Reducing your tax exposure, maximising the opportunities available to you, and reducing your risk of an audit by the regulators is in your best interests. With the end of the financial year fast approaching, this update will help you do exactly that:
· In brief - A summary of key changes and actions.
· What’s new - An explanation of key changes that may affect your business.
· Financial house-keeping - Essential pre 30 June actions.
· Reduce your risks and minimise your tax - Our tips to reduce your tax liability and risks.
There are a number of tax changes that apply to sole traders from 1 July 2017. We briefly explain these below …
| Date | Changes and actions |
| 1 July 2016 – retrospective changes |
· Small business entity threshold changes from $2m to $10m – the SBE concessions provide a series of concessions for small business operators including sole traders. · Unincorporated small business tax offset increase to 8% (from 5%). · Aggregated turnover threshold to access the unincorporated small business tax offset increased to $5 million (up from $2 million). |
| Pre 30 June 2017 |
· Pay superannuation to deduct contributions in the current financial year. · Complete a stocktake where required (see Do you need to do a stocktake?). · Write off bad debts and scrap any obsolete stock or plant and equipment. · Ensure any inter-entity management fees have been raised. |
| 1 July 2017 |
· GST applies to digital products & services imported by consumers. · The requirement that an individual must earn less than 10% of their income from employment activities to be able to claim a deduction for personal superannuation contributions ends. · The threshold at which high-income earners pay Division 293 tax on their concessionally taxed superannuation contributions reduces to $250,000 (from $300,000). |
| 14 July 2017 (on or before) | · PAYG Payment Summaries provided to any staff. |
| 28 July 2017 | · Quarterly super guarantee payment due (1 April – 30 June). |
| 14 August 2017 | · Annual PAYG Payment Summary lodged with the ATO. Penalties apply for late lodgement. |
| 28 August 2017 | · Taxable payments annual report for the building & construction industry due. |
| 30 June 2018 | · $20k instant asset write-off ends (reduces back to $1,000). |
| 1 July 2018 | · Taxable payments annual reporting extended to cleaning and courier businesses. |
Avoid ATO scamsOver the last 12 months there has been a significant influx of scams that purport to be from the ATO or another regulatory body. The easiest way to avoid being caught in a scam is to register for my.gov.au. This way, you never have to click on an email or respond to a phone call as you can simply go online and check if there is anything you need to know. |
From the current financial year (2016-17), the unincorporated small business tax offset will increase to 8% (up from 5%). And, the tax offset will apply to more businesses with the aggregated turnover threshold to access the offset increased to $5 million (up from $2 million). However, the maximum tax offset per year is still capped at $1,000.
The threshold to access the small business entity concessions has increased to $10m from 2016-17 enabling more businesses to access these concessions. The concessions provide access to:
· Immediate deductibility for small business start-up expenses - New small businesses can immediately deduct a range of professional expenses required to start up a business – such as professional, legal and accounting advice as well as amounts paid to Government agencies to set up their business entity.
· Simpler depreciation rules - Choose to pool assets and claim one deduction for each pool. Plus, access to the $20k accelerated deductions (see $20k accelerated deductions for small business extended another year below).
· Simplified trading stock rules - You can choose not to conduct a stocktake if there is a difference of less than $5,000 between the opening value of trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year.
· Roll-over for restructures of small businesses – The ability to change your business’s legal structure without triggering CGT or income tax implications on transferring depreciating assets or trading stock.
· Immediate deductions for certain prepaid business expenses - choose to claim an immediate deduction for prepaid expenses where the payment is for a period of service which is 12 months or less and ends in the next income year.
· Accounting for GST on a cash basis – You can choose to account for GST on a cash basis (i.e. when you receive payment for a sale made). Your business can also claim GST credits when you actually pay for a purchase.
· Annual apportionment of input tax credits for acquisitions and importations that are partly creditable - Account for the private portion of business purchases annually rather than on each activity statement. Full GST credits can be claimed for a business purchase and an adjustment made for the private portion of the purchase in a later activity statement.
· Paying GST by quarterly instalments - You can choose to pay a GST instalment amount worked out by the ATO that can vary each quarter. Annual GST returns are lodged for this method.
· FBT car parking exemption - An exemption from FBT on certain car parking benefits provided to employees.
The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended until 30 June 2018.
From 1 July 2018, the immediate deduction threshold will reduce back to $1,000.
There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases.
If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.
Second hand goods are also deductible. However, there are a number of assets that don’t qualify for the instant asset write-off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.
If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.
From 1 July 2018, courier and cleaning businesses will need to lodge additional reports to the Australian Taxation Office about payments made to contractors (individual payments and total for the year). While this is a year away, if your business is affected by the change, think about what systems you will need to track and measure these payments and collect the required information from contractors.
From 1 July 2017, certain supplies of digital products and services to Australian consumers by overseas suppliers will be subject to GST in Australia, even if the supplier does not have a physical presence in Australia. The rules are not intended to apply in situations where the Australian customer is registered for GST and the acquisition relates to their business activities.
The new rules use a vendor registration model. That is, businesses based overseas and selling into Australia will need to register and comply voluntarily with Australian tax law.
