With the end of the financial year fast approaching, it’s a good time to consider if there are any steps you need to take to ensure you have utilised every opportunity to minimise your tax liabilities.
Forecast tax position and distribute income as widely as possible
If you are able to distribute your practices’ business income via a trust (either because you trade through a trust or via a company where the shares are owned by the trust), consider how to best distribute that income.
The ATO required trustees to complete resolutions setting out how the trust’s income is to be distributed prior to the end of the financial year i.e. by 30 June 2019. You can do that by either specifying specific dollar amounts or percentages (make sure your accountant checks your Trust Deed to ensure you are distributing correctly). This can be challenging as you may not yet have ascertained the quantum of taxable income. Therefore, you should endeavour to draft up-to-date financials so that you are able to estimate your business and personal taxable income. The best case is that you use a cloud-based accounting platform such as Xero as this means you always have real-time, up-to-date financial information which is critical for tax planning.
If your have a significant amount of taxable income, you may be able to distribute it to adult beneficiaries such as your spouse, adult children, parents and so forth. You must ensure that you have completed a relevant ‘family trust election’ to include these family members, where applicable. If you plan to distribute to parents or other family members (siblings, cousins, etc.), you must make enquiries into their expected tax pensions, any Centrelink benefits and so forth. There are asset protection issues you must consider too – so make sure you are well advised.
Distributing income to a corporate beneficiary can be even more beneficial since the corporate rate has reduced to 27.5% for companies with a turnover of less than $50 million. However, the company’s passive income must not exceed 80% of total income to be entitled to this lower rate. Therefore, depending on your practice structure, you may need to consider making alterations prior to 30 June so that you can benefit from this lower tax rate.
Super contributions for you and your spouse
Each individual can made tax-deductible superannuation contribution of up to $25,000 per year (called Concessional Contributions). It is important that these contributions are credited into your account before 30 June, so do not leave it to the last minute. If you are making a personal contribution (not from your company), make sure your accountant completes a “Notice of Intent to make a personal superannuation contribution” form. Otherwise, you may not be entitled to the tax deduction.
You may be able to contribute into your spouse’s super and claim a tax deduction for the expense of doing so. This can be done if your employ your spouse on a bona fide basis. You must pay them a market level salary, even if that is only $1. It does not matter that the super contributions (i.e. up to $25,000) makes the total remuneration (i.e. salary plus contributions) more than market level.
Asset write off of $20k. Must be ready for use by 30 June
The government has extended the instant asset write-off concession if your turnover is less than $10 million. This means you can write-off each asset that costs less than $20,000 that has been used or installed ready for use before the end of the financial year. It is not sufficient that you pay for the asset – it must be installed ready for use before 30 June 2019.
The Liberal government announced that it would increase the instant asset write-off cap to $25,000 and extend it another year to 2020, but unfortunately that proposal is not yet law.
Is your taxable profit expected to be lower next financial year?
If you expect your practice profit to be lower next year – either because of higher expenses such as depreciation or lower income due to holidays for example, then you should consider bringing forward some expenses into this year. You can do that by prepaying expenses. The most common prepayment of expenses is interest in respect to loans (personal or business). You can pay interest 12 months in advance. However, there may be other expenses that you can prepay in advance.
Beware to plan for higher tax instalments
If you lodged your 2017/18 income tax return in May 2019, and your taxable income was materially higher than the previous (2016/17) financial year, then you will have to make a catch-up instalment when you lodge you June BAS at the end of August 2019. Notwithstanding that, your instalments for future BAS will be based on your higher reported taxable income. This can be quite a shock to some taxpayers as they can potentially end up paying almost two years of tax in a short space of time. Your accountant should be able to forecast your next 12 months of BAS liabilities. This will help you manage your cash flow.
Keep this in mind if you expect your taxable income next financial year (2019/20) to be materially higher than this financial year.
Do you have non-tax-deductible debt (home loan)?
If you have a home loan you might be able to structure your loans to allow you to repay your home loan at a much faster rate as well as reduce the amount of tax you pay. How your business income is structures and your financial position will determine whether this structure is available to you. If it is, it can be incredibly valuable. An experienced accountant should be able to give you personalised advice in respect to this.
Net realisable value of stock and equipment at year end
It is important to understand a stocktake at the end of the financial year. Doing so helps you achieve two things. Firstly, if your stock register is wrong (overstating holdings), you can write off lost or damaged stock in this financial year. Secondly, if you have stock that you can only sell at a rate that is below cost, you can write-down that stock and therefore claim a tax deduction.
Could be other opportunities
Unconscious incompetence is simply not knowing what you don’t know. And it can cost taxpayers a lot! Therefore, it is very important that you talk to a proactive accountant to ensure that you take all the necessary steps to minimise your taxes. Items such as stocktakes, super contributions, prepayments, trust resolutions and so on all must be completed before 30 June 2019. Therefore, don’t leave it until you start preparing your tax returns when it could be too late. Most importantly, make sure your accountant is proactively giving you this valuable and important advice.
Stuart Wemyss is a qualified Chartered Accountant and founder of ProSolution Private Clients, a holistic financial services firm which specialises in looking after dentists.