Year End Tax Planning Strategies For Business Owners

Year end tax planning is the use of legitimate strategies to accelerate deductions and to defer the recognition of income. Where the business owner has elected to adopt the “Simplified Tax System” (STS), there are a different set of rules applying to some of these strategies.

The most common tax planning strategies that business owners should consider prior to 30 June 2007 include:

Simplified Tax System

The Simplified Tax System (STS) is designed to minimise the compliance burden on small businesses by applying either “cash” or “accrual” accounting rules for income and deductions as well as simpler rules in recording trading stock and depreciation.

For the 2006/07 year, a small business with a three year average turnover of $1M or less GST exclusive and depreciating assets (other than land & buildings) with a written down value of less than $3M can elect to use the STS. From 1 July 2007, the turnover test increases to $2M GST exclusive and the $3M depreciable asset limit will be removed altogether.

Businesses entering the STS this financial year have a choice to record income on either a “cash” or “non-cash” basis depending on which method is the most appropriate to their particular circumstances. These businesses can also claim a deduction for certain expenses that have been “incurred” but not paid by 30 June 2007 (see below) even though they are required to account for income on a cash basis. This provides business owners with a further incentive to enter the STS this financial year.

Small businesses that entered the STS prior to 1 July 2005 year can choose to opt out of the cash accounting rules from the 2007 year (this does not involve leaving the STS). If an STS small business chooses to opt out they can never re-apply the cash accounting rules. There are 2 possible outcomes from opting out:

• The business will continue to record income on a cash basis (because it is the most appropriate method) and will now be able to claim deductions on an incurred basis; or
• The business will commence to record income on an accruals basis (because it is the most appropriate method) and will now be able to claim deductions on an incurred basis.

Deferring Income

• STS and non STS small businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay “receipt” of the income until after 30 June 2007.
• STS and non STS small businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the “issuing of invoices” until after 30 June 2007.
• Realising a capital gain after 30 June 2007 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes.

Maximising Depreciation Claims

• Non STS small businesses can claim an immediate deduction for assets costing less than $100 GST inclusive (e.g. minor tools). An STS small business can claim an immediate deduction for assets costing less than $1,000 GST exclusive.
• Non STS small businesses can scrap or sell depreciable assets for less than their written down value to realise a tax deduction loss. This does not apply to STS small businesses as they are subject to pooling arrangements for assets costing $1,000 or more GST exclusive.
• Where an STS small business purchases assets costing $1,000 or more GST exclusive, they are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2007 regardless of when the assets were acquired during the income year.
• Non STS small businesses can allocate assets costing less than $1,000 GST exclusive to a “low value pool” and claim depreciation of 18.75% for 2007 (37.5% thereafter) regardless of when the assets were acquired during the income year.