The end of a financial year is a period when planners rush to help their clients with tax strategies, but as Janine Mace reports, it is important they focus on their own business as well.
In the rush to talk to clients about year-end tax strategies, it is easy to forget that this is also an important time of year for your own business.
As Peter Bembrick, a tax partner at HLB Mann Judd, notes: “Often practitioners don’t think of their practice as a business.”
This means normal year-end activities such as reviewing accounts, writing off bad debts and fixed assets, and bringing forward expenses such as training, repairs or maintenance if profits look good, are often overlooked.
But this can be a mistake, according to Andrew Graham, national head of business solutions for accounting firm RSM Bird Cameron, as simple strategies like these are important when there is pressure on margins and the bottom-line.
“While business owners should have strategies in place all year round to reduce tax liabilities, 30 June presents some additional opportunities and is a critical deadline for minimising tax for the financial year,” he notes.
Strategy Steps director Louise Biti agrees year-end is important not just for clients, but for the practice itself. “You need to remember that if something applies to your business clients, it will apply to the practice as well, as you are running your own business.”
There are also important administrative tasks to finalise.
This includes ensuring shareholder loans are set up properly or repaid by the end of the financial year. “Otherwise the business owners could end up with a deemed dividend and some unexpected tax,” explains Graham.
The same goes for distributions from trusts. A trustee resolution to distribute the trust’s 2012/13 income needs to be executed and signed before 30 June.
Otherwise the trustee will be assessed on the trust’s income at the highest marginal tax rate plus Medicare levy. “This decision should be recorded and signed off before the end of the financial year,” Graham notes.
Budgeting for the new year is also a key year-end task, with practice budgets, salaries and financial arrangements to be addressed.
The rise in the Superannuation Guarantee (SG) from 9 per cent to 9.25 per cent from 1 July 2013 needs to be considered, according to Gemma Dale, MLC’s head of technical services.
“The increase is important and advisers need to factor it in for their employees and to plan for it in terms of salaries.”
With the ATO tightening up on superannuation administration, practices also need to ensure they are including contribution details on pay slips.
Although administrative tasks can be tedious, not doing them can be worse.
“The compliance side is important, as it can be costly if you get it wrong and it can be very time-consuming to substantiate claims,” Bembrick says.
“Problems with tax can be a distraction from your practice if they are not done right, as you need to spend time on them and you are not servicing clients or undertaking business development. Getting the fundamentals right is important.”
Given all the changes occurring in the advice industry, it can be worth reviewing the structuring of the practice.
“You need to recheck whether the existing structure is still appropriate for the current situation. For sole practitioners, it may be worth considering whether another structure would be better,” Bembrick notes.
Structures incorporating a family trust, particularly where the owners may be exiting in the next few years, offer significant benefits.
“If you have a company operating the small business but a family trust as the shareholder, then franked dividends can be paid to the family trust. The profits come through the company to the family trust,” Bembrick notes.
However, there are stamp duty implications and CGT considerations.
“If you are re-structuring, one of the best CGT concessions comes if you have owned the asset for 15 years and then it is tax-free, so you need to be mindful of the impact in undertaking a re-structure,” Biti warns.
Payments from the business are also important.
“The pattern of distribution this year can be part of the determination in whether you qualify for CGT concessions at sale, so it is important to proactively think about exiting,” Biti says.
A common mistake for many practices is not to take full advantage of all the tax benefits on offer.
“Small business concessions are important to check and you need to ensure you are taking advantage of all of these,” Bembrick says.
By way of example, he cites the immediate write-off of assets costing less than $6,500, introduced on 1 July 2012. This applies to the purchase of both new and second-hand assets used in a business and is applicable to businesses with an annual turnover of less than $2 million.
“Even if they are not significant tax benefits, the new rules make compliance easier, so it is important to keep them in mind,” Bembrick says.
Another change announced in the May 2012 Budget was the Government’s intention to provide tax relief for companies by allowing them to carry-back tax losses so they receive a refund against tax previously paid.
“The loss carry-back rules will be legislated soon, so if people make profits this year but losses the next year, they can carry it back and offset it,” Bembrick explains.
An important area for practices to review is their fringe benefits tax (FBT) liabilities, as the ATO has announced this is an ongoing focus area for audit attention, particularly in relation to motor vehicles.
The implications of the phased-in changes to the rules relating to motor vehicles from the statutory formula to a flat 20 per cent rate also need to be reviewed.
These changes are making packaging less attractive and the decision is “increasingly marginal”, Bembrick notes. “There are very few concessions now for tax planning, with less benefits from the statutory formula all the time.”
For people with limited business use of a leased car, it is less attractive to package a vehicle, he says. “Often now you can’t see a lot of benefit from packaging of FBT benefits as the increased administration makes it not worth it.”
Practices also need to ensure their FBT paperwork is up to date and catches all the relevant information. “You need to look at whether you need to lodge for FBT and have all the paperwork you need,” Biti says.
Bembrick agrees: “You need to be aware of FBT in areas like entertainment for clients – and staff – and you need to ensure the accounting is done. There is a need for proper record-keeping, as it allows you to make choices about the approach and to keep costs to a minimum.”
The paperwork for other taxes also needs to be up to date.
“For worker’s compensation tax, you need to make sure all the obligations are taken care of and you also need to ensure you are paying payroll tax on everything the practice should be,” Bembrick explains.
“We are seeing increasingly active interest in many States in relation to payroll compliance. It is an easily overlooked area and often a business may not be doing it correctly, even if it is complying.”
For practices which have increased their staff numbers, Bembrick says it can be easy to go over the threshold without realising it.