Depending on whether you are a business, an individual, filing your own tax return of using a tax agent, the due dates for returns are pretty much spread across the year from October to June the following year. However, the due date for your return doesn’t change the fact that for the vast majority of Australian taxpayers, the reporting period runs from July 1 until June 30.
Why is the reporting period important?
If you are hoping to claim a deduction, write off an asset, claim an expense, defer income or take advantage of any other tax minimisation strategies during this 2015/2016 financial year, the transaction needs to occur before June 30.
A little bit of preparation can have a sizeable impact on the amount of tax you are required to pay, but only if it’s done in the correct period. Consider the following example:
A contractor who tends to have large contracts interspersed with periods of minimal income also needs to purchase an expensive piece of equipment. For the current year, they expect to report a $500,000 profit, but only expect to earn $200,000 in the following financial year. The equipment will cost $2 million and can be depreciated over five years. When should they make the purchase?
The equipment depreciation will reduce the business’ taxable income by $400,000 each year for five years beginning in the year it is purchased ($2m divided by five). If it is purchased prior to June 30, the taxable income for the business in 2015/2016 will be reduced from $500,000 down to $100,000. If the business is structured as a sole trader or partnership, it is taxed at the individual income tax rate, so for $500,000 taxable income, it would owe $204,947 in tax. Whereas for $100,000 taxable income, the tax debt would be $24,947!
If you delay until the following year, the depreciation would reduce taxable income to zero instead of $200,000, which would save $63,947 in tax with a $600,000 loss carried over to the following year (depreciation of $200,000 from the previous year and $400,000 for the current year). As you can see, the depreciation will still benefit your business substantially for years, but the initial tax benefit for 2015/2016 will be lost if you purchase after June 30.
While this is an extreme example that individual taxpayers are never likely to face, it clearly illustrates just how much impact the timing of transactions can have on your next tax return. Now is the time to consider what actions you can take to reduce your tax bill for this year, rather than waiting until just before or even after the end of June, because by then, it will be too late!
By Jennifer Lowe