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The Business of Photography

30% Tax Deduction

And End Year Tax Planning

This article is mainly applicable to Australian readers.

Is the 30% tax deduction for new equipment worth it? In a single word, yes! But it's possibly not as attractive as you first thought. The government in its attempts to keep our country out of recession has introduced an incentive for people in business to purchase new equipment and thus keep the economy rolling. New equipment hopefully means the sellers will stay in business and the buyers will create more business opportunities too.

And 30% is an attractive number. Imagine spending $10,000 on a new camera or computer and getting a tax deduction of $13,000 over the next few years ($10,000 + $3000 extra).

So how does it work and is it worth the effort? What really happens when you spend that $10,000, apart from the fact it leaves your bank account?
First up, the normal depreciation stays in place, so assuming you're a small business, if you buy the equipment before June 30 you can claim 15% this year and then the balance gets pooled with your other assets and is depreciated at 30% per annum from then on. Eventually you will get to claim the full $10,000 as a tax deduction, which in turn will reduce your income tax by, say, $3150 (I am assuming a marginal tax rate of 31.5%).

So the $10,000 asset really only cost you $6850.

Second, in addition to the depreciation, you can claim another 30%, or $3000 in our example. So assuming you have a profit on which you're paying income tax, you can deduct $3000 more which in turn will save you, say, $945.

Now the $10,000 asset is really only costing you $5905.

This probably doesn't sound quite as attractive as the 30% figure waved around by the government, but I disagree. I think it's a great saving because, if you're planning to invest in equipment in the near future, it makes sense to do it before 30 June 2009. (And if you have already purchased new equipment, then as long as it was on 13 December 2008 or after, then you're still entitled to the deduction.)

I mean, if you negotiated hard and were offered a camera or computer package for $10,000 and someone offered you another $945 deduction, you'd have to be smiling.


The Fine Print

Of course, there are a few issues to deal with to ensure you get the 30% tax deduction.

The first is that you must purchase the equipment. This means you can't lease it, but you can borrow from the bank or enter into a hire purchase agreement instead. Talk this over with your accountant if you plan to finance the acquisition - the most important thing to remember is that leasing it won't help you.

(However, you may find that leasing companies can offer you more attractive finance than for a loan or hire purchase because they pass on the 30% to you through lower repayments. Just make sure you do your sums and, again, if in doubt talk to your accountant.)

If you purchase the equipment after June, then the extra deduction drops from 30% to 10%, so the incentive is there to get moving.

Does the equipment have to be delivered before 30 June 2009? No, you can purchase it this year, have it delivered next year and claim the 30% next year as well.

The assets you purchase must be $1000 or more in value to get the 30% (assuming you're a small business - large businesses need to spend $10,000).

The assets you purchase must be new. You can't buy second hand equipment and get the extra 30% deduction.

And the assets you purchase must be primarily for business. Obviously our cameras and computers used are 100% for business, but what about our cars? As long as we use our cars more than 50% for business purposes, then even cars are entitled to the 30%. There are a couple of little twists with cars, so if you're thinking of a new vehicle, talk to your accountant first.

So is this good tax planning? Yes, it's great tax planning because it will certainly reduce your tax. However, the next question to ask is, is this good business planning? To answer this, you need to look at your cashflow. It might not be a good idea to pay cash for new equipment if you think we're heading into a recession and cash will be short, but it could still be a good idea to finance the equipment given interest rates are so low.

In short, it is a good opportunity if you're in a position to use it.

The only small concern is that as this newsletter goes to press, the 30% tax deduction isn't yet law. Everyone is assuming it will be passed by Parliament, but the fact is it hasn't been passed just yet!

What else can we do in the lead up to the end of the financial year?

Timing Is Everything

If tax planning involves delaying the income to a future year, you may choose not to finish a big profitable job until early in the next financial year. Similarly, you might ensure some expenses are incurred prior to the end of the financial year, thus decreasing your 2009 profit and tax.
In the past, prepaying expenses like advertising, rent and insurance were effective in reducing the current year's tax - and still can be for small businesses. The only stipulation is that the prepayment doesn't cover a period extending beyond 12 months. And of course the pre-payment must be physically paid prior to 30 June 2009 to qualify.

What can you consider prepaying? Well, after ensuring you have paid all of your existing expenses, look at prepaying lease expenses on camera equipment and non-luxury cars, rent on the studio, insurances, buying air tickets and paying for accommodation for business trips that are planned for next financial year, plus stock up on consumables for your printer, blank DVDs and so on.

Superannuation

To be deductible under any system (accruals, cash or STS), superannuation must have been physically paid in the tax year, so to get a tax deduction for superannuation this year you must pay it on or before 30 June.

There are limits to the amount of super that is tax deductible. Basically the amount is $50,000, but there are some people who are approaching retirement that may be entitled to claim $100,000.

If you are a sole trader or in a partnership, the tax system used not to be so generous, but now you're not discriminated against. The only thing you have to watch is if you have a second job as an employee and that earns you more than 10% of your income - in which case your super will not be deductible. If in doubt, chat to your accountant!

Travel

If you are trading through a company or a trust, and you are an employee, the following two suggestions may be useful. Unfortunately, if you are trading as an individual or through a partnership, these rules won't work.

The first is travel and allowances. The ATO issues a list of travel allowances an employer can pay to an employee, and as long as the employee doesn't claim more than the allowed amount, the deduction doesn't have to be substantiated. I am told the politicians and public servants in Canberra love these allowances because they can be very generous. While not so useful for accommodation expenses, the allowance is a great idea for food and incidentals, obviating the need for keeping every receipt. However, you do need to keep a travel diary and there are a few other little rules and regulations you should check out with your accountant.

Long Term Tax Planning

The most effective form of tax planning for photographers with family working in the business, is to involve the family. A single taxpayer with a non-working spouse can pay thousands of dollars more than a mum and dad working through a partnership or a company - or simply paying the ‘non-working' spouse a wage for the hours spent in administration and other work-related matters.

There may be some strategies you can try prior to 30 June this year, but if not, now is the time to put things in position for 2010. While the ATO has systems in place to discourage the splitting of income, most professional photography businesses would appear to be unaffected. Chances are you are already taking advantage of this form of tax planning, but if you're not, look into it.

And finally, a word of philosophical advice that will grate on most ears. Your accountant's objective in life should be to see you paying at least $100,000 a year in tax. Read on. If after getting every legal deduction and putting in place a wealth-creation program (such as superannuation) you are still paying a bucket load of tax, then you must have a healthy, profitable business. Be happy, pay the tax and focus on investing the after-tax income in a way that minimises future tax.

This article is provided as general information only and is not intended to replace specific advice provided by your own accountant and business advisers.

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