Year end tax tips at June 2008

With the end of the financial year rapidly approaching we provide below a list of things you might consider to reduce your tax bill.

Prepay expenses

Prepaying expenses before year end can be a great way of reducing your current tax liability. It can be particularly beneficial if you expect to be on a higher tax bracket this year than next year. Additionally, if payments are due early in the next financial year, payment may get you the tax benefit much earlier.

The rules differ depending on whether the taxpayer is an individual, small business entity (SBE) or other business entity. Broadly, an SBE is a business entity that has turnover of less than $2 million.

Individual taxpayers such as employees and investors can claim a deduction for a prepayment of up to 12 months of expenses. Typically, this includes subscriptions, memberships and interest paid on investment loans.

Business taxpayers who are in the small business entity regime are also entitled to these deductions. Non SBE businesses can claim deductions for prepayments, only if the prepaid amount is less than $1,000.

If prepaying interest, make sure the financial institution is aware of what you are doing. Otherwise they might use the payment to reduce the principal and no deduction will be available.

To be deductible, a prepayment must be incurred. Before making rent, insurance, interest or lease payments etc. for the purpose of claiming a prepayment deduction, check your contracts to ensure they can be made. Advance voluntary payments may not be deductible.

Taking advantage of super

Deductible Contributions

If you are self-employed or do not have employer superannuation support, a very effective way to reduce your tax liability is to make a deductible contribution into your super before 30 June 2008. There are limits and rules associated with these contributions but we would be pleased to advise you on how these affect you.

Generally, contributions up to $50,000 made by an employer are deductible. For over 50’s, $100,000 is the deductible limit. The same limits apply for personal deductible contributions for self employed taxpayers. The total of contributions from employers (both compulsory and salary sacrificed contributions) and deductible member contributions (if applicable) must not exceed the applicable $50,000 or $100,000 limit.

Non-Deductible Contributions

Contributions that are not tax deductible (either to you or your employer), known as non-concessional contributions, have a limit of $150,000 per year. It is possible to bring forward two years’ entitlement and transfer up to $450,000 in one year. Non concessional contributions can be useful in moving your personal wealth to a superannuation fund which has a 15% tax rate, and in building your retirement funds. If you are considering a substantial contribution to superannuation we suggest that you discuss this with us to ensure that the contribution is in line with the current requirements.

Government co-contributions

Consider making an after-tax payment (up to $1,000) into your superannuation and the government will contribute $1.50 for every $1.00 contributed by you if your income is less than $28,980. This co-contribution gradually decreases and ceases once your income reaches $58,980. For example, if your income is $45,000 a contribution of $1,000 by you will be matched by a government co-contribution of $699.

You can contribute as little as $20 to a superannuation fund to take advantage of the co-contribution. Remember, your superannuation contributions are locked away until age 55, so the level of your contributions should be decided after considering your personal cash requirements.

Further details on the government co-contribution

Remitting employee superannuation

If an employer wishes to receive a tax deduction in the current year for superannuation contributions in respect of their employees, the contributions will need to be received into your employees' super funds by 30 June 2008 so make sure you mail the cheques or attend to the remittance in sufficient time.

Salary packaging

The financial year end is an opportune time to review salary packaging. There are still worthwhile advantages to be gained from salary packaging but it is a complex area.

Fringe benefits that are fully taxable and are provided as part of a salary package to employees who pay less than the top marginal tax rate are less tax effective than if they were not packaged and simply paid out of after tax salary. However, certain concessionally taxed benefits (such as an employer-provided car) can be worth packaging, as are exempt fringe benefits (such as a notebook computers used primarily for business, airline lounge memberships, professional association memberships etc.).

Tax free minor benefits

Employers can provide minor and infrequent benefits, valued less than $300, to employees. Why not consider a gift voucher instead of a performance bonus? This is tax free to the employee and is exempt from FBT.

Stock and consumables

Businesses pay tax on the value of stock at the end of the financial year, so now is the time to move any slow moving stock, by sale or disposal, so that it is not counted at the year end stocktake. Similarly any assets which are on the business’s balance sheet that are obsolete should be disposed of by year end. This commonly applies to old computer equipment, printers and similar items which may have been retained, but have no further use in the business.

Consumable items can be purchased before 30 June to enable a deduction in the 2008 financial year. For example photocopier paper and supplies purchased on June 30 will decrease the tax payable on 2008 income, but the same item purchased on July 1 has no impact on tax until one year later. Other items to consider are stationery, cleaning products, repairs & maintenance.

Bad debts

Bad debts should be written off before year end to enable a tax deduction in the 2008 income. The write-off entry must be processed in the ledger by 30 June and we recommend that this also be recorded in the minutes of the business.

Income deferral

Where possible invoices should be deferred until July 1. In many cases income is not recognised until a bill is produced, so this can be an effective way of deferring income, and tax, another year into the future.

Forestry investments

There are still a number of plantation forest investments that attract a 100% deduction. Investments in these products typically take a long time to return any income to the investor, but these can assist with reducing taxable income in a particular year. You should be careful to ensure that the investment makes sense in its own right and look for an ATO product ruling on the investment.

Shares, capital gains and losses

If you have a capital gain that has emerged in the 2008 year, any capital loss in the same year will reduce the tax payable on that gain. It may be wise to look at your non-performing shares to see if any shares should be sold before June 30 so that the capital loss is available to offset the capital gain.

Similarly if you are intending to sell shares which will realise a capital gain, consider deferring the sale to July to defer the tax payment by another year.

Published : 12 June 2008