It is now timely to consider your year-end tax position and 2016 provisional tax as the 2015 year draws to an end. While many SMEs are rushed to manage day-to-day operations, these important matters can often be overlooked. Over the next few days we will be releasing some handy tips to assist you in considering the options available to your business. Today we will focus on Income, expenditure and assets.
New Sources of Income
Unusual or one-off receipts of income during the year should be considered. New sources of income may be treated as taxable. It is important to speak with your advisor in relation to any recent changes in tax rules that might impact your taxable income position during the 2015 year.
Timing of Income
Generally, income is returned in the period it is ‘derived’. However it will be important to give consideration to credit notes, disputed sales, rebates and deposits to ensure they are reflected in the correct tax period. The tax treatment of amounts receivable in relation to long term construction contracts which span multiple taxable periods should be considered.
Personal Attribution Rules
Personal attribution rules apply in certain situations as an anti-avoidance measure to prevent individuals diverting income to entities with lower tax rates than their own personal marginal tax rate. If an attribution adjustment is required the net income is deemed to have belonged to the individual.
Bad Debts are deductible in the year that they have been written off. Your debtors summary should be reviewed and bad debts should be physically written off for tax purposes. It is also possible to write off a partial bad debt it if is believed a portion of the debt may be recovered.
Capital vs Revenue Expenditure
The boundary between capital and revenue expenditure is not always clear. Items of capital expenditure cannot be deducted, therefore it is important to give consideration to large or unusual items of expenditure. Issues often arise in regards to expenditure on repairs and maintenance, feasibility expenditure and certain types of legal fees. There are specific rules around the treatment of repairs and maintenance. Expenditure of this nature is generally capitalised if it relates to improving or replacing a significant part of an asset. With regard to legal fees, generally these will be deductible if the total amount spent within the year is equal to or less than $10,000.
Only 50% of an entity's entertainment expenditure (e.g. food, drink, corporate boxes, holiday accommodation etc.) is deductible. A review of where entertainment expenditure is coded in the accounts should be carried out. There are also some exclusions for certain types of entertainment expenditure which will allow a 100% deduction (e.g. entertainment incurred overseas).
R & D and software development costs
Special tax rules apply with regard to claiming deductions for research and development expenditure. Expenditure on software development projects that have been unsuccessful are deductible in the year in which the development was abandoned.
Accruals for holiday pay and bonuses for employees, prepaid expenditure, warranty provisions and other general accruals should be reviewed at year end. Generally, an expense should be deductible if you have “incurred”, (i.e. definitively committed to) the expenditure at year end. It should also be noted that employment expenditure (i.e. leave, salary and bonus accruals) are only tax deductible if they are incurred and paid out in the current year or within 63 days after balance date.
From 1 April 2013, lease inducements and lease surrender payments will be income for the recipient and deductible for the payer. If a person has been a party to any such agreement, the tax treatment should be reviewed.
Review Your Fixed Asset Register
Year-end is a good time to review the assets recognised in your register to ensure they are still used and available for depreciation purposes and that the correct depreciation rates are being applied. Assets purchased during the 2015 income year should have a “correct” depreciation rate assigned to them. Depreciation on these new assets is calculated to include the full month of purchase (not from the day of purchase). If there are assets that are no longer used in the business they may be able to be written off for tax purposes.
Depreciation can be claimed on certain intangible rights to use software, designs, patents and copyrights.
Low Value Assets
A deduction can be claimed for assets costing less than $500 (low value assets). However where several low value assets have been purchased together at the same time from the same supplier and which have the same tax depreciation rate, the low rate threshold will not apply. Instead, these assets will need to be capitalised and depreciated.
Mixed Use Assets
If an entity (including trusts, companies and individuals) owns/leases/licenses land, boats and/or aircraft, which are used partly for business use and partly for private use, they could be subject to the mixed-use asset rules. These rules applied to land from the start of the 2014 income year and to boats and aircraft from the start of the 2015 income year. Under these rules, deductions related to the asset should be apportioned based on how many days the asset was deriving income relative to the total days used. A detailed review of expenditure and use in light of the mixed asset rules might be required.
The above is a list of the common tax issues for SMEs and is by no means an exhaustive list. Businesses that have operations in international markets, or which are subsidiaries of overseas companies will also need to consider international tax issues such as thin capitalisation and transfer pricing.
Keep a look out for tomorrow's blog post on trading stock, imputation credits and tax losses. For assistance with any of the issues listed above please make contact with your Deloitte Private advisor.