With the lead-up to June 30, we being to think about how we can minimise the taxman’s bill, but of more importance in today’s business environment is maintaining cash flow – so the better strategy is to minimise tax and maximise cash flow .
Some of the key tax planning strategies are classic commonsense actions that many of us are often too busy to address – while other tax minimisation strategies are driven by Government decisions, in particular the recent Federal Budget. Paying attention to and taking action on these strategies can make a significant difference in your personal and business taxation liabilities, and ultimately, your net wealth. So the best investment you can make NOW is with your time, to put these effective strategies in place.
Small Business Eligibility – Up to $500,000 tax free capital gain
Small businesses with a turnover of less than $2 million (if possible, make adjustments to fall within the threshold) are eligible for a range of tax benefits including:
Defer asset purchases until after 2012
Federal Budget changes present a valid reason to postpone the purchase of a new business vehicle until the new financial year. Small businesses can claim an accelerated initial deduction of $5,000 for this type of asset.
Further you can instantly write-off other individual assets purchased up to the value of $6,500.
The limitations and conditions aren’t clear yet, so it would be wise to consult with your advisor before making the decision to purchase – and the only downside is that any cash flow benefit isn’t received until 2013-2014.
The upside is that there will be deals on cars between now and June 30, as car dealerships try to encourage spending before the end of this financial year. In addition we have seen a decline in interest rates on motor vehicle finance.
Defer income until after 1 July
A fundamental end-of-year tax strategy for small business is to defer as much income and capital gains as possible until after June 30. Logically this done by invoicing only when work is completed or when the goods/services are provided, which may only be in the next financial year. If your business is on the $2 million turnover borderline, deferring income could also help you qualify for SME concessions.
Also consider postponing the sale of any business assets to push any related tax to the next financial year.
Bringing deductible business expenditure into the current financial year is another classic tax minimisation strategy. Appropriate expenses to incur before June 30 include:
Business Loss Carry-Back – Up to $300,000
The 2012 Federal Budget introduced a scheme that will allow companies (and entities taxed like companies) to carry-back tax losses to offset previous profits so as to provide a refund of tax previously paid.
A one year loss carry-back will apply in 2012-2013, where tax losses incurred in that year can be carried back and offset against tax paid in 2011-2012. For 2013-2014 and later income years, tax losses can be carried back and offset against tax paid up to two years earlier.
Losses of up to $1 million can be carried back for each year, providing a cash benefit of up to a maximum $300,000. The measure will apply to revenue losses only, will be subject to integrity rules and will be limited to a company’s franking account balance.
While this is an encouraging move for business – it does not immediately benefit businesses that have incurred trading losses through the GFC years.
Income Splitting - $18,200 tax free income
With the increase in the personal income tax-free threshold to $18,200 there is now the real opportunity for partners to consider splitting incomes to reduce personal tax liabilities – for example, put the income earning asset, term deposit or shares, in your spouses name, who may be on a lower income and therefore lower tax rate. This strategy can potentially entitle family members to a range of low income earner benefits and concessions as well.
Private Health Insurance – save your 30% rebate – keep your income down
Changes have been made to the Medicare Levy threshold, with the introduction of a tiered levy structure based on income brackets for single and family taxpayers. A similar tiered threshold has been introduced for the Federal Government’s Private Health Insurance Rebate scheme, previously based on a flat 30% of premiums paid for all taxpayers.
A strategy has been proposed that higher income earners pre-pay their annual private health insurance premiums before June 30 – to maintain the 30% rebate – it’s best to check with your health fund before doing so. Through personal research, certain health funds may treat policy pre-payments differently and may not guarantee the 30% rebate throughout the 2012-2013 year.
The new Medicare Levy and Private Health Insurance Rebate thresholds are shown below:
$0 - $84,000
$0 - $168,000
$84,001 - $97,000
$168,001 - $194,000
$97,001 - $130,000
$194,001 - $260,000
Superannuation – maximising contributions – save $15,750
The Federal Budget has given taxpayers over 50 years old added incentive to maximise their superannuation contributions up to the cap of $50,000 before June 30. From 1 July, this halves to a standard $25,000 concessional contributions limit for all taxpayers, regardless of age, which also cuts your possible tax deduction in half.
For those over 50 and currently in the top marginal tax bracket, a $50,000 deduction for a concessional contribution is worth and additional $15,750 in the hand – after the 15% contributions tax.
Superannuation – Avoid Excess Contributions
It is vital to understand the total amount of your superannuation contributions during the current financial year, both concessional ($25,000 or $50,000) and non-concessional ($150,000 or $450,000) type contributions. Concessional contributions comprise salary-sacrificed and compulsory contributions as well as personally-deductible contributions by the self-employed and non-employed investors. Non-concessional contributions are from after-tax earnings.
The tax costs for making excess contributions can be significant. Excess non-concessional contributions are taxed at 46.5% while excess concessional contributions are taxed at 31.5% – plus the standard 15% contributions tax. Find the time before June 30 to work out your super contributions for the year and adjust your remaining contributions if necessary.
Superannuation – Tax Increase for the Wealthy - Save $7,500
From 1 July 2012, the tax paid on concessional super contributions for individuals with income greater than $300,000 will increase from the current 15% rate to the higher rate of 30%. The definition of ‘income' under this measure is expected to include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free government pensions and benefits, less child support. By making a $50,000 contribution this year instead of next year you save $7,500 in taxation.
Many have described the 2012 Budget as the welfare budget, with a raft of taxpayer hand-outs being driven by the introduction of the Mining Resources Tax – and to sweeten the impact of the Carbon Tax.
One such scheme is the SchoolKids Bonus, designed to replace the Education Expense Refund scheme. Eligible families with school children will no longer need to keep receipts for education expenses and lodge claims as part of their income tax returns – rather they’ll automatically receive payments twice a year to help with schooling costs. The SchoolKids Bonus is $820 for each secondary school and $410 for each primary school student.
This and other welfare payments schemes is quite dependent on the Mining Resources Tax delivering the level of tax revenue originally forecast, so let’s hope the mining boom is here for some time to come.
And from the “Weird and Wonderful” category in this year Federal Budget comes the restriction of duty free cigarettes from 250 sticks to 50 sticks. Unbelievably, this measure is estimated to save $600 million over the forward estimates period. Go figure that.back