When you’re running a business, tax has to be top of mind, most of the time.
Your compliance obligations take different forms depending on the nature and structure of your business, but tax is a constant.
Tax ‘planning’ right at the end of the tax year isn’t tax planning, it’s an afterthought – and it isn’t necessarily in the best long-term interests of your business.
Certainly, there are actions you can take as the end of the financial year approaches (see our expert tips box below), but these should form part of your overall tax planning, and should not be used as a last minute exercise.
Although tax is a huge and complex topic, that doesn’t mean you can’t have a handle on the most important concepts, even if you leave the details to your accountant or tax adviser.
Tax planning is, in the words of the Australian Taxation Office (ATO), “when you organise your tax affairs to give you the greatest tax advantage”, and is both legal and acceptable when you do it “within the letter and the spirit of the law”.
It may sound simple, but it’s not.
While you might be able to manage your day-to- day tax obligations, it’s always best to get professional advice for tax planning or strategy.
Peter Knight of Knight Partners, specialising in financial and strategic management advice, says the best approach is to “take a holistic approach to tax planning. Look at all areas of your income and expenses, including capital gains tax.
For instance, you may have made a capital gain on a particular transaction and be subject to tax on that.
But if you look at your overall position, you may have other assets which have an unrealised capital loss.
You might think of disposing of those assets and thereby crystallise that loss, which can then be offset against the gain, and your overall tax position is reduced.
Obviously you need to consider your overall asset strategy, but you can see the point this example highlights.”
Strategies such as timing your realisation of capital gains or losses are legitimate.
What you have to steer clear of is tax avoidance, or ‘aggressive’ tax planning, which involves organising your tax affairs in a way that does not comply with ‘both the letter and the spirit of the law’.
The ATO has its bases covered with that phrase because, in theory, you could be complying with the actual wording of a statute, but still be guilty of tax avoidance.
If in doubt, get advice.
Be extremely wary of any enticing tax schemes, no matter the source.
It may be a cliché, but if it sounds too good to be true, it probably is.
In the line of fire: ATO targets
In last year’s Federal Budget, the government pledged additional funding to the ATO, specifically so that it (the ATO) can focus on GST compliance over the next four years.
You may already have noticed that the ATO has upped its correspondence, with reminders about lodgement of your BAS arriving via both mail and SMS.
Some of the areas that the ATO is currently targeting include:
- Timely lodgement of activity statements – If you lodge late, you will be fined, and you’ll also receive more correspondence and reminders for future statements.
- Outstanding obligations – Businesses who are behind on their payments will find more stringent requirements in place, and repeated defaults may lead to prosecution. Keep GST and PAYG amounts in a separate account as they accrue, and don’t be tempted to use them if you hit cash flow difficulties.
- GST refund claims – The ATO is cracking down on refund claims, and will be substantiating records for claims it believes to be incorrectly reported or false.
- GST avoidance – Businesses that avoid registering for GST, or register in false names in order to avoid obligations are also a target.
- Dodgy debt – The ATO will be keeping a close eye on ageing GST debts and those who use debt to avoid tax obligations.
The ATO uses sophisticated benchmark data for analysing compliance and reporting issues – if your business falls outside the benchmark for your industry, you may be audited.
There can be viable reasons for being outside the benchmark, but you should be aware of the benchmarks for your industry. (You can find them on the ATO Website at www.ato.gov.au under ‘Small business benchmarks’.)
The take-home message is clear: keep your books in order, submit your BAS on time, pay your GST obligations and don’t be creative with your refund claims or general record-keeping.
The ATO has significantly increased its audit activity, so don’t think it won’t happen to you (later in 2011, My Business will explain what to do if you do get audited).
Gimme a break: small business concessions
It’s not all audit and prosecution.
Although it may sometimes feel like it, the ATO isn’t trying to make life difficult for the business owner.
In fact, it recognises small business as an important contributor to the economy, and offers a number of concessions designed to encourage entrepreneurship, innovation and investment in business.
To be eligible for these concessions, your business has to have an aggregated turnover of less than $2 million.
Concessions aren’t automatic, and you need to check that your business is eligible for each of the options listed here:
- Entrepreneurs’ tax offset (ETO) – If your business’s aggregated turnover is less than $75,000, you may be able to use the ETO to reduce your tax payable by up to 25 per cent.
- Small business tax break – You can claim a tax deduction of 50 per cent of the cost of eligible new assets costing $1,000 or more.
- CGT 15-year asset exemption – If your business has owned an asset for 15 years or more, and you are 55+ and retiring, you won’t be liable for capital gains tax when you sell the asset.
- CGT ‘active asset’ reduction – If you’re selling an asset that you owned to conduct your business (an ‘active asset’), you will only be liable for tax on 50 per cent of the capital gain.
- CGT retirement exemption – When you sell a business asset (lifetime limit of $500,000) you may be able to pay the proceeds of the sale into a complying super fund or retirement savings account, without paying CGT.
- CGT roll-over – If you sell a small business asset and buy a replacement, you can roll over your CGT liability, to the value of the replacement asset. This means you won’t pay any CGT owing until you sell the replacement asset; • Depreciation – Generally, you can pool your assets to make depreciation calculations easier and also claim an immediate deduction for most assets costing less than $1,000 each.
- Prepaid expenses – Immediate deduction for certain prepaid business expenses.
Super, SMSFs and tax
If you’re one of the many business owners who have a self-managed super fund (SMSF), it’s important to make sure that your fund is compliant.
From a tax perspective, the most important issue is to avoid exceeding the contributions caps.
Unfortunately, calculating contributions can be complicated (particularly with spouse splitting, identifying whether amounts are concessional or non-concessional, etc).
It’s very important to keep clear records of all contributions.
While super is an excellent, tax effective way to build wealth, having excess contributions taxed at the maximum marginal rate is not.
Don’t forget also that all super guarantee contributions must be made by June 30 to be deductible for that financial year.