End of financial year SME checklist: 2
NOW that the countdown to the end of the financial year is only weeks away, SMEs should consider the tax deductions and incentives available and analyse whether they can take advantage of them.
The investment tax break is one such deduction that businesses can claim on their annual tax return. Small businesses with a turnover of less than $2 million may be entitled to a deduction of 50% of the cost of eligible tangible assets (ie. machinery, equipment, some motor vehicles) that were invested in prior to December 31, 2009 and are installed ready for use by December 31, 2010.
All other businesses may be entitled to 30% of the cost of the asset if the investment was committed to prior to June 30, 2009, or a 10% deduction for all other investments.
If the turnover of your business is less than $50,000 in the financial year you may also be eligible for the entrepreneurs' tax offset (ETO). If your aggregated turnover is more than $50,000, the ETO is progressively phased out so that the offset ceases once your turnover reaches $75,000.
This tax offset can only be used to reduce the tax payable and is non-refundable. You may be eligible for the ETO if you have tax payable, and your annual turnover is greater than the deductions that directly relate to that turnover.
It's also worthwhile considering prepaying expenses if you have the spare cash, as in most cases for small businesses (ie. businesses with less than $2 million in turnover) these expenses will also be tax deductible.
You can prepay expenses in the current year, where the expense also relates in part to the next financial year for example insurance premiums, subscriptions and rent.
You should also consider claiming a tax deduction for bad debts. In order to do this you need to make sure the debt is physically written off your debtor's ledger prior to year-end. You also need to be able to provide evidence that you have taken reasonable steps to try and recover the debt prior to writing it off.
Business owners should also take into consideration one of the biggest tax planning opportunities available to them in the form of superannuation contributions. Now is the time to ensure you know your contribution limits and take advantage of potential concessions for your company by topping up contributions where appropriate.
For concessional contributions, which are contributions that you or your employer can claim a tax deduction for, the annual limit is $25,000 if you're under 50, and $50,000 if you're over that age.
Finally make sure you plan for the coming year, by reviewing the actual current financial performance of the business. Having an accurate understanding of the business' position and using that to update your budgets and forecasts for next year is vital.
Being prepared for reporting deadlines and known tax payments, by including them in your budgets, will set a sound foundation for your business in the 2011 financial year.
If you missed part one of our end of financial year SME checklist, click here.
Marc Peskett is a partner of MPR Group a Melbourne based firm providing accounting, tax, business advisory and financial services to fast growing small to medium enterprises.