END OF FINANCIAL YEAR IS ALMOST HERE

Written on the 2nd of June 2010 by Sharon Plant

END OF FINANCIAL YEAR IS ALMOST HERE – TIME TO BE PROACTIVE AND MINIMISE TAX - Article By Sharon Plant

Typically, July through to October is notoriously busy for Accountants offering tax services to individuals; as a result, many businesses do not start to think about getting ready for tax compliance until November or later.

Tax compliance is a legal requirement to lodge your tax return. It is based on historic figures and does nothing to assist you in your goals as a business to make a profit and minimize tax.

At Plant & Associates we offer our clients more than just tax compliance. Clients can bring their accounts in for a pre end of financial year review. During this review we gather an idea of how your business is doing and provide you with advice on how to minimize tax. April to June is the best time for businesses to start reviewing their accounts and getting their affairs in order as it gives the business time before the end of the financial year in which they can implement tax minimization strategies.

Examples of how a Pre End of Financial Year Review can save you tax.

Joe Bloggs runs his business through a company structure and companies currently have a tax rate of 30%. Joe has taken wages of $100,000 from the company for the period July to April. This amount has been treated as wages throughout the year and the PAYG of $26,950 has been remitted on this to the ATO each quarter. The company reports GST on a cash basis.

Example 1. Joe engages Plant & Associates to conduct a review of the accounts in May. It is determined that the company has a tax loss of $21,000. If Joe takes no further wages for the year, the company has no tax to pay as it has not made a profit and Joe will have taxable income of $100,000 on his personal tax return. Joe has the following options:

• Reduce Joe’s salary by $20,000, thus reducing the company tax loss to $1,000. The company still has no tax to pay, the company now only has $19,050 of tax to pay on Joe’s taxable income of $80,000, therefore an adjustment is made to the quarterly BAS reducing the reportable wages to $80,000 for the year and the company receives a refund of the overpaid income tax remittance (Tax saving of $7,900).

Example 2. Assume here that the review determines that the Company will make a profit of $15,000. The company would be looking at a tax bill of $4,500. Joe has the following options:

• Joe can take the profit as wages; however he pays 39.5% tax for the tax bracket he falls into meaning extra tax of $5,925.

• A contribution to Joe’s superannuation fund can be made. This amount is within the super contribution limits, and his super fund pays tax on the contribution of 15% ($2,250) and Joe now has a boost to his retirement savings.

• The company can prepay some of its expenses, eg Interest on loans, bringing forward July expenses to June.

It is important to note that an individuals personal situation needs to be taken into account, eg if they have centrelink or child support commitments they may not desire increased income, alternatively if they are looking at applying for finance in the near future they will not wish to decrease their income.