Tax planning


Tax planning

Flor- Hanly - Monday, June 11, 2018

Have you got your tax planning in order?

The 30th of June is rapidly approaching! The ATO acknowledges that you have the right to arrange your financial affairs to keep your tax to a minimum. We call it “tax planning” and it is typically done just before the end of the financial year.

What is tax planning?

There are two “types” of tax planning.

Ideally you should have a long-term “year-in-year-out” strategy. This involves having your business and financial affairs structured correctly to achieve an acceptable overall average rate of tax and should take into account your long-term goals and cash flow needs. 

Paying tax is a major “cash outflow” and tax is paid with after-tax dollars. Paying too much tax can severely cripple a business, possibly destroying it. On the other hand, chasing tax deductions by spending money just to reduce tax can also destroy your cash flow and your future viability. Everyone has heard that “cash is King” and it is!

With 30 June approaching, you should now be preparing estimates of actual taxable incomes to see whether or not everything is on track per your long-term strategy and adjusting accordingly to get the best possible outcome for this financial year ie “end of year tax planning”.

End of financial year tax planning

The remainder of this article is focused on what you can do between now and the 30th June to optimise your taxation position for this financial year.

1. Instant asset write-off. Plant and equipment purchased costing less than $20,000 (net of GST) can be instantly written off for tax purposes in the year purchased. This provision was to end on 30 June this year, however on Budget night it was announced this concession would continue for another twelve months;

2. General SBE Pool write-off if less than $20,000. If you are a small business entity (turnover of less than $10 million) the balance of your general depreciation pool can be written off in the year it reduces to less than $20,000;

3. Fencing. New fencing is entitled to an immediate write-off;

4. Water Facilities. New water facilities are entitled to an immediate write-off. Be careful when purchasing second-hand water facilities;

5. Fodder Storage Facilities. Fodder storage facilities are written off over three consecutive financial years ie “a third, third, third” regardless of what time of year they are acquired. Be aware that the ATO has made it very clear on what a “hay shed” is vs a “machinery shed”!

6. Farm Management Deposits. Primary producers can make deposits into Farm Management Deposits and not pay any tax on the deposits until withdrawn. Farm Management Deposits are limited to $800,000 per person at any one time and can only be made if your non-primary production income is less than $100,000 in the year you make the deposit. When making Farm Management Deposits consider whether or not you are likely to have lower income years in the future to cash them in tax effectively. FMDs are a very effective risk management tool. 

However, they are not for everyone. Beware of cashing them in without doing careful tax planning, particularly if you operate through a trust. If you are planning to cash some in before 30 June be aware that you may now need to give your bank 30 days notice and time is running out to do this this year.

7. Profit from the forced sale of livestock. Livestock producers have the ability to defer profit from the forced sale of livestock because of the loss of pastures by reason of fire, flood or drought;

8. Double wool clips. Tax relief is available in relation to the proceeds of the sale of two wool clips arising in an income year because of an early shearing caused by drought, fire or flood;

9. Converting Primary Production income into Non-Primary Production income. Be careful when paying family members wages as you are effectively converting primary production income into non primary production income and may upset their ability to utilise Farm Management Deposits and other specific provisions for primary producers;

10. Superannuation. Consider what you can contribute into superannuation and whether it is an appropriate strategy for you. Individuals can have up to $25,000 contributed into superannuation tax effectively. Such contributions are taxed at 15% inside the superannuation fund;

11. Trading Stock. Consider if there are any opportunities on what value you use for closing stock this year;

12. Trust distribution minutes. By law, trust distribution minutes must be prepared and signed before 30th June. Detailed estimates and careful planning are essential. Remember to check your trust deed to make sure you know who can be beneficiaries;

13. Distributing from trusts to “bucket companies”. The company tax rate has been reduced from 30% to 27.5% for most small businesses. Advice should be sort as to whether or not this is appropriate to your situation;

14. Prepaying of expenses. I don’t believe in giving your money to someone before you have to! There is also a very real risk that the supplier may go broke before you collect what you have paid for so be careful. Having said that, sometimes prepaying of upcoming expenses can be a worthwhile strategy;

15. Prepaying Interest. As above!

16. Financing equipment – lease verses chattel mortgages. With the turnover test for small businesses being increased to $10 million, depreciation rates are very generous. As such, leasing may not be as tax effective as it may have previously been. Lease payments can, however, be prepaid up for up to twelve months which may be a suitable strategy;

17. Income splitting. Based on your taxation structures, consider what income splitting opportunities may be available;

The above list is by no means exhaustive. It is very important to gain professional advice to determine appropriate strategies for your operation. Tony Olsen is a Director of Flor-Hanly, Commercial and Agribusiness Accountants. Tony can be contacted on 4963 4800.

Information provided in this column is of a general nature. It does not take into account your personal financial circumstances. Tailored professional advice should be sought before acting on any of the information contained.

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