The Federal Budget in May 2016 has maintained some good opportunities for Tax effective IT strategies particularly for small business. With the end of financial year fast approaching, now is the time to start planning and implementing any tax time related decisions.
The largest change is that the Small business entity threshold jumps to $10m from $2m turnover from 1st July 2016. The reform will give a greater number of businesses access to a range of tax concessions such as:
Here are 5 IT Tax Tips from Computer Troubleshooters you might consider with advice from your tax advisor:
1 Accelerated Depreciation
Deductions for Small Business (turnover under $2M) relating to the depreciation treatment of IT assets introduced in the 2015 budget has been maintained.
From July 1st 2016 to June 30th 2017 this will be extended to businesses with a turnover up to $10m.
Small Businesses using the simplified depreciation rules in many cases can claim an immediate deduction for a depreciating IT asset costing less than $20,000. As such, the increase of the threshold to $20,000 from $1,000 in previous years presents significant benefits for small businesses in terms of compliance and cash flow.
Small business can fully deduct the cost of assets worth up to $20,000 in the year they are acquired, and can apply to more than one asset purchased in the same year.
So while IT equipment may have an effective life of 4 to 3 years, the deduction for equipment for up to $20,000 can be taken in the year of purchase. So if you purchased IT equipment before the end of June 2016 it would be depreciated & therefore fully deductible in the 2015/16 tax year. With a drop in small business corporate tax rate, it may be worthwhile bringing forward investment to current year to reduce corporate tax liability prior to drop in July 2016
For a business with a turnover above $2m the depreciation rules remain the same with varying rates for asset types depending on the expected asset life.
For Small Business – if the depreciated value of your existing assets in a ‘general pool’ total less than $20,000 the entire balance can be deducted immediately.
The ‘general pool’ is often where many small IT assets (such as laptops) are held for depreciation purposes, so effectively you can deduct the remaining balances and any new purchases made before the of the financial year to a total of $20,000.
These changes in depreciation rules for Small Business means if you upgrade your IT equipment sooner you could be experiencing the benefits of the latest technology tax effectively with a lower downtime risk and better running costs.
Example – A Small Business has a fully depreciated server which is five years old and expensive to maintain with a high risk of failure. It replaces the Server prior to Jun 30th 2016 with a new one purchased & installed for $5,000 & fully deducts the costs under the instant write-off threshold rule. The full $5,000 would be expended in their 2015/2016 tax year, decreasing tax liability, and improving cashflow. It has a $15,000 balance in it “general pool” so can claim this in the 2015/16 tax year. In effect, both the $5,000 and $15,000 can be fully depreciated meeting the $20,000 threshold thus significantly reducing the business profit and associated tax liability.
2 Prepayment of IT Services
For Small Businesses turning over less than $2 million a year prepayment of the following year’s IT services is a great way of tax effectively managing your future IT costs and having a complex area of your business effectively outsourced to an expert.
A prepayment is not apportioned but allowed in full as a deduction in the year in which it is incurred if all services in respect of the prepayment are provided with 13 months of incurring the expenditure.
Your Computer Troubleshooter can provide prepayment of IT services using either a Managed Services Contract or a Block Time Services Agreement.
Example – A Small Business decides to contract Computer Troubleshooters for it’s 2016/2017 IT outsourcing contract for $500 a month. The $6,000 contract covering 12 months is signed and paid prior to end of June 2016. The business can claim the $6,000 deduction in its 2015/16 tax return.
3 Cloud Services
Cloud infrastructure, such as Microsoft Office 365, offers Small Business the ability to access enterprise grade infrastructure and services on a monthly subscription basis. Small Businesses have the ability to deflect investment in hardware by accessing data centres with centrally maintained equipment and software. Some additional costs may be incurred in data transmission and security as result of moving to the cloud.
Microsoft Office 365 is a subscription based Cloud alternative for Microsoft’s range of Office products including Outlook, Exchange, Word, Excel, & PowerPoint. You can pay a monthly subscription to use their software and associated cloud based storage, interconnection & provisioning.
Alternatively, Office 365 subscriptions can be paid annually in advance, the prepayment is not apportioned but allowed in full as a deduction in the year in which it is incurred if all services in respect of the prepayment are provided with 13 months of incurring the expenditure.
While the movement of infrastructure to the Cloud involves significant risk to business continuity if not correctly migrated, managed and supported, it can offer significant cashflow advantages. By using centralized cloud infrastructure Small Business can save significant investment in hardware, reduce operating costs, and allow scalability of solutions in the future.
Given such a move to Office 365 would involve a setup and migration project cost, this cost would be allowable as a deduction this financial year as long as the project contract is signed and paid prior to end of June 2016.
Example – A Small Business has a fully depreciated server which is five years old and expensive to maintain with a high risk of failure. It has decided to upgrade to Office 365. When the services are migrated to the data centre is saves an upfront investment of $5,000 (also losing the depreciation benefits), however they incur a one off project cost of $600 plus additional charges for hosting, data transmission and support of $200 per month. If they paid the migration project costs, Office 365 subscription & support annually in advance before June 30th 2016 they could deduct $3,000 from their 2015/16 tax return.
4 Home Computer Services
If you have used Computer Troubleshooters for servicing a computer that has been used for deriving income or managing tax affairs a proportion of the amount may be claimed as a deduction for tax purposes. IT costs such as internet access, printer consumables (toner & paper), depreciation, and computer security subscriptions may be proportionally deductible in the same circumstance.
Like all personal tax deductions, you would need to provide proof of the expense and verify the proportion of the cost that is deductible.
Example – A home user who uses their home computer for managing their tax & financial affairs has previously verified with their tax consultant that 30% of the costs associated with the computer are tax deductible. The home user has used Computer Troubleshooters during the year and spent $500 in repairing the computer and has a tax invoice & receipt. The owner can include the $500 in their computer running expenses & gain a $150 deduction for the costs (30%) in their 2015/16 tax return.
5 Get Tax Advice & Make a Plan
Often we wait until the end of the financial year to think about tax. This year why not be proactive and plan your tax outcomes in advance. Why not take advantage of tax incentives and ensure your IT is up to speed?
Talk to your tax advisor and your local Computer Troubleshooters to find a tax effective IT plan for your circumstances.
Example – A Small Business turning over less than $2 million a year decides to develop an IT plan, with its tax advisor they determine to they need to do a planned $10,000 total network upgrade and appoint Computer Troubleshooters as their outsourced IT department for next year for $6,000. The business is able to reduce the 2015/16 tax liability by $6,000 by prepaying the managed services contract for 2016/17. If they upgraded their hardware prior to June 30th 2016 they can deduct the full $10,000 investment from their 2015/16 year. This strategy would reduce taxable income by $16,000 for the 2015/16 tax year, while achieving the business goal of upgraded IT infrastructure and outsourcing the IT management
For more information, talk to your local Computer Troubleshooters – your Trusted IT Advisor
All advice contained in this communication is of a general nature and should not be relied on as a reliable source for Tax advice. The IT Tax Tips contained in this document were regarded as correct at the time of writing, changes to legislation or proposed legislation may alter these Tips. We recommend you contact the Australia Tax Office, your professional advisor or a registered Tax Agent for advice in respect of your personal or business situation.
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Here are a few questions you should ask yourself before you decide – if you answer yes to any of these questions you should seek an expert IT assessment for your business.
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Has your network been built gradually over time?
Do you think there is a better way to operate, such as migrating to Office 365?
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If a hard drive failed in your business you would lose valuable data?
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