Year End Corporate Tax Planning

General techniques applicable to all taxpayers

We highlight some of the general techniques that can be used by all taxpayers to defer taxes as the years draws to a close.

Tax tip #1: Accelerate purchase of plant and machinery

Buy equipment such as computers, plant and machinery before, rather than after, the new tax has started. Notwithstanding that the purchase occurs a day or two before the year end, you can claim up to a full year’s tax depreciation in the year of purchase.

Tax tip #2: Make accruals for incurred expenses

Make accurate accruals for expenses which have been incurred but have not been paid. For example, tax deductions can be claimed for the accrual for staff bonus payments provided the accrued bonus is paid in the following year.

Tax tip #3: Make provisions for doubtful debts

If you have debts which appear doubtful and you have taken legal and other actions to collect such debt, it would be prudent to make a provision for the doubtful debts during the current financial year, instead of next year. An advantage of recognising the bad debt this year (instead of next year) is that you can take a tax deduction this year. Also, for those doubtful debts that you have not yet taken legal or other actions, this is the time to seriously think about these actions and put them into effect.

Tax tip #4: Scrap obsolete inventory

Check your inventory and ensure that you have made adequate provisions for obsoletes, slow moving or damaged goods. If there is virtually no hope of recovering or selling the obsolete inventory, it may be better to dispose of or scrap the inventory this year, instead of the following year, in order to claim deductions earlier.

Tax tip #5: Take advantage of lower effective tax rates for taxable income below $100, 000

If your taxable income for the current year is expected to be less than $100, 000, it would be better to defer part or all of the claim for capital allowances in order to take advantage of the lower effective tax rates on the first $100, 000 of taxable income.

Special situations

In addition, here are some further tips for year-end corporate tax planning you should consider if the facts and circumstances of your company are similar with the following scenarios.

-         Companies which deal in shares and other investments

Dealing with the ups and downs in share prices and the prices of other financial instruments are part and parcel of the business of investment dealing companies. If the investment dealer has suffered a paper loss and the price of the investment is not expected to recover in the near future, you should consider realising the losses in the current year.

-         Passive Investment Companies

Passive investment companies cannot carry forward tax losses. As such, they should consider accelerating income to use the current year losses which will otherwise be forfeited because of the no carry-forward rule.

-         Companies which have remaining section 44A balances

The One-tier corporate tax system will be fully implemented on 01 Jan 2008 and companies which have not transitioned to this system have until 31 December 2007 to pay out any remaining section 44 balances, it would be wise to pay section 44 dividends to shareholders before the expiry of the transition period. This will enable individual shareholders whose marginal tax rates are lower than 20 per cent to claim a refund of part or all of the section 44 credits attached to the dividends.

Request of enquiry of this service and fee, you may contact us at Tel: 6533 7393 or email: info@tanchan-cpa.com

Extracted from Ernest & Young’s “You and the taxman magazine” Sept/Oct 2006 issue.

Updated December 2006