2017 End of Financial Year Checklist

The end of financial year is an important time for business owners as you complete end-of-year activities and begin planning for the new financial year. End of financial year planning is worthwhile and can help your business to be more prepared to take advantage of opportunities in the year ahead. There can also be consequences if you fail to satisfy some end of financial year compliance requirements. Our useful end of financial year business checklist identifies items that require your attention before 30 June 2017.

*New definition for ‘small business’

Since this time last year new legislation has changed the definition for small business. Since 1 July 2016, a small business is a business with an annual turnover of less than $10 million (previously $2 million).

Deferring your income may help you to reduce your taxable income

As the end of the year approaches, you may be able to reduce your taxable income for the current financial year by postponing any work (or receipt of payment for that work) until the new financial year. Doing so will defer the payment of tax on this income by one year.

In addition, for companies that meet the definition of a small business*, deferring your income until after year end may result in the company paying tax on that income at a lower rate.

Prepaying your business expenses may help reduce your outgoings and save on tax

#1 Many suppliers will offer you a discount if you pay them one year in advance. Even if they don’t (offer you a discount), prepaying allows you to lock in the cost and beat any price rises that may occur during the upcoming year.

#2 If you are a small business*, prepaying your expenses can also help you save on tax.

Normally, business expenses are only tax deductible once they have been incurred. This occurs when your business is definitely committed to paying the expense, usually once the service has been completed and you have received the invoice.

Note that you don’t actually have to pay the invoice for the expense to be incurred. This applies even to businesses who account for their transactions on a cash basis. The special prepayment rules for small business* allow you to pay for services before they are incurred and then claim a deduction in full in the year that you make the payment. To qualify for these rules, the services which you are prepaying must be provided over a period of 12 months or less.

Typical expenses that can be prepaid include:

interest on borrowings
advertising
rent
insurance premiums
business travel expenses and
subscriptions.

If you meet the small business* turnover requirement, I suggest that, before June 30 2017, you review the services that your business will require in the coming year. Cash flow permitting, you can then contact the supplier(s) to prepay 12 months of those services.

For companies that meet the definition of a small business*, an added advantage to prepaying expenses prior to June 30 is that you will receive the tax savings for these expenses at the 28.50% rate rather than the 27.50% tax rate that applies from July 1.

Purchase business assets of less than $20,000 and claim the whole amount as a tax deduction

For small businesses*, an immediate write off is available for any asset costing less than $20,000.

If you own a small business*, you should review the assets that you currently own and consider whether any need to be repaired or replaced. You should also consider whether you will need additional assets in order to meet your business objectives for the new financial year.

If you buy new (or repair older) assets before 30 June 2017, you will be able to claim the whole cost as a deduction for 2016-17. Please note that any new or repaired assets would need to be installed and ready for use by 30 June 2017 for you to claim the write off. (You will not qualify for the write-off if you order and pay for new assets before 30 June 2017 but arrange for delivery in the new financial year.)

Write off bad debts to take advantage of a GST refund

If you have exhausted all avenues for collecting unpaid invoices and don’t envisage collecting them at any point in the future, you can write off the outstanding amounts as bad debt.

In chasing up your unpaid invoices, you could consider offering a small discount to the debtor if they pay before 30 June, though bear in mind that this may encourage future bad behaviour from the client.

For businesses registered for GST, remember to include the bad debt in either your June Quarter BAS or Annual GST Return to receive a refund of the GST you previously paid on the amount owed.

Managing your trading stock can help reduce your tax liability

For businesses with trading stock, the lower the value of stock on hand at the end of the financial year, the lower your tax bill will be.

You can use one of three methods for valuing stock on hand for taxation purposes and a different method can be used for each item of stock.

i. Cost value refers to what you paid for the stock, including freight, customs and delivery costs.

ii. Market selling value refers to what you can sell the stock for today under normal business conditions

iii. Replacement value refers to what it would cost to obtain an identical item on the last day of the income year.

Use this 3-step process to revalue your stock at the end of the financial year.

Step 1. On 30 June 2017, conduct a stock take and list all stock at its cost. Then, consider any stock that you are unlikely to sell in the future. This stock has a market selling value of nil, so it can be recorded as having no value.

Step 2. Next, consider stock items purchased at a higher cost than they can be purchased for at year end. This could include imported stock purchased when the Australian dollar was weaker than it is today. These stock items can be valued at the lower replacement value rather than at their cost.

Step 3. Finally, consider stock items that, whilst not being obsolete are out of fashion or slow movers and are going to require a selling price below their cost to be sold. You can benefit from tax savings by valuing these items at their market selling value rather than at their cost.

Businesses with superannuation guarantee (SG) obligations to their employees are obligated to pay contributions of 9.5%

While the legislation allows you to make SG contributions for the quarter ending 30 June 2017 by 28 July 2017, making them by the earlier date of 30 June 2017 will allow you to claim a tax deduction for them in your 2017 income tax return rather than your 2018 income tax return. This means that you will receive the tax savings one year earlier. Also, if you are a company that meets the definition of a small business*, you can benefit from receiving the tax savings at 28.50% rather than 27.50%.

Trustees are obligated to distribute net income before the end of financial year

Trustee resolutions concerning the distribution of the trust’s net income for the year need to be made on or before the 30 June 2017. A trust resolution needs to specify each beneficiary who will receive a share of the net income as well as either the dollar amount or the percentage of the net income that each beneficiary will receive.

If your trustee resolution is not made by 30 June 2017 the distribution could be regarded as ineffective by the ATO and you could be required to pay tax on the taxable income of the trust at the highest marginal tax rate.

