MCA ACCOUNTANTS NEWSLETTER JUNE 2007, EDITION 4

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1 MCA ACCOUNTANTS NEWSLETTER JUNE 2007, EDITION 4 INTRODUCTION It s approaching that time of year again TAX TIME!! Our end of financial year newsletter focuses on end of year information and last minute tax deductions to help save you money. If you would like a copy of our past newsletters, please send an to feedback@mcaaccountants.com.au and we shall you any prior editions you would like. FEEDBACK We would appreciate any feedback on not only our newsletters, but any aspect of our business. If there is anything in particular you would like to see in future newsletters, or any other comments, please contact us by sending an to feedback@mcaaccountants.com.au. If you are happy with our service please recommend us to everyone that you can. Of course if there are any areas you are not happy with, we would like to hear from you so that we can make amends. TAX TIPS!!!! Some businesses calculate their tax on a cash basis (i.e. You only pay tax on income received, and only get deductions when expenses are paid), and some on an accrual basis (i.e. When you receive/send the invoice). Tips for all businesses For those businesses with a few extra dollars in the kitty, contributions into super is the most tax effective way to save for your retirement (also refer to the aged based limits later in our newsletter); Superannuation is not deductible until paid, so consider paying your employees June amounts in June instead of July; Client gifts are deductible as long as they are not excessive. Consider buying some of your clients a gift to say thank-you; If you know you will incur expenses early next year, go out and buy them before the end of June; Ensure that you value your trading stock correctly. Cash Basis Pay your creditors before the end of June; Delay the receipt of income until after June. Accruals Basis If you have debts you don t believe will be paid, write them off and claim the tax deduction (however if they are paid in the future, you will be liable for the tax on them); Bonuses to employees (including directors) that are unpaid as of June but determined are deductible (the obligation to pay must be real and present); Unpaid commissions are deductible; Individuals Individuals on salary and wages will find it very hard to lower their taxable incomes. The same principles apply as those for businesses If you pay your expenses prior to the end of June you can claim the expense. The main problem facing an individual is that there are not many expenses that are actually tax deductible. Following is a short list of the types of expenditure that are tax deductible: Stationery etc used at work or in your home office (assuming you use your home office for work purposes); Travel expenses incurred while working (not getting to and from work); Uniforms required to be worn; Home office expenses (if you do some work from home); Income protection policies; Tools purchased for work; and

2 (Generally) any other items that are incurred to help you earn your income. RECEIVING YOUR REFUND FASTER Last year we published an article on how to get your refund faster. If you wish for another copy of that newsletter, please let us know. A quick summary is as follows: Get your information to us first; Make sure your information is organised and complete; Check your tax return when you receive your copy. The ATO checks the returns when lodged against banks etc, and if missing items are found it will delay the process; and Make sure you send all required documentation back to us signed. Please keep in mind that we will be engaged to complete a large number of returns between July and September. We aim to get individual returns out within 1-2 weeks of receiving them, however this can stretch out when we are at our busiest. All we ask is that you are patient and understanding if your return is taking a little longer than you expected. CAPITAL GAINS TAX We all hate hearing from our accountant that we will be liable for capital gains tax, but exactly what does this mean? Capital gains tax is not a separate tax. It is essentially another form of income that adds to your wages / sales / etc in calculating your taxable income. It is therefore very difficult to accurately say how much capital gains tax you will pay on the sale of your investment property. It greatly depends on what other income you have, and what entity owns the property. For example, if a company makes a capital gain of $100,000, it will pay $30,000 tax. If an individual who has no other income makes the same capital gain, they will pay $11,100. If that same individual already earned $150,000 in wages, they would pay $23,250 in tax. (The above example assumes that the asset was owned for more than 1 year and as such the individuals were able to exempt half of the capital gain) There are limited ways of reducing your tax from a capital gain: Try to sell the asset in a year where you have minimal other income to take advantage of lower tax rates; If you have other assets (e.g. shares) that are currently in a loss position, consider selling them and using that loss to reduce the capital gain; Consult your accountant PRIOR to purchasing the asset as to the best ownership structure. The last point is the most important. Many people purchase an asset without consulting their accountant in order to save a couple of dollars in accounting fees. Have a look at the above example and ask yourself Would I rather pay $18,900 in extra tax or $500 in accounting fees? NEW DEVELOPMENTS The superannuation and capital gains changes discussed in prior newsletters have finally received royal accent. If you require any further information on these, just give us a call. Discussed later in the newsletter is one of the most important wins for the ATO in court. If you are running a business and use it to pay personal expenses, please be sure to read it. SUPERANNUATION Be wary of organisations advertising on how it is the last chance to make substantial superannuation contributions with the changes to superannuation. Organisations are pushing that this is the last chance to put up to $1,000,000 into superannuation in order to win your business. But what are you possibly not being told?

