Income is assessable when derived. The timing of derivation will depend on whether the business applies the cash or accrual basis. Under the cash basis, income is generally derived when it is received, whereas under the accruals basis, income is generally derived when a recoverable debt is created and the taxpayer is not obliged to take any further steps before becoming entitled to the payment.
In any event, tax planning should consider the timing of deriving income.
- Ensure that any income received in advance is identified as such may not be assessable until the services are provided. For this principle to apply, the accounting records must classify the unearned income separately from the income already earned.
- Taxpayers who provide professional services may consider rendering invoices after 30 June. Work in progress of these businesses is not included in assessable income.
- Consider the timing of asset disposals before or after 30 June in terms of applicable tax rates, realised capital gains and losses and the availability of any capital gains tax concessions, such as the 50 per cent discount, small business Capital Gains Tax (CGT) concessions or rollover relief.
However, be mindful of the Australian Taxation Office’s (ATO) negative view of ‘wash sales’ where an asset is sold and then reacquired in order to realise a capital loss.
Tax Planning: Expenses
Expenses are deductible when the expense has been incurred. This is generally defined as when there is definite commitment to the expense even if no actual payment has occurred. However, small business entities that continue to utilise the cash accounting rules under the former simplified tax system can only deduct an outgoing when it is paid.
Therefore, tax planning should consider the timing of expenses being incurred.
- Debtor ledgers should be reviewed prior to 30 June with amounts considered bad written off. Only debts that are bad and written off at 30 June can be claimed. A provision for doubtful debts is not deductible. However, ‘writing-off’ does include a board authorisation and financial controller recommendation of the bad debt prior to 30 June even if the physical writing-off occurs later. It should be noted that before the debt can be considered bad, appropriate steps must have been taken to try to collect the debt. These steps may include contacting the debtor, issuing reminder notices or taking more formal action. A deduction can also be available for the partial write-off of a bad debt.
- A deduction may be available for obsolete stock. Stock should be reviewed and obsolete items written-off or reduced in value where appropriate. Relevant considerations include the stock being out of use, out of date, unfashionable or outmoded.
- Ensure that all incurred expenses, including trade creditors, are processed reflecting the appropriate timing. Further, planned deductible expenditure could be brought forward and incurred in the current financial year.
- Bonuses may also be deductible if they are incurred by 30 June. For this to be the case the employer must definitely be committed to the bonus. The bonus cannot be subject to any later discretion or review. Further, the amount must be determined or be able to be calculated by 30 June, even if the actual calculation happens at a later date.
- Cashflow permitting, consider prepaying expenditure where an immediate income tax deduction is available. Such expenditure includes salary or wages and expenditure, which is less than $1,000. Further, small business entities may claim a deduction for expenditure that satisfies the 12 month prepayment rule (the relevant service period does not exceed 12 months and ends in the next financial year).
- Superannuation Guarantee Levy amounts should be paid by 30 June, only contributions received by the relevant superannuation fund by 30 June are tax deductible in that year. The accrual of an incurred superannuation guarantee liability is not sufficient to qualify for a deduction.
- Review asset registers to identify any low cost assets eligible for immediate write-off, opportunities to pool assets achieving accelerated depreciation and assets no longer held, which should be written-off.
With the Carbon Tax and the Mining Tax legislation both receiving Royal Assent, small businesses should remember the changes to the small business depreciation rules. In particular:
- increasing the small business immediate asset write-off threshold from the existing $1,000 to $6,500, effective 1 July 2012; and
- allowing small businesses to claim an upfront deduction of $5,000 for motor vehicles purchased from 1 July 2012, with the balance of the cost pooled for depreciation purposes.
These measures will provide small businesses with tax deduction timing benefits where possible. Where small businesses have the flexibility to manage their depreciable asset purchases and requirements, consideration should be given to the timing of these purchases in light of these effectively accelerated depreciation write-offs.
It is recommended that taxpayers discuss tax planning opportunities with their accountant or other appropriate adviser.