Companies with Division 7A loan must make minimum repayments before June 30

If you have Division 7A loan agreements in place you must ensure you have made the necessary minimum repayments for the current financial year by 30 June 2017. Not doing so could cause the outstanding amount of the loan to be assessable to the shareholders as unfranked dividends.

If you have a trust with sub-trust arrangements in place you have obligations

If this is your situation, please ensure that the interest applicable to the sub-trust arrangement is paid to the company by 30 June 2017. Failure to do so could cause the unpaid distributions to become assessable to the shareholders of the company as unfranked dividends.

If you have questions or for further information about your business end of financial year preparations, please contact your accountant at Rosenfeld Kant (gary@roskant.com.au, raul@roskant.com.au, elias@roskant.com.au), or phone (02) 9375 1200.

The information (including taxation) contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Rosenfeld Kant and Rosenfeld Kant Wealth Advisors strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

2017 End of Financial Year Checklist

2017 End of Financial Year Checklist

*New definition for ‘small business’

Since this time last year new legislation has changed the definition for small business. Since 1 July 2016, a small business is a business with an annual turnover of less than $10 million (previously $2 million).

Deferring your income may help you to reduce your taxable income

As the end of the year approaches, you may be able to reduce your taxable income for the current financial year by postponing any work (or receipt of payment for that work) until the new financial year. Doing so will defer the payment of tax on this income by one year.

In addition, for companies that meet the definition of a small business*, deferring your income until after year end may result in the company paying tax on that income at a lower rate.

Prepaying your business expenses may help reduce your outgoings and save on tax

#1 Many suppliers will offer you a discount if you pay them one year in advance. Even if they don’t (offer you a discount), prepaying allows you to lock in the cost and beat any price rises that may occur during the upcoming year.

#2 If you are a small business*, prepaying your expenses can also help you save on tax.

Normally, business expenses are only tax deductible once they have been incurred. This occurs when your business is definitely committed to paying the expense, usually once the service has been completed and you have received the invoice.

Typical expenses that can be prepaid include:

interest on borrowings

advertising

rent

insurance premiums

business travel expenses and

subscriptions.

If you meet the small business* turnover requirement, I suggest that, before June 30 2017, you review the services that your business will require in the coming year. Cash flow permitting, you can then contact the supplier(s) to prepay 12 months of those services.

For companies that meet the definition of a small business*, an added advantage to prepaying expenses prior to June 30 is that you will receive the tax savings for these expenses at the 28.50% rate rather than the 27.50% tax rate that applies from July 1.

Purchase business assets of less than $20,000 and claim the whole amount as a tax deduction

For small businesses*, an immediate write off is available for any asset costing less than $20,000.

If you own a small business*, you should review the assets that you currently own and consider whether any need to be repaired or replaced. You should also consider whether you will need additional assets in order to meet your business objectives for the new financial year.

Write off bad debts to take advantage of a GST refund

If you have exhausted all avenues for collecting unpaid invoices and don’t envisage collecting them at any point in the future, you can write off the outstanding amounts as bad debt.

In chasing up your unpaid invoices, you could consider offering a small discount to the debtor if they pay before 30 June, though bear in mind that this may encourage future bad behaviour from the client.

For businesses registered for GST, remember to include the bad debt in either your June Quarter BAS or Annual GST Return to receive a refund of the GST you previously paid on the amount owed.

Managing your trading stock can help reduce your tax liability

For businesses with trading stock, the lower the value of stock on hand at the end of the financial year, the lower your tax bill will be.

You can use one of three methods for valuing stock on hand for taxation purposes and a different method can be used for each item of stock.

i. Cost value refers to what you paid for the stock, including freight, customs and delivery costs.

ii. Market selling value refers to what you can sell the stock for today under normal business conditions

iii. Replacement value refers to what it would cost to obtain an identical item on the last day of the income year.

Use this 3-step process to revalue your stock at the end of the financial year.

Step 1. On 30 June 2017, conduct a stock take and list all stock at its cost. Then, consider any stock that you are unlikely to sell in the future. This stock has a market selling value of nil, so it can be recorded as having no value.

Step 2. Next, consider stock items purchased at a higher cost than they can be purchased for at year end. This could include imported stock purchased when the Australian dollar was weaker than it is today. These stock items can be valued at the lower replacement value rather than at their cost.

Step 3. Finally, consider stock items that, whilst not being obsolete are out of fashion or slow movers and are going to require a selling price below their cost to be sold. You can benefit from tax savings by valuing these items at their market selling value rather than at their cost.

Businesses with superannuation guarantee (SG) obligations to their employees are obligated to pay contributions of 9.5%

Trustees are obligated to distribute net income before the end of financial year

If your trustee resolution is not made by 30 June 2017 the distribution could be regarded as ineffective by the ATO and you could be required to pay tax on the taxable income of the trust at the highest marginal tax rate.

Companies with Division 7A loan must make minimum repayments before June 30

If you have Division 7A loan agreements in place you must ensure you have made the necessary minimum repayments for the current financial year by 30 June 2017. Not doing so could cause the outstanding amount of the loan to be assessable to the shareholders as unfranked dividends.

If you have a trust with sub-trust arrangements in place you have obligations

If this is your situation, please ensure that the interest applicable to the sub-trust arrangement is paid to the company by 30 June 2017. Failure to do so could cause the unpaid distributions to become assessable to the shareholders of the company as unfranked dividends.

If you have questions or for further information about your business end of financial year preparations, please contact your accountant at Rosenfeld Kant (gary@roskant.com.au, raul@roskant.com.au, elias@roskant.com.au), or phone (02) 9375 1200.