June 12, 2012
Accounting & Taxation, Financial Strategy, Improve Cashflow
We are fast approaching the end of the financial year and if you haven’t already, now is the time to be doing some last minute planning. Often we hear people say “it’ll be right” or “I haven’t got any spare cash in my bank account so I can’t have made a profit”. But once non-deductible outflows such as personal expenses, principal repayments off loans, capital purchases and the like are taken into account, people often find that they have in fact made a profit.
Until you’ve prepared your interim figures you may not know what level of profit you’ve made or what level of tax you will be paying. In some instances we have saved some people in excess of $50,000 in tax in one year alone, just by preparing interim figures and putting in place tax planning strategies – that’s already 50,000 great reasons to get your interim figures done. And people say accounting is boring!
Once your interim figures have been prepared, estimates for the balance of the year should be done so that that full-year profits estimate can be done. From there it’s a matter of estimating your likely tax position. Depending on the results, you will have three options; The first is that you do nothing. The second is that you actually look to increase the profit. The third is that you look to reduce the profit.
For those who are comfortable with the profit level and the tax liability on that level of profit there is often no need to do anything. However, for those with a low level of profit and low level of tax, there is the opportunity to increase their profit.
Why would you want to do this? It may be a good opportunity to show a higher profit while paying no or little tax where you are on a low tax rate. Also you may expect higher profits in future years. A higher profit can be shown by deferring expenses, bringing forward income, by increasing stock level (businesses generally have the option of including stock on hand at the original cost, market value or replacement value) or by a combination of these strategies.
In terms of reducing profit and tax, you can do this by bringing forward expenses, deferring income or reducing stock (particularly where some stock has decreased in value and/or become obsolete). In terms of bringing forward costs there are various options including:
- Prepaying costs for up to 12 months (generally applicable to those businesses with a gross income below $2million). This can include interest on interest only loans, however trading stock should not generally be prepaid as the extra as this would increase the stock on hand figure and would not alter profit overall).
- Deferring income where possible
- Decreasing stock on hand figure by writing off obsolete stock or by recording stock at its replacement value where the value has decreased.
- Additional superannuation contributions. This is particularly relevant for the 2011/2012 financial year as it is the last year (until at least July 2014) where deductible contributions of $50,000 can be made for taxpayers aged 50 and over. Note that eligibility first needs to be checked.
- Farm management deposits for primary producers, subject to eligibility criteria.
You should be aware however that tax should not be your sole focus. In business, we need to be comfortable paying a certain level of tax as there is no point in spending money just to get a tax deduction. At best you only get back 46.5% of the money spent in the form of a tax benefit and even then you only get this level of benefit if you are on the top tax rate which is reserved for those earning about $180,000.
Other than tax planning, there are another 6 great reasons to get your Interim Financial Figures done, including;
- Reviewing your profitability and putting in place strategies to improve profit
- Reviewing your cashflow position and preparing cashflow budgets
- Comparing your figures to industry benchmarks
- Budgeting for potential tax liabilities
- Assisting in obtaining finance
- Providing income estimates for Centrelink purposes
For many businesses, understanding what your potential tax liability will be for your business and allowing time for tax planning may save you thousands of dollars. At the very least, it will assist you in the preparation of your budgets and cash flow projections for the coming financial year.
If you would like any further information please feel free to give us at May Partners on 03 5452 1155.