The Financial Year No-one Saw Coming
As we near the end of yet another financial year, many businesses have found themselves in a world we could never foresee. Primary producers and reliant businesses have continued to have reduced turnovers and increased costs because of ongoing drought conditions, traditional retail businesses are increasingly impacted by an online world and the impact of COVID-19 has been felt by every individual and business.
Turbulent trading conditions have continued to impact business cashflow throughout the 2020 financial year and will continue to do so as we tackle COVID-19. For a business owner, the process of Income Tax Planning may now be a mere thought rather than a normal business practice. For many there is an underlying belief income tax planning needs cashflow. However there is a vast array of options available to improve your overall position without the need for a further cash injection. For some it may actually result in a positive cash position!
Crystallising Farm Management Deposits
For primary producers, Farm Management deposits commonly known as FMD’s have been an effective method of deferring taxable profit from years where trading conditions have been positive. Over time it is very common for a number of deposits to be held as the timing has not been quite right to bring them back in as income. That time could be now.
Adverse trading conditions in the 2020 financial year may have resulted in a lower taxable income or in a lot of cases, a taxable loss. This is the perfect time to crystallise a FMD that has been held for more than 12 months to minimise the income tax on redemption.
The redemption of a FMD can provide a positive cash injection for a business. In some cases the positive cash injection can be used to paydown debt and reduce not only commitments but also interest incurred on borrowings. A cashflow injection may also allow accounts to be paid prior to 30th June 2020 which will have a further positive impact on the taxable position of the business and relevant individuals.
The key for FMD redemption is that the deposit must have been held for a period of more than 12 months and the redemption must be finalised prior to 30th June 2020. It is a key time to review the maturity dates of deposits held to determine if there is a window of opportunity to redeem and take advantage of a lower income tax position.
Review of Accounts Receivable and Recognise Unrecoverable Debts
The COVID-19 Pandemic has impacted the cashflow of many businesses, increasing the need to maintain and promote positive trading terms. To ensure cashflow is sufficient to meet overhead costs along with direct wages, many owners have focused their efforts on debt collection. While this has a positive impact on cashflow another area that can also have a positive effect on taxable income is the recognition of non-recoverable debts.
It is common practice for debtors to be carried with the hope they will be paid at some time in the future. However there comes a time where the debt should be recognised as non-recoverable and a deduction made. The ATO provides that for a debt to be bad there must be an objective consideration of all the relevant circumstances of each case. It is not essential that a creditor take all legally available steps to recover the debt. What is necessary is that the creditor make a bona fide assessment, based on sound commercial considerations, of the extent to which the debt is bad.
Therefore it may be possible where a business prepares their accounts on an accrual basis, to recognise their relevant non-recoverable bad debts, reducing their taxable income for income tax purposes without having a direct impact on their cashflow.
Review of Stock on hand and recognise obsolete stock
For many retail business, day to day activities are solely reliant on holding stock and monitoring fluctuating levels. The quantity held is always reliant on a changing demand for a product and the amount to hold is very much based on experience, percentages and patterns. However, what happens when demand decreases and we are left with excess over-stock?
For many, the stock is carried on their books with the hope that there will be a future sale to offset the purchase. In reality stock may sit for several years with a low probability of sale and with no real value to the business. This is commonly referred to as obsolete stock.
An annual stocktake provides a business the opportunity to accurately reflect their stock on hand as at 30th June. Businesses busy themselves with counting every item of stock to ensure it is accurately recorded. For many the concept of considering the saleable value of the item may be far from their mind. This process of thought however may lend itself to reducing the recordable value of stock by recognising and writing off obsolete items. This will increase the cost of goods sold by the business, ultimately lowering the final taxable position of the entity. This method of recognising obsolete stock will not have a direct impact on a business’s cashflow but can have a positive impact to their overall taxable position.
Summary
While we have considered a number of planning measures that don’t involve a cash outlay but can provide a positive taxable outcome to a business owner there are many other options that could provide benefits to a business before the 30th of June.
We encourage all business owners to spend time before the end of the 2020 financial year reviewing their overall financial position and identifying any opportunities that could be a benefit to not only their current situation but in some cases helping support the sustainability and longevity of their business activities.
We invite all business owners to contact our office and talk to one of our accountants who may be able to help make the current situation a more positive one.