20 tax tips from the experts

The 2008-09 tax season is almost upon us and entrepreneurs can expect to get some extra scrutiny this year. MIKE PRESTON and JAMES THOMSON ask a panel of tax experts for their best tips and the best action you can take now to minimise your tax bill

By James Thomson and Mike Preston

The 2008-09 tax season is almost upon us and entrepreneurs can expect to get some extra scrutiny this year. SmartCompany has asked a panel of tax experts for their best tips and the best action you can take now to minimise your tax bill

The Federal Government has given the taxman an extra $257 million over the next four years to increase its scrutiny of businesses – it expects to collect an extra $1.98 billion for its efforts. 

All this means you need to have your tax affairs in good order if you want to avoid angering the taxman, and claim as many deductions as possible. To help you, SmartCompany has spoken a panel of tax experts to get their top tips from a business and personal tax point of view.

Every dollar you can save is another dollar to reinvest in your business, or pay for that well-deserved holiday.

Before we start, there are two very important bits of advice that every successful entrepreneur should follow.

PricewaterhouseCoopers partner Paul Brassil says his best tip for entrepreneurs is to spend more time finding the right tax adviser. “Find someone you really like working with, and who has strong technical backup in people and resources. Too often people muddle along with an adviser from the distant past, without recognising that the needs of a growing business include upgrading the level of advice they receive.”

And fellow PwC partner Gregory Will says it is never a good idea to change your business strategy just because you stand to get a tax benefit. “Run your business to maximise the profit you can make, and let the tax experts plan and manage your tax. Not vice-versa.”

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1. You’re an entrepreneur? There’s a tax break just for you!

If you’re an entrepreneur and you’re likely to have turnover this year of less than $75,000, make sure you claim the 25% available under the entrepreneurs’ tax offset (ETO) on the tax payable on your business income.

“This can be a real perk for micro businesses, who will be cash strapped in their initial years as they build a business,” CPA Australia Ssenior tax counsel Mark Morris says. “Moreover, this will not be means tested for the 2008 financial year.”

From 2009 the ETO will be means tested – available only to singles with personal income below $75,000 or household income below $120,000 – so if you’re eligible, don’t delay.

2. Should you really be operating as a company?

Scott McGill, a partner at accounting firm Pitcher Partners, says tax time is a good time to consider your business structure and ask yourself whether using a company to operate your business is still effective. While operating as a company has commercial benefits – many organisations prefer dealing with companies rather than individuals or trusts – it could be cheaper to operate as an individual.

As the 30% individual marginal tax rate (31.5% including Medicare) now applies to income up to $80,000 and the top marginal tax rate of 46.5% does not cut in to above $180,000, the company tax rate of 30% is becoming less attractive.

He gives the example of a mum and dad company that can have an annual net income of less than $160,000 before their salaries will be worse off from a taxation perspective if they retain profits in the company. It is also a marginal benefit for net income up to $360,000, as the average tax rate back to mum and dad on that profit amount in their own names is close to the 30% company tax rate that they are chasing.

3. Defer income where possible

Gino Malacco, partner in Hall Chadwick’s tax division, says that given the changes to tax rates that kick in on 1 July, business clients should try and defer income to next financial year where possible and bring forward deductions.

It is easier for some businesses than others to defer income until the end of the financial year. For example, if you’re a normal trading business that brings to account income on sales, your ability to defer income is limited.

But if you’ve got a small business where tax on income is not assessable until an invoice is raised on a job, you can delay raising the invoice and so delay income to the following year.

4. Clean up those company “loans” that are actually dividends

If you’ve been doing something slightly naughty and taking money out of your company and describing it as a “loan” when it is actually a dividend, then the taxman is going to be on your tail after 1 July. But until then, Malacco says you’ve got a chance to get these “loans” cleaned up.

If you can properly document a cash advance paid out of the company as being a proper loan, and sign off on that with minimum repayment and interest rates as required by tax legislation, then the tax office won’t call it a dividend. But you can only do that up until 30 June, after which the tax office will call these “loans” dividends, upon which the shareholder will pay maximum tax with no imputation benefits.

