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 Temporary Full Expensing
The vast majority of Australian businesses can benefit from Temporary Full Expensing, which enables businesses to deduct the full cost of eligible capital assets from their profit for the year, rather than depreciating the cost over several years. The tax break applies to assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023.
Unlike the old instant asset write-off, which was capped at $150,000 per asset, there is no limit on the cost of assets that can be deducted.
To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. “Aggregated” turnover means that the turnover of any parent company (including overseas parents) and subsidiaries need to be included.
In addition, businesses whose Australian income is less than $5 billion can also claim the tax break provided they have previously spent more than $100 million in the period 2016-17 through to 2018-19. This means that big international organisations (whose global turnover exceeds $5 billion) can potentially still benefit.
“Full expensing” applies to new depreciable assets and the cost of improvements to existing eligible assets.
Are second-hand assets eligible?
It depends. For small- and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets. For businesses with an annual turnover of $50 million or more, second-hand assets are excluded
What assets could a business potentially claim?
Businesses can now immediately deduct the full cost of all purchases of items such as:
- Fixtures and fittings (such as shop fit-outs)
- Technology, such as laptops, computers, EFTPOS systems and security equipment
- Motor vehicles such as utes, delivery vans and most cars (for cars costing over $59,136, the claim is capped at $59,136)
Which assets are excluded?
The following assets are not eligible for full expensing:
- “Expensive’ cars (meaning the cost of cars over the $59,136 threshold)
- Buildings and other assets that are eligible for capital works deductions
- Assets located overseas
Is it compulsory to claim full expensing?
Some business owners have rightly pointed out that claiming an immediate deduction for purchases of capital assets is not necessarily in the best interests of their business. If a business is already running at a loss (or the deduction for capital assets will cause a loss), the business may struggle to make use of that loss. Whilst companies can potentially now carry a loss back to generate a refund of tax paid in earlier years, businesses operating through other structures (such as sole traders or trusts) must carry losses forward, so there is potentially very little benefit in generating large loss-making depreciation deductions in the current year. Sole traders, for instance, could find themselves losing access to the tax-free threshold, meaning that the depreciation deductions are basically wasted.
For businesses with a turnover of $10 million or more, the government has announced that “full expensing” will be – in effect – voluntary. Such businesses can opt-out, on an asset by asset basis, of full expensing and apply the normal depreciation rules to those assets.
Businesses with a turnover of less than $10 million are not able to opt out. Such businesses must use full expensing, even if it does not produce the best tax outcome for the business. This lack of flexibility is the most significant downside of the new scheme, particularly for the small business sector that makes up the bulk of the Australian economy
What about existing depreciation pools?
Small businesses (with aggregated annual turnover of less than $10 million) must deduct the entire balance of their simplified depreciation pool at the end of the income year while full expensing applies.
Again, whilst this could be very valuable tax incentive for many small businesses, it won’t be so for all such businesses.
Whilst this measure is undeniably generous, it does suffer from the same problem as the old instant asset write-off; to benefit, businesses need either the cash or borrowing capacity to invest in new capital assets in order to benefit from the tax break.
Other tips for small business
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 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 actually be 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
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 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.
What happens if I make a mistake in my tax return?
It is essential that you take great care in putting together the information and supporting documentation when filing your tax return, and only claim deductions that are genuine to avoid penalties and possibly even prosecution from the ATO. But we all make innocent mistakes sometimes and if you realise you’ve submitted any incorrect or unsubstantiated claims then you should contact your accountant immediately and they will assist you in making the necessary tax return amendments.
Still have some questions about lodging your tax return? Talk to H&R Block. Our experienced tax consultants will be able to help. Call 13 23 25 for details or find your nearest office and book an appointment online.
Mark Chapman is director of tax communications at H&R Block.