As we approach the end of the financial year it is an important period for tax planning, with consideration given to income and deductions to ensure that you do not pay more tax than necessary.
The continued reduction in the company tax rate, together with the small business entity concessions provide opportunities to save tax prior to 30 June 2018.
Company tax rate reduction
From 1 July 2017, eligibility for the 27.5% tax rate has been extended to include companies with a turnover between $10m and $25m. However, these companies will not be eligible for any other small business tax concessions listed above.
It should be noted that in order to be eligible for the 27.5% tax rate, a company must receive at least 20% or more of its income from a business, rather than interest, rent or other passive investments. Companies which do not meet this requirement will be taxed at the normal company tax rate of 30% on all income.
From 1 July 2018, companies with a turnover of between $25m and $50m will become eligible for the 27.5% tax rate.
Increase in small business entity threshold
The income threshold at which a business will be deemed to be a small business entity was increased from $2m to $10m from 1 July 2016.
The eligibility threshold for these concessions has not increased as the eligibility for the 27.5% tax rate increased.
Businesses which a turnover between $2m and $10m, who previously were not eligible for the small business tax concessions should consider the benefits of these concessions and ensure that they are correctly applied.
These concessions include an immediate deduction for certain prepayments, simplified trading stock rules, and simplified depreciation rules, including the immediate write off of assets costing less than $20,000 (see below).
However the small business CGT concessions are still only available to entities with either a turnover of less than $2m or net assets of less than $6m.
Immediate write-off of low cost assets
Currently, small businesses are entitled to claim an immediate write-off for depreciable assets costing less than $20,000 (less than $22,000 GST inclusive if registered for GST). This threshold was originally scheduled to reduce to $1,000 ($1,100 GST inclusive if registered for GST) from 1 July 2018. However, in the May 2018 Federal Budget the Treasurer announced that the $20,000 threshold will be extended to 30 June 2019.
Small businesses should still review their planned purchases of plant and equipment, and consider bringing the purchase of any items costing less than $20,000 forward where possible in order to claim the deduction in the year ended 30 June 2018.
Any assets costing more than the immediate write-off threshold must be added to the general small business depreciation pool and depreciated at 15% in the year of purchase and 30% in subsequent years.
Whilst the ability to claim a deduction for prepaid expenses has not changed, consideration should still be given to whether it is possible to prepay expenses prior to 30 June 2018 in order to claim a deduction in the current year.
Those eligible to claim a deduction for prepayments include small business entities (turnover up to $10m, as discussed above), and individuals who are not in business.
In order to be deductible a prepayment must be made prior to 30 June and must only be for a maximum of 12 months (ie. prepaid to 30 June 2019). Examples of expenses which could be prepaid include; rent, interest, and professional membership fees.
Whilst employers have 28 days after the end of the quarter in order to pay their superannuation guarantee contributions, it should be noted that superannuation contributions are only tax deductible in the year in which they are paid.
If an employer pays their superannuation guarantee contributions for the quarter ended 30 June 2018 on 2 July 2018, they will have met their superannuation guarantee requirements, but will not be able to claim a tax deduction for these contributions in the 2018 tax return. Rather, this deduction will be claimed in the year ended 30 June 2019. To maximise the tax deduction in the year ended 30 June 2018, all superannuation contributions should be made prior to 30 June 2018.
Individuals should also consider their own personal situation, as they may also be able to claim a tax deduction for personal superannuation contributions made prior to 30 June 2018. These contributions are referred to as “concessional contributions”.
The maximum concessional contributions which an individual is able to make is limited to $25,000 per annum, which includes any employer contributions made on the individual’s behalf. Before making any personal contributions, the individual should contact their employer to determine the contributions which have been made on their behalf, or will be made prior to 30 June.
From 1 July 2017, the requirement that an individual have less than 10% of their income from employment in order to claim a deduction for personal superannuation contributions has been removed, allowing all individuals to claim a deduction regardless of their employment status.
Businesses should review their debtors prior to 30 June 2018 to determine if there are any debts which will not be paid. These debts should be written off prior to 30 June 2018.
In order to claim a tax deduction, bad debts must actually be written off. It is not sufficient to make a provision for doubtful debts in the business financial statements.