Year End Housekeeping: Business
While there is often a rush to deal with year end housekeeping during June, a more strategic and efficient approach is to incorporate these matters into your regular accounting and business processes, which can also produce tax savings.
For businesses, the below areas may be of interest in refining your accounting and business processes.
From a taxation perspective you need to formerly write off bad debts and have the paperwork to support this. Waiting until year end to do this process not only increases work loads at the busiest time of the year, but can also adversely impact your cash flow as previously paid GST can be recovered.
Superannuation should normally be paid within 28 days of the end of the quarter to be deductible. However, this means that you pay tax on your superannuation accrual. Paying the superannuation on the final pay cycle of the year before year end eliminates this issue and does not adversely impact your cashflow.
By aligning your employee contracts, timing of reviews and communication of results, accrued employee bonuses that would otherwise not be deductible until the following year, can be claimed as a deduction in the current year. PAYG withholding obligation in relation to accrued bonuses will not arise until payment.
Expenses that are incurred before year end can reduce your taxable income. As such, correctly calculating your accruals and having the evidence to demonstrate the accuracy may mean the difference between a deduction this year or next year.
Reviewing the fixed assets register and “scrapping” depreciating assets which are no longer being used before year end can reduce your taxable income.
The company tax rate is currently 28.5% for small businesses (turnover less than $2 million) and 30% for all other corporate tax entities. The Federal Budget announced a reduction in the small business tax rate to 27.5% for the 2016-17 income year, with a turnover threshold of $10m.
The turnover threshold will progressively rise until the 27.5% tax rate applies to all corporate tax entities in the 2023-24 income year, at which point the corporate tax rate will gradually be decreased until it reaches 25% for the 2026-27 income year. As a result, businesses should consider timing of income / deductions for tax purposes, and small businesses should consider timing of the $20,000 instant asset write-off for potential tax savings.
Entities affected by the change in tax rate that have deferred tax balances should consider the resultant impact on the carrying values.
In addition to the items above, a number of other areas may be worth examining including depreciation methodologies, payment of withholding taxes, and inventory valuations.
Should you wish to discuss how any of the above may be applicable to your business please contact your relevant ESV engagement partner on 9283 1666.