Business owners should, by now, be looking at strategies to legitimately reduce their tax bill for the 2009/10 tax year.

Some tax planning strategy techniques differ depending on whether the business is a “small business entity”. The most common strategies that should be considered prior to 30 June 2010 include:

Small business entity (SBE) tax concessions

The “small business entity” (SBE) tax rules provide access to a range of concessions that businesses can apply without the need to make a formal election in the tax return. A business can choose one or all of the concessions to apply.

In order to be an SBE, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive.

The major tax planning concessions that are available under the SBE rules are:

• The choice to adopt the simplified depreciation rules, whereby an immediate deduction can be claimed for assets costing less than $1,000 GST exclusive. Depreciable assets costing $1,000 or more GST exclusive are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2010 where the asset has an effective life of less than 25 years, regardless of when the asset was acquired during the income year;
• Claiming an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. Subject to cash flow requirements, the most common expenses that an SBE taxpayer should consider prepaying by 30 June 2010 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc;
• The ability to apply the small business capital gains tax concessions without the need to satisfy the $6M net asset value test.

Prepayment of expenses

Certain prepayments are not subject to the above 12 month rule and therefore both SBE and non-SBE taxpayers may be able to claim deductions for expenditure that is: 

• less than $1,000 GST exclusive; or
• incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences; or   

• paid under a contract of service (e.g. prepayments of salary and wages, bonuses and commissions).

Deferring income & capital gains

• Businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay “receipt” of the income until after 30 June 2010.
• Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred, in some circumstances, by delaying the “issuing of invoices” until after 30 June 2010.
• Realising a capital gain after 30 June 2010 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes.

Valuing trading stock

Both SBE and non-SBE taxpayers have the option of valuing trading stock on 30 June 2010 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.

For example, where the market selling price of stock items at year-end is below the actual cost price, the taxpayer can generate a tax deduction by simply valuing the stock at market selling value for tax purposes. 

In situations where stock has become obsolete at year-end (e.g. fashion clothing), the taxpayer may elect to adopt a lower value than actual cost, replacement cost, or market selling value.

Maximising depreciation claims for non-SBE taxpayers

• An immediate deduction can be claimed for assets costing less than $100 GST inclusive (e.g. minor tools).
• A tax deduction can be claimed for depreciable assets that are scrapped or sold for less than their written down value.   
• Assets costing less than $1,000 GST exclusive can be allocated to a “low value pool” and depreciation claimed of 18.75% for 2008 (37.5% thereafter) regardless of when the assets were acquired during the income year.

Claiming deductions for expenses not paid at year end

Both SBE and non-SBE taxpayers are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by 30 June 2010 including:

Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2010, but have not been paid until the new financial year.   

Directors Fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 2010 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2010 year when the amount is actually received.

Staff Bonuses and Commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2010 where it is “definitely committed” to the expense.

Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2010 but not paid until the next income year.

Writing off bad debts

Where a taxpayer accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2009/10, as long as the debt is declared bad by 30 June 2010.

The business will need to show that it has made a genuine attempt to recover the debt by year- end to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a board minute).

Businesses can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.

Concessional superannuation caps

The concessional superannuation caps for the 2009/10 year are as follows:

Person aged below 50 years of age at 30 June 2010:               $25,000
Person aged 50 and over at 30 June 2010:                               $50,000

Note that employer super guarantee contributions are included in these thresholds. Where a concessional contribution is made which exceeds these amounts, the excess is taxed to the fund member’s account at an effective rate of 46.5%.

The above contribution caps apply equally to self-employed taxpayers who can claim a 100% deduction where they satisfy the 10% test. 

Employer and self-employed superannuation contributions need to be made before the 28th day of the month following the month in which the person turns age 75.

In order to obtain a deduction in the 2010 financial year, the contribution must to be received by the superannuation fund by 30 June 2010.

Private company loans to shareholders

Business owners who have borrowed funds from their company must ensure that the appropriate principal and interest repayments are made by 30 June 2010.

Where the loans don’t comply with the strict ATO rules (including having a loan agreement) , the entire amounts may be deemed to be an unfranked dividend paid to the relevant shareholders under Division 7A of the Tax Act and taxed at marginal rates. 

Following changes announced in the 2009 Budget, private use of certain company assets (e.g. boats, cars and investment properties) from 1 July 2009 is now also potentially caught by Division 7A and deemed to be an unfranked dividend unless a market rental fee is paid.  

PAYG installments

PAYG instalment obligations should be reviewed and consideration given to varying the instalment for the June 2010 quarter where the estimate of business income tax payable for the year is less than the instalments raised by the ATO.