End of Financial Year Tax Newsletter

As you prepare to collate your 2016 year end financial and tax records for us, we have prepared some information on key aspects which may be helpful.
If you are looking to improve your current bookkeeping process and/or systems (including transition to the cloud), we can assist you in this area, so please get in touch!

1. Depreciation of Assets

The Depreciation Schedule records capital expenditure on:
  • plant and equipment;
  • motor vehicles;
  • fixtures and fittings;
  • certain buildings (may be recorded in the depreciation schedule and a claim for depreciation can then be made);
  • office equipment; and
  • computer software.
The Income Tax Law allows you to claim an annual deduction for wear and tear of items used to produce the income disclosed in your taxation return.  The items that can be depreciated are numerous and there are different rates for depreciating them.  The records need to record:
  • The original purchase price of an asset supported by invoices or other records as to its original cost.  Cost would include the cost of transporting the item to your business and any installation costs that have been paid.
 There are three methods for claiming depreciation:
  • Prime cost method is the method where depreciation is calculated on the original value of the item.  The same deduction is claimed annually but it should be pro-rated if the asset was used or was only available for use for part of the year.  The amount is calculated using a specified rate and multiplying the original value of the item by this rate. 
  • Diminishing value method is the method by which depreciation is calculated for the first year (or part year cases) on the cost price and then in each subsequent year on the value of the item after the previous year's depreciation has been subtracted.  This allows a greater deduction in the initial years as compared to the prime cost method.
  • Pooling is a method available for all taxpayers. Only small business entity taxpayers (turnover under $2m) are eligible to utilise the general small business pool, whilst all taxpayers are eligible to use the low value pools and software development pool.  Pools were introduced to simplify the administrative burden associated with the need to track and calculate the decline in value for expenditure incurred on asset separately.  Pool depreciation rates are 30% for general small business pool and 37.5% for low value pools.  Any new assets added to a pool is only subject to half the standard rate of depreciation, however this is applied as if the asset is owned for the entire year.  Software pools get a nil deduction in the first year, 40% in the 2nd year, 40% in the 3rd year and 20% is written off in the 4th year.

Immediate Write Off

If an asset that costs less than $300 is acquired or has an estimated useful life of less than three years, it may be written off in full in the year in which it was acquired.  If the entity is a small business entity (turnover under $2m), it is able to immediately write off any asset which costs less than $20,000.

Depreciation Rate

The depreciation rate is determined by an assets effective life and the method chosen.  The Australian Taxation Office has provided a list of effective life tables for the most common business assets, but allows for a taxpayer to self-assess an asset's effective life.  Taxpayers then have the choice to apply the prime cost method, diminishing value method or apply pooling.
Under the prime cost method, the decline in value of the asset each year is calculated as follows:
  • Asset's Cost x Days Held/365 x 100%/Asset's Effective Life
 Under the diminishing value method, the decline in the value of the asset each year is calculated as follows:
  • Asset Cost x Days Held/365 x 200%/Asset's Effective life
Small business taxpayers (turnovers under $2m) are eligible to utilise the general pool.  In order to determine the decline in value for the pool three steps need to be taken:
  • Step 1:  Calculate 15% of the taxable use percentage of the cost of each asset added to the each pool that year.
  • Step 2:  Calculate 30% of the closing pool balance for the previous income year.
  • Step 3:  Add step 1 and step 2 to determine the decline in value on the pool for the current year.
It is important to maintain records used to determine the effective life of an asset so as to assist in any subsequent Australian Taxation Office enquiries or audits as to how the life expectancy was established.
A taxpayer can reassess the effective life of plant and equipment based on ongoing experience as circumstances have arisen that make an earlier estimate no longer accurate.  Circumstances that may involve a reassessment of the effective life of an asset include:
  • the use of the asset turns out to be more or less rigorous than what was expected;
  • there is a downturn in demand for that kind of asset which will affect the resulting value of it;
  • changes in technology make the asset redundant.
It is only the effective life that can be reassessed and not the depreciation method.  This means that once you have chosen prime cost method of diminishing value method, you must use that method for the entire life of the asset.
Business people should be careful to ensure that an incorrect reassessment of an asset's effective life has not been made as this would result in an overstated depreciation claim - the effect of which is reducing taxable income and therefore paying less tax.  The Australian Taxation Office could impose a penalty on the basis that the taxpayer had deliberately or carelessly assessed the effective life of the asset and thus claimed more depreciation and paid less tax than what would have applied.
This problem does not occur if the Australian Taxation Office's schedule of effective life tables are utilised.  Therefore you should only take advantage of the concession which allows a reassessment of the effective working life of an asset in legitimate circumstances.

