End of financial year SME checklist: Part 1

The financial year is almost upon us, so now’s the time to start making sure you’re in the best possible position to maximise your tax benefits for this year and the next 12 months ahead.

First and foremost, and this may sound obvious, make sure your financial books are in order. As an accountant I’ve seen it far too many times when clients scramble around up to the deadline to find receipts, contracts and all manner of paperwork to legitimise their claims. Ensuring your paperwork is in order now will also mean you’re in a much better position to assess your tax exposure and implement planning strategies.

Another area that requires forward planning for maximum benefit is the new R&D Tax Credit that replaces the R&D Tax Concession in 2010/2011.

The two core components of the package are a 45% refundable tax credit (the equivalent to a 150% concession) for companies with an aggregated turnover of less than $20 million per annum, and a 40% standard tax credit (the equivalent of a 133% deduction).

If you’re an exporter, you should investigate if you’re able to receive the Export Market Development Grant (EMDG), as you may be entitled to a grant of up to 50% of eligible export promotion expenditure over the $10,000 threshold.

The main eligibility criteria requires an annual income of no more than $50 million during the grant year and expenditure of at least $10,000 on eligible export promotion activities during the grant year.

If you’re a first time applicant, you may combine two consecutive financial years’ expenses in the first EMDG claim to meet the $10,000 threshold.

If you are operating a business from a trust, it’s time to think about income distributions which must be determined by June 30. While the appropriate definition of ‘income’ to include in trust deeds has long been debated, a recent decision by the High Court in Bamford’s Case, has provided some clarification on the matter.

The High Court rejected the arguments used by the ATO and decided that the terms of the trust deed should prevail in determining how the beneficiaries should be assessed to tax.

The decision also provides that the correct method of determining a beneficiary’s ‘share’ of trust income is the proportionate approach.

Finally business owners should also be aware of Division 7A of the Income Tax Assessment Act. Under this division, loans or payments made to shareholders or their associates could be taxed in the hands of shareholders as unfranked dividends.

To avoid taxation, any new loans should be made under a complying loan agreement or fully repaid by the date of lodgement of the company’s 2010 tax return.

For existing complying loans minimum repayments need to be made and interest charged at the ATO benchmark rate. The term of loan cannot exceed seven years, unless secured by a mortgage over real property.

This division also applies to payments made to shareholders or associates. From July 1, 2009 there is a requirement for shareholders and their associates to pay market value “rental” for private use of company assets, eg. holiday homes, boats, etc.

Marc Peskett is a partner of MPR Group, a Melbourne-based firm providing accounting, tax, business advisory and financial services to fast growing small to medium enterprises.