Tax Tips For Manufacturing Businesses Australia
The manufacturing industry is a diverse sector. It includes commodity products such as some foods and beverages to high value-added products, including automotive and aerospace components.
It also covers machine tools, medical devices, electronics, advanced materials and pharmaceuticals.
Read our guides and watch our video to help learn about the eligibility of manufacturing activities under the R&D Tax Incentive.
The small business sector has been described as the engine room of the economy, as well as the biggest employer in the country – and it’s not hard to see why. Recent research undertaken by the Council of Small Business Organisations of Australia (COSBOA) showed that small businesses were responsible for generating 5.1 million jobs, or around half of private-sector employment. The Australian Tax Office (ATO) says that there are about three million small businesses in Australia, including primary production concerns, which represents around 96% of all business.
Taxes in Australia are administered and collected by the Australian Taxation Office (ATO) and in some cases state government revenue offices. Businesses can save money by paying the correct amount on time and taking advantage of any tax concessions that they are entitled to.
The essential taxes affecting businesses are Company (income) Tax, Capital Gains Tax (CGT) and the Goods and Services Tax (GST). These taxes are all set by the Australian Government.
Businesses can elect to make tax payments monthly, quarterly or annually.
Further information on these critical taxes and other business taxes is provided below.
Tax time is an opportunity to obtain essential business advice from your professional advisor, significantly if the impacts of COVID-19 have disrupted you. Your CPA Australia-registered tax agent can help you explore options to innovate, pivot, restructure or even exit your business. We’ve produced a wide range of resources to help your business, including recovery roadmap, business recovery guide and financial information factsheet to help you prepare for discussions with your advisor.
Small businesses need to ensure their bookkeeping and lodgments are correct and up to date. You should obtain professional tax advice, especially in areas where more complex tax issues arise. This includes refinanced debt, losses, restructures, capital gains tax, personal services income, trust declarations and distributions, and private company loans.
The skies are dark, the sales are on, and every ringing phone strikes fear into the hearts of Australia’s accountants. Yep, it’s that time of year again — tax time.
For the handful of small business owners who are confident across their finances and tax obligations (must be nice), the end of the financial year is probably like any other month. But for the vast majority of taxpayers, it’s a scramble to gather faded receipts and furiously Google what deductions can be claimed as the dreaded July 1 deadline approaches.
To help take some of the pressure off, SmartCompany has compiled a list of tax tips and advice for the last few days of the 2017–18 financial year to help you get your affairs in order and your claims perfected before it’s too late.
The Australian financial year runs from July 1 to June 30. For many small businesses, the end of the financial year – tax time – is frantic and stressful as they scramble to get their books in order and work out what deductions can be claimed.
To help take some of the pressure off, here are our top tips to help you get your affairs in order by the end of the financial year as well as some simple advice to make the most of this time of year for your business.
There are several reasons why the manufacturing sector in Australia has been in decline for the past 40 years. Our high labour and raw material costs combined with our remote location and relatively small production runs make it difficult to compete on a global scale. On the other hand, despite globalisation, a relatively high local currency and diminishing scale in various industries, some manufacturers are thriving.
There remains plenty of opportunities with niche products, and our successful manufacturers are innovative, they use cutting edge product designs, process innovations and their marketing stand out in the crowd. There are plenty of manufacturing success stories in this country in electronics, machine tools, textiles, food, plastics and trucks.
As a manufacturer, you face some unique challenges. You may have to manage pending builds and assemblies, track customer orders, manage inventory and costs plus identify which orders have shipped. If you import components or export your finished goods, you also have to contend with the volatility of the Australian dollar. It’s not easy, but over the years, we have helped some manufacturers work through the stages of their business life cycle – from start-up right through to the sale of the business.
In our opinion, having an accountant who understands manufacturers can give you a serious competitive edge, and we offer you a range of accounting, tax and business coaching services to support and grow your manufacturing business. We can help you with job costing, pricing, break-even analysis and management accounting services plus using industry benchmarks we can compare your business performance against your peers to help you assess what is working in your manufacturing business and what needs working on.
No job is too big or too small for the team at Sheridan’s who offer you experience and most importantly, an intimate understanding of the manufacturing industry.
Tax To Be Collected When Having A Manufacturing Business
An Australian resident company is subject to company tax, at a rate set by the Australian Government.
A non-resident company is taxed on its Australian source income at the same rate as a resident company. Taxable income and the tax rate may vary under limited circumstances, such as industry or business structure.
For more information on company tax, including company tax rates, see ATO: Company tax rates.
Capital Gains Tax
Capital Gains Tax (CGT) applies to any capital gain made through the disposal of assets. It is paid as part of the income tax.
Foreign entities may be subject to CGT on assets acquired and used in carrying on a business in Australia. Companies are required to keep records upon reaching assets that may be subject to CGT in the future. Small companies may also be eligible for CGT concessions under certain circumstances.
