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2013 Tax Planning Strategies for Businesses

The end of the financial year is approaching and business owners should now be talking to their accountant about ways to legitimately reduce the tax bill for 2013.  Some tax planning techniques differ depending on whether the business is a "small business entity” and the most common strategies that should be considered prior to 30 June 2013 include:

Small business entity (SBE) tax concessions

The small business entity” (SBE) tax rules provide access to a range of concessions that businesses can apply without the need to make a formal election in the tax return. A business can choose which one or all of the concessions to apply. In order to be an SBE, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive.

The major tax planning concessions that are available under the SBE rules are:

  • The choice to continue to use the “cash accounting method” for recording income and expenses in the tax return where the business has continually used this method both prior to and after 1 July 2005;
  • The choice to pool depreciable assets and obtain an immediate deduction to the extent it is used for a taxable purpose for assets costing less than $6,500 GST exclusive. Depreciable assets costing $6,500 or more GST exclusive are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2013; 
  • For on road vehicles costing more than $6,500 and purchased after 1 July 2012, SBE businesses pooling assets, can claim up to $5000 in the year the vehicle was ready for use and can pool the balance in the SBE General Pool to claim a deduction of 15% in the year of purchase and 30% thereafter;
  • Choosing whether or not to do an end-of-year stock take if the value of trading stock has not increased or decreased by more than $5,000 over the income year;
  • Claiming 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. Subject to cash flow requirements, the most common expenses that an SBE taxpayer should consider prepaying by 30 June 2013 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc;
  • The ability to apply the small business capital gains tax concessions without the need to satisfy the $6M net asset value test.

Prepayment of expenses

Certain prepayments are not subject to the above 12 month rule and therefore both SBE and non-SBE taxpayers may be able to claim deductions for expenditure that is:

  •  less than $1,000 GST exclusive; or
  • incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences; or 
  • paid under a contract of service (e.g. prepayments of salary and wages, bonuses and commissions).

Deferring income & capital gains

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 2013.

  • 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 2013. 
  • Realising a capital gain after 30 June 2013 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.

Valuing trading stock

Both SBE and non-SBE taxpayers have the option of valuing trading stock on 30 June 2013 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.

In situations where stock has become obsolete at year-end (e.g. fashion clothing), the taxpayer may elect to adopt a lower value than actual cost, replacement cost, or market selling value.

Maximising depreciation claims for non-SBE taxpayers

  • An immediate deduction can be claimed for assets costing less than $100 GST inclusive (e.g. minor tools).
  • A tax deduction can be claimed for depreciable assets that are scrapped or sold for less than their written down value.
  • Assets costing less than $1,000 GST exclusive can be allocated to a “low value pool” and depreciation claimed of 18.75% for 2013 (37.5% thereafter) regardless of when the assets were acquired during the income year.