2. Stock

It is a requirement that trading stock on hand at the beginning and end of the year be taken into account in calculating the taxable income of a business.
The closing stock value of one year is the opening value of stock of the next year.
A physical stocktake should be conducted with a written list of all stock being prepared showing:
  • item of stock;
  • quantity counted;
  • unit value; and
  • valuation of stock.
The stocktake sheets should be retained as part of the accounting/income tax records for the business.

If the business is a small business (turnover under $2m) a stocktake does not have to be taken if the difference between the estimate of closing stock and opening stock is less than $5,000.

What is Trading Stock?

The definition includes “anything produced, manufactured, acquired or purchased for the purposes of manufacture, sale or exchange and if you are a primary producer includes livestock”.
In certain circumstances goods are treated as trading stock on hand even though they are not in your business’ possession.  Some examples are as follows:
  • Stock held by an agent.
  • Stock held in an offsite warehouse.
  • Stock held in a bond store.
  • Stock in transit.

Valuation of Trading Stock

As the cost of trading stock (including not only its purchase cost, but also such things as freight and manufacturing costs) is an allowable tax deduction, the portion remaining unsold, including the cost of work in progress and raw materials unused has to be taken into account to prevent an overstatement of expenses in the business’ profit and loss account and tax return.
Thus to get the correct taxable income of your business, a valuation at balance date of the trading stock (raw materials, work in progress and finished goods) on hand at that date has to be made.
This generally involves conducting a physical count of the stock (raw materials etc.) remaining unsold or unused.
Documentary evidence of such a stocktake should be compiled and kept with your other business records.
The stock list should include a description of each article of stock on hand, including raw materials and work in progress.  The list should state the quantity of stock on hand, the unit value and the total value of the stock on hand.
The list should also include the following information:
  • Who did the stocktake?  How?  When?
  • Who valued the stock?
  • The basis of the valuation.
The stock can be valued using a variety of formulas basically stated as being the lower of cost or net realisable value.
You are not required to value every item of stock by the same formula i.e. you can select individual items and value them at either cost or net realisable value.
It is recommended that you prepare written instructions to give to staff as to the method to be adopted for stocktaking including your decisions as to how individual items of stock are to be valued.
Prior to stocktake you should remove any obsolete or damaged stock and sell it or dump it so that it is not included in the stocktake valuation.
However, the stock must be physically removed from the premises and either dumped or sold.  If you still own it you have to value it and include it in the stocktake.
If you require further information or assistance with your stock control processes, please contact us.

3. Debtors

Most businesses, other than very small businesses which prepare their financial accounts on a cash basis, have to bring to account amounts owed to them at the end of the financial year.  This requires the preparation of a list of debtors.
The term “debtors” refers to amounts owed to you by your customers or clients.
The list of debtors would include the following:
  • Customers or clients name and address.
  • The amounts owed to you by each debtor.
  • Total amount owed to you by all debtors.

