Top Tax Tips for ‘Tony’s Tradies’

The Shaker
Wed 27 May

The tax year end is rapidly approaching and the government has set its sights on giving a boost to small business, unveiling a raft of tax measures in the recent Budget to boost the 97% of Australian businesses who qualify as ‘small’.

The tax cut

The Treasurer announced that from 1 July 2015, all incorporated small businesses will see their tax rate fall from the current 30% to 28.5%.

Better still, those small businesses which aren’t operated through a company (about 70% of the total) will also get a tax cut. If you are a sole trader, or operate through a partnership, a trust, or indeed any other non-corporate vehicle, you’ll get a 5% discount on the tax payable on your profits from the business, up to a maximum of $1,000 per individual. The discount will be given in the form of a tax offset through your year-end tax return.

The changing tax rate at 1 July opens up a few planning opportunities that you really should be taking advantage of:

Deferring taxable income

If you’re in a position to defer taxable income (by invoicing late or delaying completion of a job for instance) until the start of the new tax year, this revenue will be taxed next year at the lower rates coming into force from 1 July.

Accelerate deductions

If you are able to pay additional bills before the end of the current tax year, or even prepay some of next year’s costs, you can lock in a deduction at the current, higher rates of tax.

The $20,000 asset write-off

Retailers are reporting a boom in enquiries and surveys indicate that the Treasurer’s message to go out and ‘have a go’ has resonated with many taxpayers, who are rushing to take advantage of the new instant deduction for assets acquired up to a value of $20,000.

But with those same surveys indicating that more people intend to take-up the tax break than are eligible to receive it, a note of caution needs to be sounded. With no legislation available yet to set out exactly how the tax break will work and only limited guidance from the ATO, the watchwords for the current situation is very much ‘buyer-beware’. To minimise your chances of having the ATO challenge the deduction, here are some key tips to be aware of:

1 Only small businesses qualify. This might seem obvious but you actually have to be in business to be a small business. All those saloon bar experts advising that you just need to go out and get an ABN to claim the tax break are wrong. At the very least, the ATO will expect to see evidence of real business activities and they will no doubt be looking very closely at post-Budget night applications for ABN’s, particularly where registration is then matched with subsequent asset purchases!

2 Make the most of the tax break and purchase this tax year. Unlike the small business tax cut, which doesn’t come into force until 1 July, the $20k asset write –off is available immediately and will apply until 30 June 2017. So, if you plan to make use of the tax break, the best time to do it is before 30 June 2015 when you will able to claim the write-off at the current, higher rates of business tax. From 1 July 2015, small business tax rates are coming down (see above) so the relief won’t be worth quite as much.

3 Understand what the tax break is. And also what it isn’t. For example, it isn’t a cash hand-out. If you go out and buy an asset for, say, $10,000 the ATO won’t give you $10,000 in cash to reimburse you. They’ll allow you to deduct $10,000 from your profits for the year which – assuming a tax rate of 30% - means that your overall tax liability will fall by $3,000. This is important because you shouldn’t allow the tax tail to wag the commercial dog. The tax break is great if you already plan to purchase assets but it would be unwise to rush out to buy things you don’t genuinely need because – following on from the example above – you’ll still be out of pocket by $7,000 on your $10,000 purchase. Note also that even under pre-Budget night rules, such assets could still be written off. The difference is that under the old rules, the deduction was spread over a number of years whereas now the whole deduction is available immediately. So, the real benefit of the tax break is to your cash flow. What you gain in the year of purchase will gradually be clawed back through reduced deductions in future years.

4 The amount you can claim is GST exclusive. This is relevant if your business is registered for GST and can claim an input tax credit on the purchase. The amount you can claim is the GST exclusive price. That means that if a retailer is quoting GST inclusive prices, you can purchase assets up to $22,000 in price ($20,000 excl GST).

5 The asset must be installed and ready for use. This is particularly important if you intend to purchase an asset before the end of the tax year and you might have to wait for it to be delivered or installed. It isn’t enough that the asset is purchased, it must be installed and ready for use in the business before the deduction can be claimed. So, if you are looking to hurry through a claim by 30 June, make sure you have the asset in use by then.

6 Second-hand assets. Yes, you can claim a deduction for second hand assets. That could be particularly useful for motor vehicles. That new ute you’ve had your eye on might not qualify because it’s over $20,000 but if you can pick up a second-hand one for less than $20,000, you can still get the benefit.

7 Beware private use. To claim the full deduction, the asset has to be used in the business. If there’s an element of personal use, you can still claim the deduction but it needs to be pro-rated to reflect the element of personal use. So, if you spend $10,000 on an asset which is used 50% privately, you can only claim a deduction for $5,000.

8 What about trade-ins? Several commentators have suggested you could get the benefit of the $20k write-off on assets priced well above that by trading-in a currently held asset, particularly in the context of motor vehicles. For example, say you want to purchase a $30k vehicle and you trade-in your current vehicle for $12k. The difference is $18k which is less than the write-off threshold. So, you can claim the deduction, right? Wrong. The trade in on the old vehicle is regarded under tax law as being part of the consideration paid for the new vehicle. So, as far as the taxman is concerned, the price you’ve paid for the new vehicle is $30k. That’s above the $20k threshold so the instant asset write-off is not available and the whole $30k will have to be written off over the estimated life of the vehicle.

9 Splitting invoices? Another favourite of the saloon-bar tax expert. Want to buy a $30k item of plant? Just get the supplier to issue two invoices for $15k and claim the deduction on both! Again, this just won’t work. Quite apart from the fact that most suppliers will baulk at such an arrangement, the ATO will be keeping a close look-out for transactions like this and you can expect to have your claim disallowed if you try it. They’ll charge penalties and interest too.

And finally….

Moving away from the Budget, here a few year-end tips that hold good every year. Write-off bad debts If you operate on an accruals basis, check your debtors ledger. If there are debts in there that will never be recovered, your business can claim a deduction in 2014-15 provided the debt is declared bad by 30 June 2015. Make sure the business has made genuine efforts to recover the debt by the end of the year and make sure you keep written documentation to demonstrate those efforts (perhaps in the form of a Board Minute). It’s also possible to claim back the GST paid on debts written off as bad or (even if not written off as bad) where the debt has been outstanding for at least 12 months.

PAYG Income Tax Instalment Payments

Review your PAYG income tax instalment obligations and consider varying the instalment for the June 2015 quarter if it looks like the estimate of business income tax payable for the year is less than the instalments raised by the ATO.

Claim an immediate deduction for prepaid expenses

For expenses covering a period of 12 months or less ending within the next income year, cash-flow permitting, consider prepaying those expenses before the end of the tax year to claim an immediate deduction.

Examples of the kind of costs which could be prepaid by 30 June 2015 are lease payments, interest, rent, insurance, subscriptions and business travel costs.