors’ bonuses and/or fees, and ensure they are evidenced in Board minutes.
For a company to claim a tax deduction for directors’ bonuses and/or fees, it must show it has definitively committed to paying or making available those amounts to the particular director by 30 June 2020 and has met company law requirements authorising those payments. Accruing the amounts in the accounts is not enough. The director will then be taxed on the bonus/fees in the 2020 income year.
5. Write off bad debts
Businesses can claim a tax deduction for debts proven to be bad, and claim repayment of GST.
Write off bad debts and keep evidence to show they are irrecoverable, then claim back GST if the BAS is prepared on accruals basis.
For normal trading businesses (not in the business of money lending) a bad debt deduction can be claimed if they can show that the debt is irrecoverable and it was included in assessable income. Evidence should be kept to show action to recover the debt and why it is reasonable to conclude it is irrecoverable, and the accounting records updated to write it off before 30 June 2020. A non-cash basis BAS can be adjusted for the bad debt write-off or for debts overdue for 12 months or more.
6. Complete a stocktake
Businesses should review the amount and value of stock on hand prior to the year end.
Scrap obsolete trading stock and revalue stock on hand at lower of cost, market value or replacement price.
Obsolete or worthless stock can be written down to amount lower than cost, market value or replacement price if a trading stock election is made for tax purposes. The write down can be claimed as a tax deduction if done before 30 June 2020.
7. Pay principal and interest payments on company loans
Loans to shareholders and their associates in a private company should have a complying loan agreement in place to avoid it being treated as a deemed dividend.
Pay principal and interest payments on Div 7A loans by 30 June 2020.
Loans made by private companies to shareholders and associates outstanding at 30 June are treated as deemed dividends if a complying loan agreement is not put in place by tax return lodgement. The minimum payment of interest and principle must be made by the following 30 June to avoid it being treated as a deemed dividend.
8. Review your business and marketing plans
Take time to set yourself up for the year ahead. Regularly reviewing and updating your plans will help you to:
remember your goals and priorities
assess whether your strategies are working
adapt to any changes in your environment
make the most of new opportunities as they come your way
prioritise and maximise your effort (work smarter, not harder)
9. Give your business a health check
The end of the financial year is a good time to take stock of how your business is performing and possible areas for improvement. This may be the only time of year that you have a complete set of accounts to look at how much money the business is making and where it’s coming from, how much money the business is spending and where it’s going, where the risks are in the business.
EOFY is an ideal time to make strategic decisions which could improve business performance and make your business more profitable. You might also want to review your business structure and insurances which can help focus tax effectiveness and reduce risk.