With the end of the tax year approaching, it’s time to take action to minimise the tax liability for your retail business. Here are my top tips for end of year tax planning:
Take advantage of the $150,000 asset write off
One of the best tax breaks for small business remains the instant asset write-off and with many businesses offering End of Financial Year promotions, now is the ideal time of year for your businesses to take advantage by acquiring some much needed capital assets to build your business and, at the same time, reduce your taxable profits.
Better still, the tax break has recently been made more generous. Assets costing up to $150,000 can now be written off immediately where acquired from 12 March 2020 onwards (previously $30,000 up to 12 March 2020). In addition, more businesses can make a claim; previously available only for businesses with an aggregate turnover of less than $50 million, that turnover threshold increased to $500 million from 12 March 2020.
The $150,000 instant asset write-off remains in place until 31 December 2020 (it was recently extended from its original end date of 30 June 2020) but from a tax-planning perspective, purchases immediately before the end of the financial year always make the most sense.
Whilst now isn’t the ideal time to make large capital purchases for many retailers, if your business needs to invest in new capital equipment and has the cash flow (or the borrowing capacity) to finance it, now is certainly the time because generous tax breaks like this will probably never recur (the instant asset write-off threshold drops back to $1,000 on 1 January 2021).
Amongst the items you could look at claiming are the following:
- Cash registers and other POS devices
- Delivery vans
- Store fittings and fixtures
- Computers, laptops and tablets
- In store security systems
- Accounting software
If you have invoices set to go out just before the end of the year, it makes sense to defer issuing those invoices until the start of the new tax year. Although the tax rate next year is the same as this year, you will defer the income tax liability by 12 months.
You can get an immediate tax deduction for certain pre-paid business expenses. The basic rule is that a deduction is available for expenses that cover a period of no more than 12 months. That covers expenses such as insurance premiums, telephone and internet services, subscriptions to trade or professional bodies, rent or leasing charges on your retail premises and bookings for seminars, conferences or business trips.
Write off bad debts
No business wants to be in a position where they can’t recover outstanding debts but we have to be realistic and acknowledge that it does happen sometimes, especially during an economic downturn like the current one. The good news is that if your business has to write off a debt, a tax deduction is available for the amount of the debt written-off.
A debt that is unpaid and deemed to be a bad debt is an allowable deduction provided it was included as assessable income in the current or a previous income year.
At this time of the year, it makes sense to go through your debtors list and if there are any debtors on it who you believe can’t or won’t pay, write off those debts by 30 June to claim the deduction this year. The business must keep a written record to document that the debt has been written off.
Employers have to pay superannuation contributions for within 28 days of the end of the quarter. Ensure that all June quarter superannuation contributions are paid by 30 June to accelerate the tax deduction. Note that contributions must be actually paid, cleared in the business bank account and received by the employee’s super fund before 30 June for a tax deduction to be available. Any other outstanding amounts should also be paid before year end.
Get the right trading stock valuation
Trading stock can be valued using different methods for taxation purposes, either at cost, market value or replacement value. The only requirement regarding changing methods is that the closing stock value at the end of one tax year must become the opening trading stock value for the next year. The provisions allow a choice to be made for each individual item of trading stock.
Changing the valuation method at year-end for tax purposes can either bring forward or defer an amount of taxable income so it pays to look closely at the method adopted.
Businesses with an aggregated turnover of less than $10m can also choose not to do a stock-take where the value of their trading stock has not changed, either up or down, by more than $5,000. In that case, include the same stock value at year-end as at the start of the year – that is as if not change had occurred.
Damaged and obsolete stock can be written down or written off entirely and a tax deduction claimed. Given that many retailers will have substantial surplus summer and autumn stock because of COVID-19 (and the bushfires before that) that cannot be sold, now is the time to crystalise that tax deduction
The Golden Rule – Keep Records
Good record keeping is your best friend for efficient business management and will also make life easier if the ATO ask you questions.
Tax law requires that records be kept for five years, and they should include:
- sales receipts
- expense invoices
- credit card statements
- bank statements
- employee records (wages, super, tax declarations, contracts)
- vehicle records
- lists of debtors and creditors
- asset purchases.
Records can be kept on paper or electronically, but should be easily retrieved. In our experience, businesses often stumble when asked by the Tax Office to verify transactions by providing supporting records, with the consequence that even “innocent” businesses can find themselves stung by the tax man where they are unable to provide the requested evidence.
An extra tip, for free. Year-end tax planning has its place but if we’re being honest, if you’re taking important financial decisions in the final few days of the financial year, you’re not really planning; you’re simply reacting to opportunity. So, by way of a new financial year resolution, make a diary note to organise a meeting with your accountant early in the new tax year to do some structured, longer term planning for the year ahead. Assess your business and personal financial goals for the year and understand what you can do to meet those needs. Whether that includes growing your business, improving productivity or planning for an exit, you need time and good advice to put the plans in place that will enable you to meet your goals.