For information on CGT payable on the disposal of assets in Australia, see business.gov.au: Capital Gains Tax.
Goods and Services Tax
The Goods and Services Tax (GST) is a national, broad-based consumer tax on most goods and services sold or consumed in Australia.
Most businesses are required to register for GST with the Australian Taxation Office. Companies which have paid for business supplies inclusive of GST are entitled to claim an equivalent input tax credit. Individual businesses may also be eligible for GST concessions.
For more information on GST, see ATO: Goods & Services Tax.
Payroll tax is a state tax on the wages you pay to employees. It is calculated on the number of salaries paid per month and must be paid if total Australian wages exceed the exemption threshold in the relevant state or territory. The payroll tax exemption threshold and the payroll tax rate varies between countries and regions.
For more information on payroll taxes and registration requirements, see business.gov.au: Payroll Tax.
Financial Year Tax Tips For Australian Manufacturing Business
Take Advantage Of The $20,000 Instant Asset Write-off.
Despite continual calls for the Government to make the much-loved $20,000 instant asset write-off a permanent fixture, the Government has continued to string SMEs along, extending the scheme for just 12 months at a time.
Regardless, it’s still around this year until June 30, and small business owners can even claim up to $20,000 worth of assets for their business up until that point. Basically, if you purchase an asset (for example, a new coffee machine or circular saw), you can immediately claim a deduction for the business portion of that asset up to $20,000.
This year’s federal budget included a proposal to (again) extend the $20,000 instant asset write-off until June 30, 2019, however, the bill still needs to pass the Senate. It’s set for debate on Thursday, where it’s expected to pass with no amendments.
Speaking to SmartCompany, tax expert and director of Solo & Smart Patrick Harrison says the $20,000 instant asset write-off is particularly important for self-employed workers with a reliance on tools, cars, and other assets.
“For business owners in this space cash flow is critically important, and any assistance that encourages business growth with better cash flow is beneficial,” Harrison says.
“A word of caution for small business owners and the self-employed particularly is not to over-extend your business in pursuit of tax benefits if it doesn’t leave enough operating cash in the bank.”
Instant Asset Write-off
One of the best tax breaks for small businesses is the instant asset write-off, which is an excellent way for your business to acquire much-needed capital assets to build your business and, at the same time, reduce your taxable profits.
Better still, the tax break has recently been made more generous. Assets costing up to $150,000 can now be written off immediately (previously $30,000 up to March 11 2020). The $150,000 limit applies until December 31 2020.
Besides, more businesses can claim as the turnover threshold increased to $500 million from March 12 2020 (up from the previous limit of $50m).
Items you could claim include:
- Cash registers and other POS devices
- Cars, vans and utes
- Fittings and fixtures for your premises
- Plant and machinery for your trade
- Computers, laptops and tablets
- Security systems
- Accounting software
You must be careful when calculating any claims to ensure you follow all rules set by the ATO, and you should note:
- Only active businesses qualify (it’s not enough to be a holder of an ABN number).
- It’s essential to understand the tax break. It is not a cash hand-out but a deduction from your taxable profit. If you spend $30,000 on a capital purchase, you will receive a 27.5% (26% from July 1 2020) per cent deduction, which equates to an $8,250 reduction in your tax – so you will still be out of pocket by over $20,000 on the purchase. If it’s something, you were going to purchase anyway, good luck and enjoy the benefit. But if you’ve acquired something, or are planning to achieve something, purely to save tax, you might want to think again. What you gain in the year of purchase will gradually be clawed back through reduced deductions in future years.
- The amount you can claim is GST exclusive. This is relevant if your business is registered for GST and can claim an input tax credit on the purchase. The amount you can claim is the GST exclusive price.
- The asset must have been installed and ready for use. This is particularly important if you purchased the support just before the end of the financial year. If you are buying it before June 30 but don’t have it available for use until July, you can only claim the deduction against profits in the following year.
- You can claim a deduction for second hand assets.
- To claim the full deduction, the support has to be used in the business, and if there has been personal use, the conclusion needs to be pro-rated to reflect this.
Claim Tax Deductions
It is commonly recommended that SME owners make sure they are claiming all the appropriate tax deductions possible. This can include items such as rent, utilities or repairs, or professional, legal and accounting advice. It may also be suitable for your business to bring forward expenses to the current financial year, such as pre-paying rent or repair expenses. However, you do need to be able to justify the expense, and in order to claim the deduction, it needs to have been paid.
ATO Assistant Commissioner Kath Anderson has warned taxpayers about trying to claim standardised deductions simply because they believe they are entitled to them. “People think that they have an entitlement even though they have not spent the money. You have to have still spent the money,” Anderson told Fairfax. “It has to be related to earning your income, and you have to be able to show us how you calculated the claim.”
A common recommendation for SME owners at tax time is to make sure you’re claiming all the appropriate deductions you can. This includes things like rent, utilities or repairs for your business, or professional, legal and accounting advice.