3 From July you can put up to $450,000 per person into superannuation over a three year period; To get money / property into superannuation, you will (more often than not) incur a capital gain, and you can t use your money in super to pay this capital gain; There may be stamp duty implications in transferring property; and Your money / property is locked in superannuation and is inaccessible (generally) until you retire. It sounds good last chance to take advantage of large superannuation contributions, but this is the case only if you plan on putting more than $450,000 per person into super over a three year period. If you decide to invest with these organisations, be wary of the tax consequences. In a number of cases the financial planner advising you has no idea what tax you will pay, often all they care about is earning commissions from your money. Aged-Based Limits As of July the aged based limits on superannuation deductions are scrapped and replaced with a flat $50k limit, but for now they are in force. If you are looking to bolster your super and claim a tax deduction at the same time, here are the limits that you can contribute: AGE CONTRIBUTION Less than 35 $ 15, to 49 $ 42, and over $ 105,113 Simpler Super With the governments simpler super laws now permanent, the ATO has announced they will be increasing their audits on superannuation funds. The main area of audit activity will be on compliance ensuring trustees know their responsibilities and abide by them. In March we sent a letter to all our superannuation funds stating the main obligations, if you didn t receive yours, or need another copy, just let us know. The ATO lists the main points that trustees need to know on their website. The address is ontent/19097.htm&pc=001/007/122/011&mnu= &mfp=&st=&cy=1 ATO Audit Activity The ATO are increasing their audits on SGC Compliance. Basically they are checking that employers have contributed the minimum 9% for all employees. This rule applies not only to employees, but owners receiving a wage from the company. There are many cases where the owners think that as they own the company they do not need to pay superannuation WRONG. Don t get caught out. Superannuation paid late is NOT tax deductible and the ATO will charge an administration charge plus penalties. IMPORTANT FBT WARNING A recent case won by the ATO has expenses paid by an employer and allocated to a loan account (not claimed as expenses) attracting FBT. The relevant facts of the case are: Mr and Mrs Slade ran their business through the company; They injected money into the company for working capital; This money was the company s only source of funding; The company paid personal expenses of Mr and Mrs Slade throughout the year, and no wages; and During the year Mr and Mrs Slade injected more money than they withdrew (the company owed them more and more money each year) Even though the Slade s were putting more money into the company than they were taking out, the courts have held that the payments of expenses attract FBT. It seems that if the company had repaid some of the monies owed to Mr and Mrs Slade by one

