Tax tips for small business

Small businesses may be eligible for a range of tax benefits

Check eligibility for small business tax regime

Small businesses (sole traders, partnerships, companies and/ or trusts with a turnover of less than $2 million) may be eligible for a range of tax benefits including immediate write off of assets costing less than $20,000, a 28.5 per cent company tax rate, simplified depreciation, capital gains tax concessions and accounting on a cash basis.

Broadly, the small business must carry on a business and its annual turnover (excluding GST) cannot exceed $2 million. Turnover will also be aggregated to include the annual turnover of certain affiliates and entities connected with the taxpayer.

While meeting the $2 million turnover test automatically entitles small businesses to choose certain concessions such as simplified rules for both tax depreciation and trading stock, it is important to note that additional eligibility tests apply to claim the small-business CGT concessions.

The government has proposed increasing the annual small business threshold to a turnover of $10 million from 1 July 2016. This would normally create a number of year-end tax planning opportunities for businesses with an annual turnover of between $2 million to $10 million, however at the time of writing it is uncertain whether this proposed increase will become law, therefore we suggest that taxpayers be circumspect.

Maximise depreciation deductions

Small businesses can get an immediate tax deduction for nearly all individual assets purchased by 30 June 2016 that cost less than $20,000, to the extent it is used for an income producing purpose and is installed ready for use by the end of the financial year. This measure is due to expire 30 June 2017.

For businesses registered for GST, the $20,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.

A depreciating asset that is not immediately deductible (an asset costing $20,000 or more) will be automatically depreciated at a flat rate of 15 per cent in the year it was bought to the extent the asset is used for income-producing purposes, and is used or installed ready for use by 30 June 2016. The adjustable value of such an asset can be depreciated, on that basis, at 30 per cent in subsequent years.

For those businesses with a turnover of between $2 million to $10 million, they may wish to delay the purchase or delivery of assets costing less than $20,000 until next financial year as such expenditure may then qualify for an immediate deduction.

However given the uncertainty as to whether the small business turnover threshold increase will become law, we suggest that businesses factor that uncertainty into their decision(s) on whether or not to change the timing of asset purchases until the new financial year.

Tax cut for SMEs from 1 July 2016

Normally we would encourage taxpayers to consider taking advantage of a number of year-end tax planning opportunities that a proposed company tax rate cut creates, however it is uncertain whether this proposed cut, especially for companies with a turnover of between $2 million to $10 million will become law, so again we suggest that taxpayers take care.

If you do want to take the risk, the following changes announced in the budget provide a number of tax planning opportunities:

  • the proposed reduction in the company tax rate from 28.5 to 27.5 per cent for companies that have an annual turnover of less than $2 million from 1 July 2016
  • the proposed reduction in the company tax rate from 30 to 27.5 per cent for companies with a turnover between $2 million to $10 million from 1 July 2016
  • the proposed increase in the unincorporated small business tax discount from five to eight per cent on the income tax payable on business income received from an unincorporated entity that meets the relevant small business test, capped to $1,000 per individual.

In particular, eligible businesses can bring forward expenses into this financial year (to receive a higher deduction for such expenses), and delay revenue into the next financial year (as revenue will be subject to a lower tax rate). 

As always, care should be taken to ensure that any actions do not breach the tax general anti-avoidance rules or any specific provisions such as the tax prepayment rules.

SMEs should seek professional advice from their CPA Australia-registered tax agent to understand how they may legitimately benefit from the proposed (but uncertain) reduction in the company tax rate, if eligible.

Review salary sacrifice arrangements

Employees can consider salary sacrifice arrangements under which their gross salary may be foregone to obtain either a packaged car for fringe benefits tax (FBT) purposes, or they can make additional superannuation contributions.

A 20 per cent flat rate applies when calculating a car fringe benefit under the statutory-formula method, regardless of how many kilometres the vehicle travels annually. However, there may still be some tax savings in packaging a car under these rules compared to the cost of funding all your car expenses from your net salary.

Professional Development: FBT in a day – Workshop 2017: this workshop covers all 13 types of Fringe Benefits Tax including examples and step–by–step guides on how to apply FBT, hints and warnings to avoid common pitfalls, and problem solving exercises to apply what you’ve learned.

In addition, under these rules employees who predominantly use a car for work-related travel may be able to obtain tax savings by calculating the FBT paid on the car under the operating-cost method rather than funding their car expenses from their after-tax salary.

Advice should also be obtained from a CPA Australia-registered tax agent as to whether such salary sacrifice arrangements would be tax effective.

Make trust resolutions by 30 June

As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2015-2016 financial year by 30 June.

If a valid resolution is not executed by 30 June, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.

A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year end. However, the trust's accounts do not need to be prepared by 30 June.

As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the 30 June deadline.

Seeking professional advice when starting a business

From 1 July 2015, the professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the year those expenses are incurred rather than deducted over a five-year period as was the case in previous years.

If you established a business in 2015-2016, you should speak to your CPA Australia-registered tax agent about claiming professional advice fees as an expense.

Small business restructure rollover relief

From 1 July 2016, small businesses will be able to change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.

This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.

If you are in the process of or considering restructuring your small business, you should consider delaying the restructure until after the new financial year commences. Business restructuring can be complex, so you should first speak to your CPA Australia-registered tax agent.

Stream trust capital gains and franked dividends

Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before 30 June and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

These streaming rules are complex and taxpayers should consult their CPA Australia-registered tax agent for advice.

Private company loans

Income tax law can potentially treat a payment or a loan by a private company to a shareholder or an associate (like a family member), or the forgiveness of a shareholder’s or associate’s debt, or the use of a company asset by a shareholder or their associate, or the transfer of a company asset to a shareholder or their associate as an unfranked deemed dividend unless an exemption applies.

The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether or not the loan is secured.

There are various things a private company can do before its 2015-2016 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend. Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.

The rules around private company loans can be complex, therefore you should consult your CPA Australia-registered tax agent on this.

Prevent deemed dividends in respect of unpaid trust distributions

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2015 will be treated as a loan by the company, if the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution in 2015-2016.

However a deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the company's 2015-2016 income tax return needs to be lodged. Alternatively, a deemed dividend will not arise if the amount is held in an eligible sub-trust arrangement for the sole benefit of the private company, and other conditions are satisfied.

Trustees and beneficiaries should consult their CPA Australia-registered tax agent on the full implications of these very complex rules if applicable.

Write-off bad debts

Businesses can only obtain income tax deductions for bad debts when various conditions are met.

A deduction will only be available if the debt still exists at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts no deduction will be available. The debt must also be effectively unrecoverable and written off in the accounts as bad in the year the deduction is claimed. The bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money-lending business. Certain additional requirements must be met where the creditor is either a company or trust.

SuperStream

Originally due to come on line on 1 July, the ATO has announced it is extending the compliance deadline for small businesses to adopt SuperStream until 28 October.  This means that if you are an employer with 19 or fewer employees you will pay super contributions for your employees electronically (EFT or BPAY) and send the associated data electronically.

There is no change for larger employers as they already do this.

The data is to be in a standard format so it can be transmitted consistently across the super system – between employers, funds, service providers and the ATO. It's linked to the payment by a unique payment reference number.

This means you can make all your contributions in a single transaction, even if they're going to multiple super funds.

If you are not prepared for SuperStream, seek professional advice or visit the ATO website www.ato.gov.au.

Seek independent advice on end of year tax effective investment products

The end of the financial year often sees the emergence of tax effective investment products. If you are considering such an investment, seek independent advice before making a decision, particularly from your CPA Australia-registered tax agent.

Read next: Tax tips for employees


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