The beginning of a new financial year is a good time to undertake a ‘financial health check-up’ to help ensure the business is in the best possible position for the next 12 months.
This kind of check-up can help identify what has changed in the business’s financial situation over the last year, and what its current needs are, as well as revealing any opportunities that are perhaps being missed, or areas that have been neglected or over-looked.
It can also help work out what action can be taken to reduce tax liabilities well in advance. Business owners and managers should also ensure they are up-to-date on any tax or legislative changes that may affect them, and take them into account in their business planning.
Some key areas to review include:
Businesses with a turnover of $2 million or less qualify for the small business entity rules and as a result can access a number of tax concessions. One of the most useful is the rules around asset depreciation.
Assets that cost over $1,000 can be depreciated at 15 per cent for the year in which they were purchased, and then 30 per cent for each year afterwards (for assets with an effective life of less than 25 years), so it’s a good idea to maintain a list of all assets and the date they were purchased, to help ensure the full depreciation is claimed at the right time.
On top of the normal depreciation, there are still some extra tax deductions available under the investment allowance first announced in December 2008. A small business that ordered a depreciable asset costing over $1,000 before 31 December 2009, and first holds the asset ready for use at any time before 31 December 2010, can claim a deduction equal to 50 per cent of the cost of the asset. The deduction is claimed in the year in which the asset is first held ready for use in the business.
Business owners who have borrowed money from a private company must keep detailed records of the loan and ensure minimum payments are made during the course of the year.
If the loan doesn’t meet ATO’s guidelines, the amount of the loan will be accessable in full as a deemed dividend, and tax payable by shareholders, treating the amount of the loan as taxable income for the business owner. Therefore, it’s worth checking early to ensure the loan is allowable to avoid an unexpected tax bill at the end of the financial year.
In addition, legislation has recently been passed that extends the deemed dividend rules to any company assets used by shareholders and family members, including real estate, cars and boats. As a result, it may become necessary to start paying rent for any personal use of such assets, and the rules apply retrospectively from 1 July 2009. The deemed dividend rules are a key focus area for the Tax Office, so business owners and managers should review these to ensure they are aware of any action that needs to be taken during the year.
Finally, check to ensure that the structure in operation for the business is still effective, bearing in mind the tax rate changes, capital gains tax discount and the small business CGT concessions. It can be costly and time-consuming to change the structure, but in the long run it may be a worthwhile exercise.
Peter Bembrick is a tax partner with accountants and business and financial advisers HLB Mann Judd Sydney