4 large cheque, which the Slade s then used to pay expenses, they would have been OK. Basically there are two warnings from this case: If you are going to use the company s money, either pay a bonus to yourself or repay your loan by banking a cheque in your personal account first; and If you are working in the business, draw a reasonable wage. Drawing no wage gives the ATO a stronger position in a case like this, as the business setup is less commercial. MYOB Checks to do For those clients using MYOB, here is a quick summary of some of the things that you should do in your MYOB file before you send it to us: Reconcile all bank accounts, credit cards, and loan accounts up to June 30, making sure: o There are no unpresented cheques or deposits that will never be presented; and o That the reconciliation actually matches your bank statement; Look at a Receivables Reconciliation Summary and Payables Reconciliation Summary for two things: o That your list of debtors and creditors are accurate; and o That the total owed to you matches what is shown on the balance sheet; Check a Payroll Activity Summary report and check the figures against: o The applicable wages and superannuation items in your profit and loss statement; o What has been lodged on your BAS s and IAS s to the ATO; o The group certificates given to employees; and o The PAYG Payment Summary Statement sent to the ATO; If you run inventory, check your item list matches your stocktake, and the total is correct; and Run a GST report covering the entire year and make sure the report matches the total GST sent to the ATO for the year. This list is far from exhaustive, but covers the common errors we find in MYOB files. If you have a late version of MYOB (Premier v9 onwards or Accounting v15 onwards), there is a Data Auditor which will run a number of checks on your file. To find it, go to the Accounts menu, and it should be to the right of the Record General Journal item. Some common problems One of the biggest problems we have with MYOB files are transactions from prior years being changed or deleted. There is no easy way to check for these, and unfortunately it is time consuming to find and fix these mistakes. The best cure is prevention in this case. Go to Setup up the very top of MYOB, and then select Preferences. From here click on the Security tab, and then look at the second item Lock Periods. This prevents transactions from being changed or entered prior to a certain date. This is commonly an issue where you send us your MYOB file, then two days later delete a bunch of transactions and then forget to let us know. Another major problem we face is that transactions are allocated to incorrect accounts and commonly have the incorrect GST code on them. We are obliged to correct any errors we find, however we cannot audit your data as it is extremely time consuming, and would end up very expensive. We understand that bookwork is an area uncommon to most business owners, however in the case of an ATO audit, you are responsible for the data in your MYOB file. We are able to do extensive checking of your file upon request, but keep in mind this will increase the cost of your job.

5 The best option would be to keep a list of all the transactions you are unsure of and either call us or give them to us at the end of the year. To keep your file running smoothly Rolling over your file will delete all past transactions. You are able to specify some transactions that will not be deleted if needed. This will reduce the size of you file and make it run as efficiently as possible. But remember ALWAYS BACK UP YOUR FILE FIRST! Once deleted, transactions are not recoverable without a backup. Hopefully you have a routine backup stored in a location other than in your computer. Prior to rolling over a year, we suggest getting the balance sheet to match the financial reports prepared by us. We can provide a journal to assist you with this. Making your MYOB file match our accounts has two advantages: It gives you the most accurate data possible if you decide to look at a profit and loss or balance sheet during the year; and It means we need to spend less time checking the reliability of your MYOB file upon commencing your job. For a helping hand Just give us a call. We are always happy to help there and then wherever possible. If we cannot fix your problem over the phone, we can arrange a time to come out and fix any issues you have. MCA STAFF Below is a list of our contact details. Phone (03) Fax (03) Ian Wallis ian@mcaaccountants.com.au Brent Murphy brent@mcaaccountants.com.au Michele Hird michele@mcaaccountants.com.au Adam Sellars adam@mcaaccountants.com.au Linda Sanderson linda@mcaaccountants.com.au Heather Hill heather@mcaaccountants.com.au Grant McIlroy grant@mcaaccountants.com.au Peter Deighton peter@mcaaccountants.com.au Bree Harrison bree@mcaaccountants.com.au Terry O Brien terry@mcafinplanners.com.au Admin admin@mcaaccountants.com.au Feedback feedback@mcaaccountants.com.au FINAL THOUGHTS It is getting harder and harder to find ways of reducing your tax at the last minute. Most strategies outlined in this newsletter and by other publications only defer the tax until next year. This is because you are generally claiming deductions this year for items that you would normally claim next year (for example buying stationery this year instead of next). Occasionally paying that tax this year instead of next year may be more appropriate. For instance, if you think you will have a bigger profit next year, claiming the expenses next year may reduce your tax bill to a manageable level. There is no magic formula to reducing your tax bill apart from effective tax planning. This centres on getting the correct structures in place to not only minimise current tax, but also provide flexibility for the future. We are happy to talk to you about your business structure. All you need to do is give us a call. Name I would prefer NOT to receive a quarterly newsletter from MCA Accountants Pty Ltd, please remove me from the subscription list. I currently receive MCA s newsletter by paper and would like it to be ed to me in the future and my address is: