Tax Planning

It’s my bet bigger businesses will overpay millions in tax this financial year

It’s my bet bigger businesses will overpay millions in tax this financial year

If you’re business turns over between $2M and $10M, make sure you read this!
Why do you need to read this?
From 1 July 2016, businesses turning over between $2M and $10M in sales have now gotten access to the Small Business Tax Concessions that the ATO previously capped for businesses up to $2M in sales.
 
The ATO redefined ‘Small Business’ to include all businesses with a turnover of $10,000,000 or less.
 
Wow! That’s a lot of businesses.
 
So the first tax return or financial statements that this relates to is actually the year from 1 July 2016 to 30 June 2017, or the 2017 Financial Year.
 
Time is of the essence, because your tax returns for the 2017 Financial Year are either complete, in progress or you’re about to start them with your accountant.
 
Now here’s what I predict: many accountants are actually going to COMPLETELY MISS these concessions for their clients.
 
The reason why?
Because in my experience at previous accounting firms, and based on what we see from new clients every day at inspire, the majority of accountants just ‘roll forward’ last year’s reports, put the clients’ new numbers in, and hit print.
 
Not much thought goes into stopping and thinking “OK, what can we do here to save the client tax?”...
 
So my bet is hundreds of thousands of dollars (if not millions) are going to be overpaid this year in tax by businesses in the $2M - $10M sales band.
 
What concessions are now available?
Lower company tax rate of 27.5%
Now the first one is actually pretty cool.
 
If you're business is structured as a company and turning over between $2 million and $10 million, your tax rate drops from 30% to 27.5%!
 
There's something your accountant needs to declare on the tax return to claim this, so make sure you pay the lower tax rate.
 
So that's a tax saving of 2.5%. And if your profit is $250,000 in a year, that little concession just saved you $6,250.
 
So that small business company tax rate is a great thing.
 
(Note: this unfortunately doesn’t drop the rate for ‘bucket companies’ or ‘corporate beneficiaries’.)
 
$20,000 Instant Asset Write Off
Now, as a small business you also become eligible for the $20,000 instant asset write off.
 
So previously this was only eligible to the under $2 million businesses where if you buy an asset, like a laptop or a car for $20,000 or less (excluding GST), then you can claim 100% of the depreciation in the year that you purchased it.
 
That's pretty cool if you ask me.
 
So previously, the maximum you could claim for a car worth $20,000+GST was $5,000 in deduction in the year you buy it - or a tax saving of $1,500 if you were a company.
 
Now that means the full $20,000 deduction in the year you buy it, or a $5,500 tax saving!
 
Small Business Accelerated Depreciation
Now, also on the depreciation front, you now get access to the small business general pool.
 
Normally ‘big’ businesses have to write an asset off over what's called their effective life.
 
A car gets written off at over eight years.
 
Other equipment might be 10 or 20 years.
 
It totally depends on what you buy - here’s a list of the effective lives from the ATO.
 
But the small business general pool says that ALL of your depreciating assets, like cars, office equipment, manufacturing equipment and that sort of thing get written off if they are under $20,000 - we mentioned this above.
 
But if they're over $20,000 then you write off 15% in the first year and then 30% of that value every year after that.
 
If your business has assets from the previous financial year, being written off under the OLD rules, you can now move these assets into the ‘General Pool’, and write them off at 30% per year.
 
Let’s say you have $200,000 in massive equipment previously being written off over 20 years - that’s a tax saving of $11,000 if you’re a company if you switch to the new rules!
 
So that's pretty powerful and may be quite a considerable increase in the amount of depreciation you can claim.
 
Prepaid Expenses
Small businesses are also eligible to deduct prepaid expenses.
 
So this would have been very helpful if you knew this in June 2017, but you can actually prepay up to 12 months of expenses as a small business and claim it all in that financial year that you pay it.
 
Some great ideas here are prepaying:
  • Rent on your premises
  • Memberships
  • Interest on certain loans
  • Software subscriptions (most will give you a discount for paying annually)
  • Accounting fees (had to say it)
If you prepay just $10,000 worth of expenses, as a company you’ll save $2,750 in tax.
 
So if you didn't do that last financial year, please keep it in mind for the financial year coming up, a great tax planning tip.
 
So that sums up the big concessions that you’re now eligible for.
 
Please reach out to us as usual through a Test Drive if you have any more questions with these concessions!
 
What do you do if you turn over more than $10M?
Well great news: the annual revenue or sales limit for access to these concessions is being lifted from $10M to $25M in the 2018 financial year (1 July 2017 to 30
June 2018).
 
So make sure you remember this for next tax return season!