Bad Debts

Prior to the end of the financial year, a business can write off a debtor’s amount owing, if the business believes that the debt will not be recovered.  This is so long as the debt has been brought to account as assessable income.  This would mean the business was lodging its tax return on an accruals basis.
Before a bad debt is written off, appropriate action should have been taken to recover the amount owing.  This would include at least correspondence with the debtor, a meeting with the debtor and preferably some sort of legal action for the recovery of the debt.
A file should be maintained on the action that has been taken against any debtor that is considered to be a bad debt so that you can justify to the Australian Taxation Office that the debt has legitimately been written off as a bad debt.
The actual writing off of a bad debt must take place prior to the end of the financial year.
If your business is operated as a company or a trust then a Board of Directors or Trustees’ minute should be prepared authorising the writing off of the bad debt.
Once a debt has been written off as a bad debt, it should be removed from the debtors’ ledger.  However there is nothing wrong with continuing to record in a bad debt ledger the amount that has been written off and for the business to still continue recovery action against the debtor.
If, in a subsequent financial year, you recover an amount that has been written off as a bad debt, then it has to be brought to account in the financial accounts for the year in which you recover the debt as being a bad debt recovered.

4. Creditors

If you are other than a very small business that is preparing its return of a cash basis you are entitled to bring to account a claim for all amounts that you owed at the end of the financial year whether you have drawn cheques in payment of the invoices or not.  These amounts are referred to as creditors.
You should prepare a list of creditors.
The list of creditors should show the name of the creditor, the amounts owing and for what particular business expense category to which the invoices relate.

5. Wages

We recommend that upon completion of the financial year and the PAYG Payment Summaries and June Business Activity Statement are completed but not finalised, that the PAYG Payment Summaries are summarised for Gross Wage and PAYG Withholding.
This action will allow for direct comparison to those figures reported to the Australian Taxation Office at labels W1 and W2 on the Business Activity Statements lodged with the Australian Taxation Office.  This is an area often subject to review by the Australian Taxation Office and easily verified by automatic internal cross checking of the figures reported to the ATO on BAS Statements and the PAYG Payment Summaries lodged.

6. Superannuation Guarantee Charge

All employers are required to be making contributions to the superannuation guarantee charge for employees and paid at least quarterly.
You should ensure that, prior to the end of the financial year, all payments required under the superannuation guarantee legislation have been paid otherwise penalties will accrue to you.
The required contribution is 9.5% of ordinary time earnings (from 1 July 2014).
To gain a tax deduction in the year in which the payment relates, the payment should have been physically made prior to 30th June.
If the payment is not made by 28th July, the Australian Taxation Office can impose penalties for late payment.  You are not entitled to an income tax deduction for the payment of the superannuation guarantee charge or the penalty and interest.

7. Records Checklist

  • Bank statements and bank reconciliations.
  • Loan statements or any other debt financing documents.
  • Lease agreements.
  • Hire Purchase and chattel mortgage agreements.
  • Contracts for properties purchased - including all acquisition costs.
  • Contracts for sale of properties.
  • Copy of electronic accounting records or details and log in for cloud computing stored accounting records.
  • Credit Card Statements and reconciliations.
  • Private Use of any assets.
  • If a company, details of any changes. e.g. share issues/trasfers
  • Wages reconciliation with PAYG.
  • Check total wages for payroll tax liability.
  • Check associated entity's payroll tax liability.
  • Details of any new capital introduced.
  • Livestock schedule: births; deaths and sales.

8. Retention of Records generally

It is essential that records are retained for at least five years after the financial year to which the transactions and records relate unless you are requested by the Australian Taxation Office to retain them for a longer period.
However, in the case on any asset which could be subject to Capital Gains Tax, it is essential that the records be retained indefinitely as they have to be retained until five years after the date of the sale of an asset that was subject to Capital Gains Tax. 
As an alternative to keeping full records for capital gains tax purposes, businesses can instead choose to transfer some or all of those records to a CGT asset register.  An entry made in a CGT asset register is only valid if it is certified by a registered tax agent or another person approved by the Australian Taxation Office.  The register entry must be in English and contain the same information as the documents from which it was extracted.  The asset register must be maintained for at least five years beyond the date that the asset is sold.
These record keeping requirements place an onerous responsibility on taxpayers to maintain proper records.