Your end of financial year questions – answered
If you’re one of Australia’s two million-odd small business owners, you’ll probably know that end of financial year can often be a challenge. With several updates and announcements to keep an eye on this year, it’s important that you arm yourself with all the information you need.
To help you out, we called in business accountant Cassandra Ferris of Ferris Financial to answer some common questions small business owners have around EOFY.
Q: What business records do I need to prepare for my tax return?
Cassandra Ferris: You’ll need to provide a complete record of all income, a complete record of all your expenses (including the GST paid on these if you’re registered for GST), the wages and super paid to yourself and/or your employees, and records of any money you’ve taken out of the business (if not a sole trader) if it hasn’t been captured in wages mentioned before.
Up to date, fully reconciled accounting software, such as Xero or Reckon, will provide your accountant with everything they need to prepare the tax return. Hopefully, you’re also using this software to do some electronic record-keeping, which will assist your accountant if they have any queries as they review the data.
If you’re not yet using accounting software, provide complete records in a spreadsheet, substantiated by receipts and invoices.
If you have a shoebox of receipts, this will also work – but beware! The more work your accountant needs to do to figure out what those receipts are for and to categorise them, the more your tax return will cost to prepare.
Q: I recently started my own business – do I need to register for GST before EOFY?
Ferris: The timing of registration for GST is dictated by whether your business has reached the turnover threshold for GST, rather than being triggered by the end of a financial year.
If you’re not registered for GST, you should monitor your turnover carefully. Once your business reaches a turnover of $75,000 per annum, or is on track to achieve this figure in any given 12-month period (i.e. income of $6,250 per month), you should be registering for GST for the start of the following quarter.
Q: Do I need to do a stocktake?
Ferris: As a small to medium business with a turnover of less than $10 million, you will only need to do a stocktake if the difference between your beginning and end of year stock is more than $5,000.
If you’re tracking inventory, you should be able to use both the numbers of the quantity of stock on hand and the value of those items to determine if you’re under or over that threshold.
If you don’t closely track your inventory, then you can make a reasonable estimate taking into account the stock you hold, how you value the items, and the purchases and sales made throughout the year.
Q: I have unsold stock, can this be written off?
Ferris: Obsolete stock or damaged stock that either cannot be sold or would be sold at a discount should be revalued to an appropriate amount (i.e. a reduced stock value or valued at zero). You should then reduce the closing stock figure at the end of the financial year. If this results in the value of the opening stock figure being higher than the value of the closing stock figure, the excess is an allowable deduction.
Q: What’s the $30k instant asset write-off?
Ferris: This is a government small business initiative to allow small businesses to write off eligible assets, where the purchase price for each asset is $30,000 or less if purchased in full in the current financial year. This allows a full tax deduction of 100% of the purchase price of the asset.
The $30,000 threshold only applies to eligible assets purchased after 7:30pm on 2 April 2019. The $25,000 threshold applies to eligible assets purchased between 29 January 2019 and 7:30pm on 2 April 2019, and all eligible assets purchased prior to that in the 2018–19 financial year are subject to a $20,000 limit.
Note: these limits are GST exclusive if the business is registered for GST, otherwise they are GST inclusive for those businesses not registered for GST. Speak to your accountant for further details and to discuss eligibility.
Q: Do I need to act upon the $30k instant asset write-off before EOFY?
Ferris: If you want to claim the instant asset write-off of $30,000 on any eligible assets in this current financial year, then you will need to purchase the asset and have it installed and ready for use by 30 June 2019. It’s not enough to simply sign a contract before the end of the financial year, or even pay for and receive the asset by that date – it has to be installed and ready to use.
However, the threshold of $30,000 will continue to apply next financial year for purchases made on or before 30 June 2020.
Q: Can I write-off bad debts before EOFY?
Ferris: You can write-off bad debts before the end of the financial year to get a more accurate view of your profit and loss, especially if this might help you make business decisions prior to 30 June. However, it is also possible for your accountant to write-off bad debts after the end of the financial year when preparing the financial accounts and tax returns. The timing is not critical.
Q: Can I pre-pay any business expenses to reduce my tax liability?
Ferris: Absolutely. Prepaying any business expense in the current financial year will reduce your taxable income and potentially lower your income tax liability. However, you should also be aware that shifting the expense into the current financial year, for example by paying a premium up front instead of in monthly instalments, will mean it will not be a tax deduction in the following year where you don’t incur those costs, and is potentially only delaying the tax liability. This might be particularly useful, for example, if you know that you may have a lower taxable income the following year.
Q: Do I account for income and expenses on a cash or accruals method?
Ferris: This really depends on the type of business you run, the way cash flows in and out of your business, and the size and complexity of your business.
Cash accounting generally suits smaller businesses as it only recognises income and expenses when the cash is either paid or received. It is simpler to manage but doesn’t give an accurate picture of debtors and creditors – therefore your business could look profitable even if you haven’t paid all of your outstanding bills.
Accruals accounting is more complicated as it requires all invoices and bills to be accounted for when received (rather than when paid), but it does track your true financial position and can be more useful for making financial decisions with confidence.
Q: Are there any 2018–19 small business tax concessions I should know about?
Ferris: Apart from the instant asset write-off already discussed, the 2019 financial year includes access to the following small business tax concessions:
- A company tax rate of 27.5% for companies with a turnover of less than $50 million.
- Small business income tax offset of 8% up to a limit of $1,000 for small businesses with a turnover of less than $5 million.
- Full deduction of certain start-up costs such as professional, legal and accounting advice, and government fees or charges (rather than claiming over five years).
- A range of Capital Gains Tax concessions including small business restructure rollover, 15-year asset exemption, 50% active asset reduction and the retirement exemption.
Q: What deductions can I claim for a depreciating asset?
Ferris: If an asset is a depreciating asset, the difference between the closing written down value and the opening written down value is claimed as a depreciation expense deduction. The depreciation is worked out based on the value of the asset, the effective life of the asset and the manner of depreciation (diminishing value, straight line or pooled asset).
Q: What can I do in advance to help me prepare for next EOFY?
Ferris: Make sure you know what you can claim and keep detailed records of all your expenses, whether that’s in a spreadsheet or in accounting software.
For more detailed information, visit the ATO website or speak to your accountant.
If your EOFY planning has spurred a decision to invest in your business, a small business loan could be a great option for you. Find out more about Prospa’s different financing options or contact us on 1300 882 867.
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