Taxwise Business News – Jun 2009

As part of the Budget, the Government has announced the extension of the small business tax break (also known as the investment allowance). The tax break was designed to encourage capital investment by Australian businesses.

Despite the Budget extension, time is running out for you to take advantage of the tax break.

It’s important to get advice now about whether you should be taking advantage of this one-off incentive. The main features of the tax break are recapped below.

• Under the Budget announcement, small businesses will now be able to claim a bonus tax deduction of 50 per cent – up from 30 per cent previously – of the cost of eligible assets acquired between 13 December 2008 and 31 December 2009, and installed by 31 December 2010.
• All other businesses will be able to claim a bonus deduction of:
  • 30% on expenditure for eligible assets acquired between 13 December 2008 and 30 June 2009 and installed ready for use before 30 June 2010; and
  • 10% on expenditure for eligible assets acquired between 13 December 2008 and 30 June 2009 or 1 July 2009 and 31 December 2009 and installed ready for use before 31 December 2010.

• There are different eligibility spending thresholds for small businesses (one that has a turnover of $2 million per year or less) and other businesses.
• Small businesses will only need to spend a minimum of $1,000 per eligible asset in order to qualify for this special deduction. Other businesses will be entitled to the same deductions if they spend a minimum of $10,000 per eligible asset.
• Assets eligible for this allowance are new tangible depreciating assets and new expenditure on existing assets used in carrying on your business and for which you can claim a capital allowance deduction.
• This bonus deduction is on top of the usual capital allowance (depreciation) deduction that you can claim for eligible assets.

Before looking at some key tax-time issues for you to consider when preparing your 2009-10 return, it’s important to recap briefly on some important basics for your tax return preparation.

Tax planning is something you should be looking at regularly throughout the year. The reality, however, is that most of us tend only to look at it about now. Whilst there is no magic formula for the ‘best’ tax planning strategies, good planning practice aims to:

• Cover the basics – such as including all your assessable income and maximising all the tax deductions to which you are entitled; and
• Look at opportunities to improve your tax situation – this depends on your particular circumstances but may include things like ensuring any capital gains are offset with any available capital losses or maximising your superannuation contributions for the year.

It goes without saying that this is essential and is where a lot of problems start if not done properly. To get motivated, some people find it helpful to approach record keeping as if your business could be audited by the ATO at any time. Here are some tips to help you:

• Generally you should keep your records for five years.

• You will need records like bank statements, cheque butts, deposit slips, cashbooks, and accounting records (e.g. your general ledger, trial balance, and preliminary profit and loss statement and balance sheet).
• Watch out for some types of expenses that need particular records (e.g. motor vehicle log books, diaries for travel expenses).

One of the more popular strategies to legitimately maximise your deductions is by prepaying some items of your business expenditure before 30 June.

Before you prepay any business expenses, you should be aware that there are some rules that may affect your entitlement to claim a deduction for prepaid business expenses (eg, you may have to apportion your deduction over more than one tax year).

This is a real issue in the current economic climate and one that the ATO always takes a close look at.

If your business has a debt that has already been brought to account as assessable income and you can’t collect that debt, you want to make sure you don’t end up paying tax on income you can’t collect.

The way you do this is to claim a deduction for this debt, where such a debt is ‘bad’ and is written off in your accounts before 30 June.

Has your business received income from more than one activity during the year and one (or more) of these activities made a loss?

This is another area that increases in importance in an economic downturn.

You may be able to reduce your overall taxable income by offsetting this loss (or losses) against profits from your other business activities during this year.

You should be aware that if you carry on business alone or in partnership, there are some special “commerciality tests” that your business will need to satisfy so you can do this.

It’s not hard to make a mistake keeping track of and working out your business GST reporting obligations, payments and refunds.

Here are some common traps to avoid.

• Be careful not to understate the total value of goods and services supplied.
• Make sure you are not overstating your entitlement to input tax credits.
• Make sure you report supplies and purchases in the correct period.
• Classify your supplies correctly – be particularly careful if you think a supply is GST-free.

You’ll need to value your closing stock on hand and work-in-progress at 30 June. Resist the temptation to guess – this is a common mistake that businesses make!

When you value your trading stock, clearly identify which valuation method you use –cost, replacement, market value (or less if the stock is obsolete).

As a general rule, you are required to give your employees their payment summaries (“group certificates” in the old language) on or before 14 July 2009.

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