Isn’t it amazing, here it is, days before the 2012 Federal budget and the Newspapers are writing about nothing else. Talk about budget leaks.

I love the heading on page 6 of the Financial Review of Friday 4^th May, Abracadabra – surplus. This says it all. It starts off by stating that accounting tricks are so commonly used by governments around the world the International Monetary Fund provided a menu of the most popular one in a report released in March.

Titled “Accounting devices and Fiscal Illusions” the paper explains dryly how governments create surpluses where none exist. 

Take this on board and then read what Jennifer Hewitt has to say on Page 2 of the Financial Review of Tuesday 8^th May, still many hours before the budget is released. Ms Hewitt writes” ‘Wayne swan will be selling his budget tonight to a public that now identifies Labor with a union leadership whose financial records would make a Greek government blush.” But then again wasn’t Wayne brought up through the union ranks. Maybe his treasury skills were honed in a pseudo HSU type union.

The Sunday Telegraph on 6^th May, big heading: ‘$820 Gillard’s gift for school kids in your bank account next month’. WOW. Only a few things wrong with this; 1) It is not Gillard’s money to give away; 2) it will not end up in my bank account; 3) it is not a gift; 4) it is theft and deceit.

What our Julia is doing is spending some of her 2013 budget now so that it does not have to be reported as spending in the 2012/2013 financial year thus allowing Wayne to report a surplus.

Other tricks he has up his sleeve are: do not count the billions being spent on the NBN as government money, pay more bills before the end of June so that they do not have to be paid for in the 2012/2013 year. Defer some payments until 2013/2014 so that they do not have to be reported in the 21012/2013 tax year. Count as income money that has not yet been received, such as the carbon tax which will be received in much later years, but who gives a damn.

Another strange thing is this promise to change the rules so that companies that have been profitable can now run at a loss and then claim back tax paid in a prior year. Tough luck if you are a sole trader or Partnership, you can go whistle. After all Swannee already abolished the Entrepreneurs tax rebate which was real money in your hand for some airy fairy depreciation crap which meant you had to spend more money in order to pay less tax. He must have grown up in the union ranks and has never worked for himself.

If you can claim back tax paid in an earlier year, what happens if you have paid a fully franked dividend, this means you have already used up that tax payment. Unfortunately this will really mess up the calculations but then again that is for someone else to work out. Mister swan is only after votes.

Financial statements, what are they? When-ever a business, large or small, approaches a financial institution for a loan they ask for a copy of the ‘Financial Statements”. In a lot of cases the person asking for the statements has no idea of what to expect. 

Financial statements consist mainly of two documents, the Profit & Loss statement (P&L) or as it is now known, the Income Statement, and the Balance Sheet. These two documents represent as complete as financial picture as you can get. With this financial information we can develop a set of measurements that will allow you to monitor both your current position and your progress. A lot of this information is also included as part of your tax return when it is prepared and lodged. These numbers are used by the Tax Office to determine as to whether or not you are declaring sufficient income to cover the expenses you are claiming. We will cover that in the next couple of weeks, but first a couple of definitions.

The P & L is the easiest to explain and the easiest to understand. This document simply shows the income of the business at the top, followed by the expenses incurred by the business (the spending), which, when deducted from the income gives the profit (or loss) made by the business.  This document is used to determine the ability of the business to fund additional borrowings so if your business is mainly cash transactions it helps to account for this cash so as to be able to borrow to expand or acquire new assets, such as that work vehicle.

The Balance Sheet is a different monster in that it lists what the business owns and what the business owes. A balance sheet tells a story at a particular point in time and therefore it is important to be aware of the implications associated with this document on a regular basis. A good time to review it is each quarter when you do your GST reporting (BAS).

The Balance Sheet is divided into three parts, Assets, Liabilities and Equity. The Assets are what the business owns. The Liabilities are what the business owes and Equity is the difference.

Assets are divided into several categories but we will simplify this into two categories, Current assets and Fixed (or long term) assets. Current assets include cash at bank; amounts owed by customers (accounts receivable or debtors); stock on hand, this may be finished goods or raw materials and work in progress such as costs on jobs not yet completed. Fixed assets include assets such as motor vehicles, plant & equipment, office furniture, land & buildings and goodwill.