5. Get those inter-company agreements ship-shape

Peter de Cure, a partner in KPMG’s middle market advisory practice, says it is also time to get your intercompany agreements sorted out before the tax man cracks down. One of the most common forms of intercompany agreements is where back office or administrative functions are shared across a group of related companies, with the expenses for these functions also shared.

Some companies have used these shared functions to effectively shift tax profits and losses around, but now the taxman wants proof that these agreements are legitimate. “The ATO is more and more focused on businesses having their house in order in terms of having the right documentation for agreements,” de Cure says.

6. Review your trust deeds

McGill at Pitcher Partners also warns that the tax office is ramping up its focus on discretionary trusts, which means you need to check that you’ve got things in order.

There are three big things to check. First, make sure you comply with the requirements of your deed in declaring distributions to ensure it is not invalid. Second, ensure your trust is still working as you expect it to – if it has passed its vesting date, it will not work at all. Finally make sure that the person or entity that has the power to replace the trustee (known as the “appointer”) is still the right person.

7. Take advantage of more generous small business CGT concessions

Capital gains tax (CGT) has been made significantly more small-business friendly in recent years, both in terms of the available concessions and who can access them.

Business owners should start thinking now about how to position for their business to take greatest advantage of new CGT rules, according to McGill.

“You may not be currently considering the sale of your business, but it never hurts to look into methods to allow you to access the small business CGT concessions,” he says.

There are a range of CGT concessions available, from which small business is eligible to claim up to 13 separate concessions each year.

Possibly the most important concession deems business assets CGT free where they are sold after being held for 15 years and the business owner is either over 55 and retiring or permanently incapacitated.

Alternatively, according to CPA Australia, where a business asset has been held for less than 15 years, there will be an automatic 50% reduction of any gain if all the relevant conditions are met. Business owners may also qualify for other concessions to reduce the balance of their CGT liability such as the $500,000 retirement exemption.

Previously, most CGT concessions were only available to businesses with net CGT assets that did not exceed $6 million in value or with turnover that was below $2 million. But now, satisfaction of one threshold will make business eligible for the concessions even if they breach the other – so a business with assets worth more than $6 million for example, but with a turnover that is less than $2 million, will qualify.

8. Review bad debts – do it today!

If you are carrying bad debts, Malacco at Hall Chadwick says it’s a good idea to review them. If you decide they are not going to pay, write off any bad debts before 30 June or you will have to wait until next year for the deduction.

9. Make your car a lean, mean, tax deduction machine

There are three different methods of claiming tax deductions for work-related motor vehicle travel – CPA Australia says tax savings can be had by choosing the method that works best for you:

If you are planning to claim a deduction for less than 5000 kilometres of work-related travel, you can claim a deduction for your car expenses on a cents-per-kilometre basis (check the work related car expenses calculator).

If you have kept a log book, odometer readings and receipts, you can claim a deduction for total running expenses.

If you plan to claim for business travel in excess of 5000 kilometres, it may be possible to claim one-third of actual car expenses or 12% of the original value of the vehicle without a logbook.

10. Clear the decks of business costs before 30 June

Wherever possible, business owners should bring forward up-coming expenses so they can be claimed as deductions in this financial year, Grant Thornton tax services director John Ross says.

Ross advises business owners to have a think about the costs that may be on the horizon. Possible costs that could be brought forward include:

• Unpaid workers’ compensation insurance premium instalments.
• Bonuses that can be minuted and confirmed by 30 June.
• Short-term consumables such as office supplies, stationary and chocky bickies.
• Any shareholder loans which require repayment.

11. I can’t get no…. depreciation

The CPA’s Mark Morris says small businesses can obtain significant tax benefits by keeping their depreciation schedules up to date.

“Small businesses can obtain significant benefits by being able to write off any depreciating assets costing less than $1000, and by pooling assets over $1000 and depreciating them at accelerated rates. Businesses can also claim immediate deductions for certain pre-paid expenses,” Morris says.

12. Package that salary

McGill from Pitcher Partners says it’s a good idea to review any salary packaging arrangements and check whether they are still effective. With the increase in the tax brackets, employees who earn more than $180,000 are now the only ones that really fully benefit from packaging items (such as cars and expense payments) subject to fringe benefits tax.