These rules apply to supplies of music, games, apps, movies and books as well as certain professional services. Contracts, supply agreements, licensing agreements and royalty arrangements for digital products may all be affected.
From 1 July 2017, the ability to claim a tax deduction for superannuation contributions has been broadened.
Currently, to claim a tax deduction for your super contributions you need to earn less than 10% of your income from salary or wages etc. From 1 July 2017, the 10% rule will be abolished.
This change will be useful for contractors who hold their insurance through super as they will be able to claim a personal tax deduction for these insurance premium contributions. The caveat here is that these contributions must remain within the reduced $25,000 concessional contributions cap.
Claims for work related travel expenses are a major area of focus for the ATO. The larger the claim the more likely it is that the ATO will take a closer look. If you claim travel expenses, it’s important to ensure that you fully understand what’s required.
Every year, the Commissioner publishes the reasonable rates for travel expenses when travelling overnight in the course of employment activities – accommodation, food and drink, and incidental expenses. However, these rates are only applicable if you receive a genuine travel allowance from an employer for that travel and are not applicable to sole traders who are not employed by another entity. This means that you would need to keep appropriate records of all travel expenses that you want to claim as a deduction.
In order for accommodation and meals to qualify as a travel expense, you need to travel away from your home. The ATO takes that to mean that you’re sleeping away from home - not just travelling for the day.
Before rolling over your accounting software for the new financial year, make sure you:
· Prepare your financial year-end accounts. This way, any problems can be rectified and you have a ‘clean slate’ for the 2017-18 year. Once rolled over, the software cannot be amended.
· Do not perform a Payroll Year End function until you are sure that your payment summaries are correct and printed. Always perform a payroll back-up before you roll over the year.
You need to provide all of your staff with their PAYG Payment Summary on or before 14 July 2017. This includes any staff that left your employment during the 2016-17 financial year.
If we prepare your Payment Summaries for you, please provide us with the data file from your accounting software.
The ATO imposes penalties for the late lodgement of PAYG Payment Summary Statements.
The annual PAYG Payment Summary Statement for the year ending 30 June 2017 needs to be lodged with the ATO on or before 14 August 2017. However, if we are preparing your Payment Summary for you and you only employ family members in your business (closely held employees), you may be eligible for an extension.
Where you have provided fringe benefits to your employees in excess of $2,000, you need to report the FBT grossed-up amount on their PAYG Payment Summary. This is referred to as a `Reportable Fringe Benefit’ (RFB) amount and a label is included on the PAYG Payment Summary for this purpose.
Businesses that buy and sell stock generally need to do a stocktake at the end of each financial year as the increase or decrease in the value of stock is included when calculating the taxable income of your business.
If your business has an aggregated turnover below $10 million you can use the simplified trading stock rules. Under these rules, you can choose not to conduct a stocktake for tax purposes if the difference in value between the opening value of your trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year is less than $5,000. You will need to record how you determined the value of trading stock on hand.
If you do need to complete a stocktake, you can choose one of three methods to value trading stock:
· Cost price - all costs connected with the stock including freight, customs duty, and if manufacturing, labour and materials, plus a portion of fixed and variable factory overheads, etc.
· Market selling value - the current value of the stock you sell in the normal course of business (but not at a reduced value when you are forced to sell it).
· Replacement value - the price of a substantially similar replacement item in a normal market on the last day of the income year.
A different basis can be chosen for each class of stock or for individual items within a particular class of stock. This provides an opportunity to minimise the trading stock adjustment at year-end. There is no need to use the same method every year; you can choose the most tax effective option each year. The most obvious example is where the stock can be valued below its purchase price because of market conditions or damage that has occurred to the stock. This should give rise to a deduction even though the loss has not yet been incurred.
To be a bad debt, you need to have brought the income to account as assessable income, and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a resolution confirming the write-off is a good idea.
Check to see if obsolete plant and equipment is sitting on your depreciation schedule. Rather than depreciating a small amount each year, if the plant has become obsolete, scrap it and write it off before 30 June. Small business entities can choose to pool their assets and claim one deduction for each pool. This means you only have to do one calculation for the pool rather than for each asset.
To claim a deduction for the 2016-17 financial year, consider paying for any required repairs, replenishing consumable supplies, trade gifts or donations before 30 June.
Pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is due on 28 July 2017. However, some employers choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months.
Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Your personal contributions need to be received by the fund before 30 June to be deductible.
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes. It may be possible to contribute assets with unrealised losses to superannuation in order to do this.
Also remember that the 2% debt levy is expected to be removed from 1 July 2017. Delaying the sale of an asset until the new financial year could mean that you avoid having to pay the extra 2% tax. Remember that in many cases the taxing event is triggered when a contract is entered into rather than when settlement occurs.
Where management fees are charged between related entities, make sure that the charges have been raised by 30 June. Where management charges are made, make sure they are commercially reasonable and documentation is in place to support the transactions. If any transactions are undertaken with international related parties then the transfer pricing rules need to be considered and the ATO’s documentation expectations will be much greater. This is an area under increased scrutiny.