How businesses can legitimately reduce tax bill
OPINION: Today I begin a series of three articles in which I give business owners the heads-up on planning to legitimately minimize the tax you pay in the 2015 tax year.
Our 2.1 million small businesses are the "engine room" of the Australian economy according to the Coalition government - now anyway.
Funnily enough their attitude changed between 1 January 2014 when they scrubbed Instant Asset Write-off concessions brought in by Wayne Swan's 2012 Budget. and May 12 this year when Treasurer Joe Hockey brought down the 2015-16 Budget.
These are the concessions announced by Hockey. To qualify, your business must have an aggregated turnover of less than $2 million.
Instant asset write-offs for small businesses
From 7.30am on May 12 this year to midnight on June 30, 2016, the following concessions apply:
You can immediately write off the cost up to $20,000 of all plant, equipment, fixtures and fittings including business use motor vehicles.
And, if a piece of plant, equipment, fixtures or fittings including a business use motor vehicle costs more than $20,000, it may be pooled and depreciated by 15% in the first year and 30% per year thereafter.
Note that this applies to each individual purchase, not the aggregate of a number of purchases.
Note also that the concession applies equally whether you pay cash or finance the purchase as long as that is not lease finance.
The announcement has immediate effect and applies equally to companies, partnerships, trusts and sole traders.
It should be obvious that if you are in a position to take advantage of these concessions, you should do so.
But a word of warning: if you have insufficient cash to make the purchases or cash flow to meet future finance commitments, don't do it.
Much of the commentary I have seen seems to suggest that the $20,000 is a tax saving.
It is not that at all: the tax you'll save is somewhere between ZERO and 49% depending on how you are structured and how much net (taxable) profit you look like making.
There is evidence about the traps that high-earning employees are looking to the concession for a tax break.
If you did set up a small business, you'd get absolutely no tax benefit whatsoever from the ploy.
Let's say you get yourself an ABN and spend $19,999 on a second hand vehicle intended for business use and make absolutely no sales between now and 30 June.
Yes, you'd be able to claim the $19,999 in expenses, no worries.
But what will happen is that you will be reporting a commercial loss of $19,999 to the ATO, a loss you cannot apply to your salary and wage income.
That loss is carried over into the 2016 tax year and onwards until you engage in a truly commercial activity at which point it is offset against profits.
There are four definitions of what constitutes a truly commercial activity but the simplest is that the business must generate an assessable income of $20,000 or more.
Once that happens, the owner may apply any losses against their salary and wage income.
Tax reductions for small business
Again there seems to be a bit of misinformation around the traps.
The 1.5% reduction in the corporate rate of tax for small business and 5% offset (up to a maximum of $1000) for individuals as sole traders, partners or trust beneficiaries does not apply until July 1 this year, next tax year!
July 1 is also the start date for immediate write off of professional expenses associated with starting a new business. Currently the expenses are amortised over five years.
Write back of company losses
This concession applies equally to big and small companies and to losses not exceeding $1 million.
If a company makes a loss in 2015 and has paid tax on profits made in the prior two years, the 2015 losses can be written back.
Handled properly, this can mean a refund of tax previously paid.
My expectation is that many companies that supplied services to miners in 2013-2015 will find relief in this concession now that income has reportedly dried up.
Bob Lamont and Corporate Accountants are in Goondoon Street, Gladstone. Bob may be contacted at email@example.com.