Similarly, liabilities indicate what the business owes and this is also divided into two categories being Current Liabilities and Long Term (or non-current) liabilities. Current liabilities include bank over-draft, amounts owed to suppliers (accounts payable or creditors), taxes owed such as GST and PAYG, staff superannuation owed. Long term liabilities would include staff entitlements and long term mortgage debt. The examples cited here are but the tip of the iceberg. To get a better feel for what is included in a balance sheet check out big corporations such as BHP, Qantas, etc. Their balance sheets contain more than a few categories.

An article in last week’s Sunday paper (8/4/2012) took my interest. It was from our beloved Treasurer telling all who would listen that there were some fantastic tax cuts coming to offset the Mining Tax, Carbon Dioxide tax and the other tax increases he is going to put in the May Budget. Well a little bit of research revealed the following:

No tax will be payable on income earned up to an amount of $18,200. Apparently this is an increase from the current tax free threshold of $6,000. What he did not mention was that he will abolish the low income rebate of $1,500 which meant that the current situation was that no income was payable on income earned up to $16,000. The tax cuts give most taxpayers an extra $303 per year until you get to $68,000 from where it gradually drops to a saving of $3.00 at $80,000 and beyond.

Mr Swan claimed that low income earners will be so much better off under the new tax structure, that is, unless you earn between $26,450 and $37,000 because in this range you will be paying more tax.  On $30,000 you are currently paying $2,100 per annum tax (plus the Medicare levy). Under the new tax scales implemented from 1 July 2012 you will be paying $2,242.00 tax on the same income.

Now I am willing to be proved wrong on these calculations, and once the budget is released the anomalies may have been fixed, but as it now stands you are worse off. On an income of $35,000 you currently pay $3,050 tax and after 1 July 2012 you will be paying $3,192.00, an extra $142.00.

The most amazing part of the new tax scales is that on $37,000 you are $142 worse off but if you earn an extra $1.00 you are $445.00 better off.  So if it looks as though you are going to earn close to the $37,000 mark, work that extra nights overtime to generate a bigger refund. In the words of the immortal Professor Julius Sumner Miller, “Why is it so?” The $1,500 low income rebate that did apply from $1 will be deleted and a new low income rebate will be introduced. This will apply from $37,001. So on $37,000 it does not apply, on $37,001 you get $445.00. 

The new tax scales show that on an income between $0 and $18,200 no tax is payable. Between $18,201 and $37,000 tax at the rate of 19% is applied. There are no low income rebates available at this stage. As mentioned, once your income exceeds $37,000 you become eligible for a low income rebate of $445 which is reduced by 1.5 cents for every dollar earned over $37,000 phasing out at $66,667.00

The tax rate for income earned between $37,000 and $80,000 is $3,572 plus 32.5 cents in the dollar for each $ over $37,000. The next tax bracket is for income between $80,001 and $180,000 where you pay $17,547 plus 37 cents in the dollar for income over $80,000.

Over $180,000 you pay the maximum rate of 45%. On top of these tax rates is added the Medicare levy, flood levy and whatever other levies the government decides to add. The argument here is that the levy is a levy and not a tax so it can be increased at any time and you are not paying extra tax.

The week before last we mentioned items which may generate a tax deduction such as motor vehicle expenses, protective clothing or specific uniforms, technical literature or magazines, union fees and membership of professional associations, tools of trade, this includes pens and pencils etc if you supply your own, self education expenses and attendance at business related seminars.  

It is my belief that tax deductions are over rated. Why would you give someone $100 just so you could get a refund of $30 (or less).  The best thing to do about a tax deduction is to look at what you are spending and if you can turn that spend into a tax deduction then all the better.