Following the federal budget in May, employees will no longer be able to obtain laptops, briefcases, mobile phones, personal digital assistants and similar items as exempt FBT items each year, unless they are acquired primarily for work-related purposes. It’s a big change, and you might need to seek advice about how to most effectively structure salary packages in the future.

13. Pay your super contributions before 30 June

Here’s a quick one, and one that Peter de Cure from KPMG says many businesses have forgotten: If you don’t physically pay employee superannuation contributions before 30 June, you can’t claim them as deductions. So what are you waiting for?

14. Crystallise some tax loses

Given the poor performance of the sharemarket in the last year, plenty of people will have incurred a loss on their shares. If you’ve got a capital gains tax bill, Jon Dobell, the managing partner, strategic growth markets, at Ernst & Young, says it makes sense to crystallise those losses and offset against capital gains for tax purposes.

But if you are thinking of selling an asset at a nominal loss and then buying it back – purely with the intention of minimising capital gains tax – be aware that the taxman is focusing heavily on these transactions, known as wash sales.

15. If it’s work-related, deduct it

Most people know that you can claim deductions for up to $300 in work-related expenses without having the receipts to prove it, but there are many other juicy deductions available.

CPA Australia suggests looking at the following possible deductions:

• Up to $150 in eligible laundry claims can be deducted without a receipt, even if you’re over the $300 no-receipt threshold.
• Home workers may be able to claim a deduction for heating, cooling, lighting and depreciating your office equipment or professional library, but you need to keep a diary of the hours worked at home for at least four weeks to substantiate the claim.
• Education expenses for study directly related to your field can be claimed as deductions, but not if the study is to help you obtain new qualifications in a different field.

16. Non-work related expenses can be deductible, too

A partial or full deduction can be claimed for a wide variety of non-work related expenses, including:

• Fees paid to a tax agent for the preparation of your tax return.
• Management fees paid to a financial planner, provided the advice relates to income producing assets.
• Bank charges or, in many cases, interest payments on funds borrowed to purchase investment assets.
• Donations to charities or professional association or union membership fees.

17. Depreciate your tools

If an item or piece of equipment helped you earn assessable income other than business income over the past year, chances are you can claim some form of deduction for it.

Eligible items include tools, calculators, briefcases, computer equipment and technical books – the amount that different items can be depreciated for varies, so check CPA Australia or the tax office website for the details.

18. Get your rental deductions right

The explosion in property investment in recent years – there are now 1.5 million Australian taxpayers who own a property – means the taxman is intent on ensuring all rental deductions are above board.

“It is critical that rental property owners have their books in order when they consult their tax agent at the end of the financial year and have up-to-date records and copies of all relevant receipts for the year,” CPA Australia’s Morris says.

Morris advises taxpayers to ensure they only claim deductions for expenses incurred for the period when the property is rented or available for rent and in the year of the tax return.

But while care must be taken to ensure claims are warranted, there are a wide range of costs that be can deducted, including advertising, bank charges, body corporate fees, cleaning, council rates, electricity and gas, gardening, insurance, interest on loans, land tax, lease preparation costs, legal costs, pest control, postage and stationary, property agent fees and commissions, repairs, secretarial and bookkeeping fees, security patrol fees, telephone calls and water rates.

19. Minimise the CGT you pay on investments

When calculating the value of assets for capital gains tax purposes, make sure all relevant costs of acquiring the asset – purchase price, capital improvements, stamp duty, legal costs, advertising expenses and commission fees – are taken into account to ensure the assessment is as low as possible.

There is also a general 50% discount where the asset sold has been owned for more than 12 months.

But, CPA Australia warns, don’t try and push envelope by under-reporting CGT on your tax return – the tax office has recently beefed up its data matching program to include data from all state land title and revenue offices, the Australian Stock Exchange, share registries and managed funds in attempt to catch CGT cheats.

20. Super makes tax sense for the self-employed

Superannuation contributions made by the self-employed to themselves from pre-tax income are fully tax deductible, so if you’ve got a big tax bill coming up it could be a good time to set some money aside for a rainy day.

There are some limitations on the contributions that can be made, according to CPA Australia: You have to be under the age of 75; you cannot earn more than 10% of your income from other employment; except in certain limited circumstances, there is a cap on contributions of $50,000 a year for people under 50 and $100,000 for those over 50.

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