Tax Minimization Strategies - 2018
Below I have highlighted some information that may be useful in the context of the year end looming.
Tax Minimization Strategies
The idea is to be proactive and to do what is necessary prior to year-end – after 30 June 2018 it is too late.
The idea is to draw up a profit and loss as at current date and then extrapolate the figures to end June 2018 using your expectations for the balance of the year.
Then consider the best strategies – this will depend on things like cashflow, structure, personal circumstances, etc. – below are some ideas.
Employ Your Children
If you have children lazing around at home that are not earning an income, then get them to work in the business and pay for their upkeep.
As long as everything is done by the book and maybe keep a record of the services provided this can be a useful strategy.
They can then pay their board and lodging from this income.
Any other benefits they receive will need to be considered
Personal Super Contributions
One of the changes that take effect in the current tax year is the removal of the so called 10% rule.
Without getting to complicated what it meant was that (in the main) only taxpayers who earned non- employment income such as a business income could contribute to super and claim a tax deduction.
If you were employed, you could (in the main) only do this via salary sacrifice.
This rule has now been removed - this means most people under 75 years old can claim a tax deduction for personal super contributions (including those aged 65 to 74 who meet the work test).
This provides an additional mechanism for employed tax payers to reduce their tax without going the salary sacrifice route.
If your income for the year is below $51,813, then you are entitled to receive co-contributions (up to $500) from the government if you made any after tax contributions to a complying Superfund.
The amount of the government co-contribution you will receive depends on how much you contribute and what your income is.
In short if more than 10% of your income comes from employment or business (as opposed to rental, etc.) and your income for the year is lower than $51 813, then the government will contribute (up to $500) towards your super for every dollar of personal contribution you make.
I do not want to go into too much detail here, and there are some other eligibility requirements but there is calculator here you can use https://www.ato.gov.au/Calculators-and-tools/Super-co-contribution-calculator/
Small Business Asset Write-off.
Remember if you have an ABN or separate business entity classified as a small business then any asset purchased for business purposes costing less than $20 000, can be written off as a tax deduction immediately.
This write of is available until the end of the 2018 tax year and applies to each asset individually.
What many people do not know is that this also applies to assets purchased in prior years that have been pooled.
This means that assets purchased prior to 12 May 2015, (when this law was enacted) may be deducted in one year if they form part of a pool which has a closing value of less than $20 000 by the end of June 2018.
Primary producers can
Immediately deduct the cost of fencing assets and water facilities
Depreciate the cost of fodder storage assets over three years.
Log Book – Travelling Expenses
One of the largest deductions for employees that use their motor vehicle for work is normally the traveling expense deduction – the ATO allows two different methodologies to calculate this.
But without a doubt the methodology that is most favourable to tax payers most of the time is the log book method – yet time and time again a client will come in to complete a tax return and have paid a substantial amount for a nice flashy car and because no logbook was kept, the deduction able to be claimed is severely limited.
Remember you only need to keep a logbook for 12 weeks and then this can be used for up to 5 years.
What has been said above also applies to business owners that use their vehicle for business purposes.
Tax offset for super contributions on behalf of your spouse
If you make contributions to a complying superannuation fund or a retirement savings account (RSA) on behalf of your spouse (married or de facto) with an assessable income of less than $40 000 (including fringe benefits and reportable employer super contributions) or not working, you may be able to claim a tax offset.
Effectively if all conditions are satisfied and you make an after-tax contribution to your spouse’s Superfund you will receive a tax offset of 18% of the contribution, limited to $540.
Immediate deductions for prepaid expenses
If you are classified as a small business, you can claim an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year.
Effectively if you pay any expense now but it relates to the following year then you get the deduction in this year – the prepayment cannot be for a period longer than 12 months.
So, for instance if I pay my rent now for 8 months (starting from 1 April 2018) – no problem I can claim the tax deduction in this year – but if I pay rent for the next 14 months then I cannot claim it this year because it was for a period longer than 12 months.
This deduction can also be claimed for expenses paid relating to rental properties.
Changes to business structures.
The new tax legislation which came into effect from the 1 July 2016 allowing small business owners to change their business structure and defer capital gains and income tax consequences has had the result that many of our clients are now considering or have changed their business structure from 1 July 2016.
This new legislation effectively defers any capital or income tax gains or losses on the transfer of assets that are CGT assets, trading stock, revenue assets, and even depreciating assets when a business changes its business structure.
Immediate deductibility for start-up costs
From 1 July 2015, you can immediately and fully deduct certain expenses associated with starting up a new small business. This applies to the following expenses you may have had when setting up your business:
Professional, legal or accounting advice
Australian government fees and charges.
Defer issuing sales invoices
If cashflow allows than defer issuing sales invoices until after 30 June 2018.
If you have any – write these off prior to year-end – have some sort of supporting documentation supporting the non-recovery of these debts.
If you have stock, write of old and obsolete stock – what has been said above regarding documentation for bad debts also applies here.
Depreciation schedules for investment properties.
You will need one of these to claim certain non-cashflow deductions allowed under the act – normally these are worth the time or cost to create.