In this edition, we discuss the key items that have a significant impact on your tax and financial year-end. Getting them right can have a major impact on your reporting season.
With the Easter holidays over, you are probably now focussed on how your dealerships will perform in the final three months of the financial year. While the dealerships operational results are key, it's just as important to focus on one of your largest expenses, your year-end tax bill.
It won't be long until 30 June comes and goes – but the one thing we do know is that your 30th June financial results will live with you for the next 12 months. Whether it's refinancing, selling or buying, how your 30th June accounts look will influence how people see your business.
Here are some key items that have a significant impact on your tax and financial year-end. Getting them right can have a major impact on your reporting season.
First and most importantly 'don't let the 13 month surprise you'.
Monthly reconciliations must be up to date and any issues that have been carried forward from month to month need to be dealt with in the April/May month ends.
The following accounts should be fully reconciled and any issues resolved:
Your year-end accounts are a snapshot of your business on 1 day out of 365.
The key is to present an accurate position on this one particular day, as you will live with this for the next 12 months. This is important, particularly if you are planning big things in 2018.
During the financial year-end reporting season there are items in the balance sheet which the Owners/Directors of the dealership group need to consider.
Don't be fooled with overstated assets or understated liabilities in your balance sheet. They have a direct relationship to the profitability of the dealership. A good way to ensure your balance sheet accounts are reasonable is to compare them to your adjusted prior year-end balances for any indication of balances are over/under stated.
The new leases standard, AASB 16, significantly changes the accounting for leases and introduces complexity, judgment and continuous reassessment requirements for subsequent accounting over the term of the lease.
Dealership groups need sufficient time in order to identify and quantify the impact of the new standard on the information they provide to key stakeholders, such as financiers, shareholders and also their external advisors. Identifying the potential impact of the standard BEFORE entering into new contracts may reduce the risk of any unintended consequences.
The key is being prepared and to assess the GAP and IMPACT of the changes in the new leases standard. The summary of the changes and potential impacts must be shared and discussed with the owners/directors and executive management of the dealership group.
If you need a hand, we can help with the impact assessment, implementation process, systems support and calculations, assurance over the compliance with the standard through accounting advice and training your finance team and key personnel.
Tax planning is imperative to the success of your business and critically important in managing your second largest expense.
The key is to manage the tax issues typical in a dealership, such as:
The tax legislation allows for three methods of valuing trading stock; they are:
IT 2648 provides guidance on various tax issues relevant to the motor vehicle industry. With regards to replacement value, the ruling states that it requires an Independent valuation or the use of an independent source such as red book or Glass' guide.
Demonstrator vehicles require an independent valuation as the red book and Glass' guide cannot estimate the value since the vehicle is too new.
Used vehicles can use either red book/Glass' guide or independent valuations. The valuation approach can change from year to year.
Independent valuations must be truly independent (refer IT2648). The valuer cannot be an associate of the dealer. The valuer must be qualified and not an individual the dealership deals with in the normal course of business.
It is the responsibility of the dealership's management to ensure the valuation/provision booked for tax represents market value and isn't too aggressive or inappropriate.
Lastly, the independent valuer must be paid and a tax invoice issued to the dealership.
Refer to the annexure: Independent Valuation Wording per IT2648
Management of the dealership should identify obsolete stock or stock that is becoming obsolete. Typically, this would be parts stock aged 12 months with no movement. Determine if it can be returned to the manufacturer for a credit or whether it is required to be scrapped?
An important aspect to the tax election for obsolete parts stock (section 70-50) is solid support. Therefore, dealership management should obtain a report from the parts manager of the realizable value of the parts stock at 30 June.
For obsolete parts stock, a specific tax election under section 70-50 of ITAA 1997 allows for a deduction of the obsolescence to be obtained if:
This election is a must for all dealership groups.
Refer to the annexure: Suggested wording for Trading Stock Election Pursuant to Section 70-50 of ITAA 97.
Holdback income can be deferred for unsold new vehicle inventory (no change from normal end of month treatment). However, no deferral can be claimed for demonstrator vehicles and the holdback income attached to demonstrators are treated as an addition to your taxable income calculation.
Doubtful debt provisions are not tax deductible and must be added back in your taxable income calculation. However, if your dealership has debts that are unrecoverable (and the necessary steps to recover the debt have taken place), a tax deduction can be taken per TR92/18.
There are dealership specific items that need to be considered for the tax year end.
Key dealership provisions – not deductible until paid and therefore the movements in the provisions year on year are tax assessable/deductions in the current tax year, for example:
Typical Non-deductible items for dealership groups are as follows:
Some typical Deductible/Non-assessable items for dealerships are as follows:
Factory Bonuses are assessable if they are definitive ('earned') and calculable at 30 June. Remember, demonstrator bonuses are assessable.
Superannuation is deductible when paid and this is determined as and when the trustee receives the funds. Outstanding cheques or payments are not sufficient for the tax deduction, therefore it is important to ensure the payment is made with sufficient time to clear prior to 30 June.
Represented by a payment/loan to a shareholder or associate from the company or an unpaid present entitlement (UPE) from a trust to a corporate beneficiary.
Post 4/12/1997, these loans and UPEs are addressed under Division 7A of the Tax Act and may be subject to the following:
The rules relating to UPEs owing to companies are extremely complex and it is recommended that you discuss this with your tax advisor should it apply to you. Planning is the key with regards to Division 7A so speak to your tax advisor sooner rather than later.
Whilst not necessarily a tax planning matter for all dealerships, many dealerships are privately owned and superannuation forms a significant part of the wealth of the owners, which is often held in Self-Managed Super Funds.
Due to recent changes to the superannuation legislation, the upcoming year-end represents the final opportunity for many to maximise their contributions into super and also an opportunity to review super strategies during the transitional period leading up to 30 June 2017.
If applicable to you, we recommend that you contact your tax advisor as soon as possible to commence superannuation planning.
Start planning now! 'Spring clean' your balance sheet in April and May to identify any areas of concern and to ensure the 13th month adjustments are not a surprise.
For income tax, identify your non-deductibles and provisions that have a significant impact on your taxable income. Perform tax estimate calculations for your dealership group and determine possible tax liabilities to understand where you stand.
If you have discretionary trusts in your group, distribution determinations/resolutions need to be made prior to 30 June (or earlier if required by the Trust Deed). You should discuss a tax effective and commercial distribution strategy with your tax advisor well before year-end.
Do you have enough cashflow to pay the tax when it's due?
Have you prepared a cash flow projection to ensure the owners/directors are able to meet their tax obligations?
Make sure your accounts represent the best 'view of you' as a business at year end, double checking valuations, debt covenants and working capital positions prior to year end will ensure you will look your best for the next 12 months.
"I hereby confirm that the used vehicles and demonstrator stock inspected and detailed on the attached sheets has been valued on the following basis:
I have sighted the attached list of vehicles and consider the GST inclusive replacement price of such units as at 30 June XX is the amount reflected beside the description of each individual unit – The replacement price is inclusive of GST.
"Trading Stock Election Pursuant to Section 70-50 of ITAA 97"
XYZ Motors Pty Limited “The Taxpayer” has valued a certain portion of spare parts at zero.
Given the age and condition of the sock and current market conditions the taxpayer deems itself unlikely to receive any consideration for these goods. As a result the taxpayer has claimed a deduction of $ in the 20XX year tax return.
In accordance with the legislation the taxpayer will remove the stock from its premises and have it destroyed.
All substantiation requirements have been met.
Dated this..... Day of .............20XX
Article written by Steven Bragg, KPMG Motor Industry Services
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