Not long until June 30 now so here are some small business owners tax tips for the coming year
In my opinion small business operators need to be more proactive with the help of their public accountant to make the most of ever changing tax rules and tax-saving opportunities. Ideally, astute small business owners should be implementing strategies at the start of each financial year that help them avoid the end of year scramble.
Even with the best intentions of staying ahead there are changes that occur during the course of the year that require things to be done before 30th June and this looming year end is no exception.
Below is some bread and butter end of year tax strategies for small business owners. Amongst the mix however are a couple of suggestions which will need to actioned before year's end as the opportunity window will disappear forever due to changes to the rules.
1. To buy or not to buy before 30th June - small asset purchases
The answer to this will depend on the amount you intend to spend. This year's decision is not as straightforward as the threshold for small asset write-off for small businesses goes up from $1,000 to $6,500 from 1 July 2012. If your asset purchase will cost less then $1,000, then there is a cash flow advantage to purchase before year end as per normal practice. If the asset purchase exceeds $1,000 but costs less than $6,500, there will be an advantage to delay the purchase until the new financial year and obtain a 100 per cent write off in your 2012/13 tax year. Faster write off for tax translate to cash flow benefits as you are able to bring forward deductions which reduce your tax bill.
2. Motor vehicles
If you are planning to update or buy a vehicle then it might pay to hold off until after 30th June 2012. Small businesses will be entitled to additional one-off depreciation deduction of $5,000. The remainder of the purchase cost is depreciated as part of the general small business pool at 15 per cent in the first year and 30 per cent in later years. The positive aspect of this initiative is that it applies to both used and new motor vehicles. If a tradesman purchases a ute that costs less than $6,500 after 1 July 2012, which is used for business purposes only, then it will be able to claim full amount as the vehicle is under the small asset threshold. If the motor vehicle cost say $14,000 the business could deduct $6,350 in its first year ($5,000 + 15% x ((100% x $14,000) - $5,000) = $6,350. If this vehicle was purchased before 30th June, the depreciation claimable would amount to $2,100 so the added tax advantage and cash flow benefit is quite significant.
3. Entrepreneurs tax offset (ETO)
This financial year will be the last where businesses with a turnover of less than $75,000 will be able to claim entrepreneurs tax offset. The ETO provided small businesses with a tax offset of up to 25 per cent of their tax liability on their business income. Over 400,000 small businesses claimed this offset in 2008/09. The ETO will cease from 1 July 2012 to make way for higher small asset write off threshold (see above). If you meet the eligibility requirements make sure you fully exploit this offset before it disappears.
4. Superannuation cap to be reduced to $25,000 (regardless of age)
The Government was proposing to reduce the cap that applies to concessional superannuation contributions on 1 July 2012 from $50,000 per annum to $25,000 per annum for people aged 50 or over with more than $500,000 in superannuation. This measure has now been deferred until 1 July 2014. As a result there will be only one concessional contribution cap regardless of age which will play havoc with retirement plans for those over 50.
Concessional contributions include the superannuation guarantee and other employer contributions (such as salary sacrifice), personal contributions claimed as a tax deduction (subject to 10 per cent rule), and other amounts.
If you are likely to be impacted by the concessional cap reduction, you should consider taking full advantage of the current limit of $50,000 prior to 30 June this year. It's a no brainer if you have the cash flow to do it. Even if you have less than $500,000 in superannuation, it's still a good strategy to top up as much as possible as you cannot carry over any unused cap in following years. If you are 50 or over, you are likely to have less than 15 years until you retire. So with the retirement clock ticking, under utilising this year's cap means less money to generate a tax-free income at age 60 and over.
In the federal Budget just handed down, the Government also proposes to introduce a superannuation surcharge for high income earners whose adjusted taxable income exceeds $300,000. Instead of 15 per cent tax rate, a rate of 30 per cent will apply to their concessional contributions. This is another good reason for high income earners to maximise this year's concessional contributions ahead of the proposed super surcharge.
Warning: Be careful not to breach the contribution caps as you will be stung by draconian excess contribution tax. Whilst new rules allow you to get a refund of up to $10,000 of excess contribution for first time offenders who exceed the cap, it's a hassle you can do without.
5. Non concessional contributions
You will need to review your concessional contributions and adjust them where necessary if you are over 50 years of age and contributing over $25,000 in concessional superannuation. Where surplus investible funds become available, it may be worthwhile making additional non-concessional superannuation contributions, which are subject to a different cap ($150,000 or $450,000 - bring forward 3 years worth).
Whilst concessional contributions are the most tax effective way to invest in superannuation, after tax or non-concessional contributions still make sense as they too enjoy tax benefits.
The fund only pays 15 per cent tax on earnings and once you start a pension both earnings and your pension is tax free after age 60, setting yourself up for tax free income forever.