SME Year End Tax Strategies for Australian businesses

It is that time of year again. A time that business owners dislike intensely – the end of the financial year and tax time. It should be a time that business owners embrace; a time to be proactive and a time to save as much tax as possible - why pay more tax than you have to?

There are many tax saving strategies such as deferring income, accelerating deductions, claiming the investment allowance, writing off bad debts, writing off redundant assets and so on. While most business owners are aware of these tax saving measures, it is also important for them to ensure they are complying with the latest taxation legislation to avoid paying tax unnecessarily. Below are three issues that SME owners need to be aware of for the year ended 30 June 2011 and following years.

Excess Superannuation Contributions

Making excess contributions on both concessional and non-concessional could cost a massive 93% so it clearly makes sense to make sure of your own position.

Concessional contributions caps were amended by the Labor government. Concessional contributions caps for the year ended 30 June 2011 allow under 50s to contribute a maximum of $25,000 and over 50s a maximum of $50,000. These caps remain in place for the year ended 20 June 2012

Some trustees have been trying to avoid paying tax on excess contributions by having certain clauses inserted into the superannuation funds trust deed. The ATO has reviewed these arrangements and considers them to be ineffective and believes any excessive contributions will be subject to tax.

Division 7A

Division 7A of the tax act may deem loans and advances to private company shareholders (or their associates) to be an unfranked dividend unless formal loan agreements are in place and repayments are made. This is nothing new and something that should be reviewed by SME owners each year.

On the 28 June 2010, Tax Laws Amendment (2010 Measures No.2) Act received Royal Assent. This bill extended the Division 7A rules so that ‘payment’ (in the context of a payment by a company to a shareholder or associate) includes the use of a company asset by shareholders (or associates) for free or less than their market values. The classic example is a boat or yacht owned by the company and used privately by shareholders at no cost. To avoid Division 7A the shareholders (or associates) must pay market value “rental” costs.

This amendment was applicable for 2009/10 so SME owners need to be prepared and have put appropriate measures in place. Ignorance may be bliss in some cases but ignorance is not an excuse the ATO accepts.

Trust Distributions

Careful attention should be given to trusts especially as a result of the High Courts decision in the Bamford case.

A trust may not have anything to distribute but taxable income may still arise. If this is the case then the trustee may be subject to a 46.5% tax rate on the taxable income. In addition to this the trustee would not benefit from the standard 50% discount on capital gains.

The courts decision in Bamfords case essentially deems that a trust deed determines the income of the trust and what income members are entitled to.

It is imperative for trustees to know what their trust deed states and make sure that distributions are made in accordance with its terms. If the trust deed does not reflect the trustees’ intentions then the trust deed may need to be amended.

Please contact your Accru business adviser should you need any advice on avoiding unnecessary tax or for any year end tax planning matter.