Tax agents also often recommend businesses bring forward as many expenses as possible to be pre-July 1, such as pre-paying rent or repair expenses. However, both tax experts and the Australian Taxation Office have urged businesses to ask themselves: “Can you justify this expense?”.
On the ATO’s hitlist this year is a crackdown on ‘standard’ deductions, with assistant commissioner Kath Anderson warning taxpayers about trying to claim standardised deductions simply because they believe they are entitled to them.
“People think that they have an entitlement even though they have not spent the money. You have to have still spent the money,” Anderson told Fairfax.
“It has to be related to earning your income, and you have to be able to show us how you calculated the claim.”
Small businesses with an aggregated annual turnover of less than $10 million can still get an immediate tax deduction for nearly all individual assets purchased by June 30, 2018, that cost less than $20,000. The business must use such assets for an income-producing purpose, and they must be installed ready for use by June 30 2018.
For businesses registered for GST, the $20,000 threshold is calculated on a GST-exclusive basis, but for businesses not registered for GST, the threshold is calculated on a GST-inclusive basis.
A depreciating asset that is not immediately deductible (an asset costing $20,000 or more) will be automatically depreciated at a flat rate of 15 per cent in the financial year of purchase to the extent the asset is used for income-producing purposes and is used or installed ready for use by June 30 2018. The adjustable value of such an asset can be depreciated, on that basis, at 30 per cent in subsequent years.
It is important to note that it is proposed that this measure be extended until June 30 2019.
Make sure you pay the correct company tax rate.
Most companies with an aggregated annual turnover of less than $25 million will pay tax at 27.5 per cent in 2017-18. However, some companies with a turnover below $25 million will continue to pay tax at 30 per cent, especially companies that earn nearly all their income from passive investments such as rental income or interest income. Companies that pay tax at 27.5 per cent can only frank dividends up to that rate.
As the law currently stands, to qualify for the lower tax rate in 2017-18, a company must have a turnover of less than $25 million and be “carrying on a business”. However, there is a proposal before Parliament to replace the” carrying on a business” test with a test that will mean that companies below the $25 million thresholds must earn no more than 80 per cent of that turnover from passive income such as rent, interest and net capital gains to qualify for the lower company tax rate company. This proposed change may lead to different tax outcomes from the current law for certain companies.
Both the current law and the proposed change create a number of complexities for companies, especially companies holding investments, as well as for the owners of companies. Your CPA Australia-registered tax agent is best placed to assist you with these issues.
Make Your Superannuation Payments On Time
In order for small business owners to claim the tax deduction on super contributions made on behalf of employees, the super has to be paid before June 30. Super contributions need to be paid to employees’ super fund 28 days before the end of each quarter. For any quarter you miss that deadline, the super is not tax-deductible.
Make Trust Resolutions By June 30
As always, trustees of discretionary trusts are required to make and document resolutions on how trust income should be distributed to beneficiaries for the 2017-18 financial year by June 30.
Suppose a valid resolution is not executed by June 30. In that case, any default beneficiaries under the deed will become presently entitled to trust income and subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed at the highest marginal tax rate on any taxable income derived but not distributed by the trust.
A trustee must be able to show how an effective resolution was made through minutes, file notes or an exchange of correspondence documented before year-end. However, the trust’s accounts do not need to be prepared by June 30.
As a corporate trustee may need time to notify its directors that a meeting must be convened to pass and record a resolution, such a notice should be sent out well before the June 30 deadline.
Seek Professional Advice When Starting A Business
Professional expenses associated with starting a new business, such as legal and accounting fees, are deductible in the financial year those expenses are incurred rather than deductible over five years as was the case previously.
If you established business during the year, you should speak to your CPA Australia-registered tax agent about claiming professional advice fees as an expense.
Document the streaming of trust capital gains and franked dividends to beneficiaries
Broadly, trustees of discretionary trusts can stream capital gains and franked dividends to different beneficiaries if the trust deed allows the trustee to make a beneficiary “specifically entitled” to those amounts. The trustee must document this resolution before June 30, and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.
The Tax Act provides a set of simplified trading stock rules whereby if your trading stock did not change in value over the tax year by more than $5,000, you could include the same stock value at year-end as at the start of the year.
A small business can also get an immediate tax deduction for certain pre-paid business expenses made before the end of the financial year. Suppose a payment covered a cost that has gone into the new financial year (such as insurance premiums, rent or membership of a trade or professional body). In that case, you could claim that deduction in the last financial year. Check your payments for the period before June 30 to see if anything qualifies.
Give Your Business A Health Check
The end of the financial year is a good time to take stock of how your business is performing and possible areas for improvement. This may be the only time of year that you have a complete set of accounts to look at how much money the business is making and where it’s coming from, how much money the business is spending and where it’s going, where the risks are in the business.