Figure: End of financial year planning sequence for owner-operated businesses
Most end-of-year tax planning fails for the same reason: it happens in July. By then every decision that could have changed the result has already been made or missed. This guide sets out what is still open to you before 30 June, roughly in the order the decisions need to be taken.
Start with an estimate, not a checklist
Nothing below is worth doing until you know the number. A deduction that saves 25% in a company is a different proposition from one that saves 45% in an individual's hands, and spending money to avoid tax is only sensible if you were going to spend it anyway.
Ask your accountant for an estimate of the year's taxable income by late May at the latest. It does not need to be precise. It needs to tell you which bracket you are landing in, whether the company is a base rate entity, and whether any entity in the group is carrying a loss that changes the arithmetic.
Trust distributions: the deadline that is not negotiable
If you operate through a discretionary trust, the trustee must resolve to distribute the year's income by 30 June. Not in September when the accounts are prepared. Not when the return is lodged.
Miss it and the consequences depend on the deed: income may be assessed to the trustee at the top marginal rate, or default to a beneficiary you did not intend. Neither is easy to unwind.
The resolution should identify beneficiaries and amounts or percentages, deal with capital gains and franked distributions separately if you want to stream them, and be signed and dated before the year ends. Where a corporate beneficiary is used, plan how the entitlement will actually be paid or placed on complying Division 7A terms, because an unpaid present entitlement left sitting is exactly what draws attention.
Superannuation: paid, not just accrued
A superannuation contribution is deductible in the year it is received by the fund, not the year you initiate the payment. Clearing houses can take several business days, and a payment made on 29 June may well land in July.
Two things are worth checking. First, that the June quarter's employee superannuation guarantee has cleared if you want the deduction this year. Second, whether your own concessional contribution has room, including any unused cap carried forward from the previous five years where your total super balance allows it.
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Every year we see a contribution initiated on 28 June, received on 2 July, and deducted in the wrong year. Pay superannuation by mid-June and the question does not arise.
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Asset purchases and the write-off threshold
The instant asset write-off lets eligible businesses deduct the full cost of an asset in the year it is first used or installed ready for use, rather than depreciating it. The threshold is per asset, so several qualifying purchases can each be written off.
Two traps recur. The asset must be installed and ready for use by 30 June, not merely ordered or paid for — a machine sitting on a loading dock does not qualify. And the threshold changes frequently, often late in the year, so confirm the current figure before committing to a purchase on the strength of the deduction.
The wider point holds: a $20,000 purchase to save $5,000 of tax is only a good decision if you needed the asset.
Bad debts, obsolete stock and prepayments
Three deductions that have to be actioned rather than claimed.
A bad debt is deductible only if it is written off in the books before 30 June. Deciding in August that last year's debtor was never going to pay does not create a prior-year deduction. Review the aged debtor list in June and write off what is genuinely gone.
Trading stock can be valued at cost, market selling value or replacement value, and you may choose per item. Obsolete or damaged stock written down to a realistic value reduces the year's profit, but the write-down must be supportable.
Prepayments of under twelve months — insurance, rent, subscriptions — are generally immediately deductible for small businesses. Paying a twelve-month premium in June rather than July brings the deduction forward a full year.
Division 7A and loan accounts
If your company has lent you money during the year, that loan must be repaid or placed on a complying loan agreement before the company's lodgement day, or it is treated as an unfranked dividend in your hands.
The minimum yearly repayment on existing complying loans also has to be made by 30 June. Missing it converts what was a manageable arrangement into an immediate assessable amount, and the ATO's discretion to overlook it is narrow.
Check the loan account balance in May. It is the single most common cause of a tax bill nobody was expecting.
The sequence that works
Estimate the position in May. Review the trust position and sign resolutions in early June. Pay superannuation by mid-June. Make purchase, write-off and prepayment decisions in the last fortnight, once you know the number they are moving. Then close the books.
Do it in that order and the year ends with a result you chose. Do it in July and you are simply reporting one.
Tax Visory Team
Chartered Accountants ANZ · Registered Tax Agents. Questions about this article? Book a free consultation.