Tax deductions for employees are limited these days and can be industry specific. One tax planning option is salary sacrifice, whereby a benefit may be derived by paying for something with pre tax dollars. The health industry is one area that has a very generous scheme going whereby they are not subject to fringe benefits tax on pre tax spending up to a predetermined amount. The rest of us have to suffer and pay the 46.5% tax. There are benefits available although not as generous. You can sacrifice part of your salary to Superannuation. This allows you to increase you super fund while at the same time reducing the tax paid on the income foregone by anything from 16.5% to 31.5%.

The benefit here can be increased if you are over 50 as you can access the salary sacrificed once you turn 55 and can actually increase the balance of your super fund whilst maintaining the same take home pay. This is known as a transition to retirement pension and can be a very effective tax saving tool.

The other big salary sacrifice area is motor vehicles whereby you can save money by salary sacrificing the acquisition of a motor vehicle.  This allows you to pay for a new car out of pre tax dollars and, depending on the various variables, can save hundreds of dollars per year on what it would have cost you to run the same car in after tax dollars.

As an employee the only other options available to you to reduce your tax, and end up with something of value, is to look at negative gearing. As stated previously, I believe tax deductions are overrated and there is no point in spending money just to get a tax deduction.  The concept behind negative gearing is that you borrow to buy an income producing asset. Now, the most popular method of negative gearing is the purchase of an investment property, which is pretty expensive, so why not start small. You can negative gear into shares.  This allows you to borrow a smaller sum, buy your shares and start that million dollar portfolio.

The interest on the loan is tax deductable whilst the income from the shares by way of dividend is usually fully franked, that is it is an after tax payment, so there may be no extra tax paid by you on that income. There is also the possibility of capital growth in the shares creating a win-win situation.

 These options cannot be created at the last minute to generate a tax deduction so if you go down this path today, you will derive the benefit next year.

If you have any questions on any of this send me an email to les@coulcher.com.au

Last week we started our expose on Year End Tax Planning. It seems that in June each year we get all these newspaper articles advising us on how to reduce our tax bill. For the salary & wage earner this is almost impossible to achieve if you leave it to the last minute. The best way to save on tax is to take a pre-active approach, implement a plan in July and follow that plan all year. 

We have clients coming every year who acknowledge that they are aware of the records they needed to keep and promise to do better next year. So what approach needs to be taken, and can we do anything in the next few weeks. At this time of year we need to assess what we have done during the course of the past 12 months to see if there is any way we can generate a tax refund when we have our tax return prepared.

Depending upon your occupation, you can claim such items as tools of trade, purchase and maintenance of protective clothing, cleaning of that protective clothing, union fees, membership of professional bodies, subscription to professional journals, education expenses related to maintaining job skills whereby the education may be a refresher course related to a specific part of the job. In my industry my staff and I attend regular tax schools whereby we are brought up to date on changes to tax rules, tax forms etc. It may be that you need to be aware of changes to occupational health & safety rules etc so you pay to attend updates on this subject. The cost of the course is tax deductible as is the cost of travel and if the course is in another city then the cost of overnight accommodation and meals may also a tax deduction.

Other self education may be deductible if it is relevant to the earning of your wages and is relevant to your current duties. Education to get a promotion or another job is not tax deductible, however the cost of education to help you perform your current tasks is an allowable tax deduction. The fact that this helps in you gaining a promotion is a tax free bonus. The cost of uniforms is usually a tax deduction but if you work for a fashion shop and the boss expects you to buy clothes from that shop then the purchase of the clothes is not a tax deduction (what a bummer). If your job requires you to travel or work outside, then the purchase of a good pair of sunglasses and perhaps some sunscreen may be allowable.

If you travel between job sites on a daily basis or the place of work changes from day to day or week to week then the cost of travel may be a tax deduction.  With any of the claims for travel you must ensure that you keep accurate records. If you use a motor vehicle then document the odometer reading at the start and finish of each journey. It is amazing how many people rip themselves off by not keeping accurate records. If you go to TAFE as an apprentice, log the distance travelled, this is a tax deduction. The trip from home to TAFE and return is a tax deduction. The distance will not vary so measure it once and you have that measurement for all time. Also with TAFE students, keep a record of what you spend on books, stationery etc. It all adds up.