Income tax query

[want2bewealthy]

Hi guys,

I've a question for you. I made a capital gain this year where the 50% CGT discount applies and on it's own without including any other income I'll owe $15k tax.

I've started my own business finally which makes good money for minimal hours which is exactly what I've been looking for and I'd like to know this: will anything I buy for the business reduce the tax payable on my yearly income including the CGT? Or is CGT seperated from income tax? I figure I might make around $20k over the next 5 months working part time and spend $10k in work related expenses. So if that income was separate there would be no tax payable but included with the capital gain I expect it would just drop 10k off my yearly income and make the $20k $10k plus the capital gain. Right?

 

[Terry_w]

CG goes on top of your other income. So does business income if you are a sole trader.

 

[want2bewealthy]

So it would be a wise financial decision to purchase the majority of my gear this financial year to offset?

 

[coastymike]

The non commercial loss provisions will apply as a sole trader so you may or may not be able to apply any business loss to your other income.

if a profit then don't need to consider the provisions.

just make sure the gear you buy is done early as a lot of it will be subject to the depreciation rules for small business entities (SBE)

- An immediate deduction will be available for assets costing less than $1,000;
- Assets costing $1,000 or more will be allocated to the small business general asset pool;

 

[Terry_w]

Well, that would depend on next year's anticipated income, taxs and whether these items are capital in nature.

 

[Blacky]

CG goes on top of your other income. So does business income if you are a sole trader.

I thought that CGT losses could only be offset against CGT profits?

And therefore the CGT of $15k, could only be reduced if there was a CGT loss - not a business operating expense?

Or am I mistaken in my understanding?

Blacky

 

[coastymike]

CGT losses can only be offset against CGT profits. BUT business losses can be offset in certain circumstances against CGT profits.

Think the question is being asked that they have a business profit and want to try to minimise the profit as much as possible as they also have a capital gain to report. Therefore any additional expenditure will help in reducing that taxable profit.

 

[Terry_w]

I thought that CGT losses could only be offset against CGT profits?

And therefore the CGT of $15k, could only be reduced if there was a CGT loss - not a business operating expense?

Or am I mistaken in my understanding?

Blacky

Misunderstanding. A capital loss can offset a CG. But a CG goes on top of other income (after capital losses applied) so reducing the other income can mean tax savings.

 

[want2bewealthy]

Thanks man. So does that mean, if I make more than I spend in business then it can offset the capital gain income? And if I don't, it cannot be?

 

[coastymike]

Wanttobewealthy

The business expenditure isn't reducing any capital gain income. The business expenditure will reduce business income. That means a lower profit. That lower profit gets added to the capital gain. So a lower profit from increased business expenditure will mean lower overall tax.

Once you start generating a business loss i.e. expenditure is greater than your revenue then you need to start looking at the non commercial loss provisions.

 

[want2bewealthy]

Thanks Mike. I'm having a hard time understanding this. I'm really wanting to play this year strategically from a financial perspective. What to do (?!) I'm my own boss now so have the ability to work it however but I'd hate to work my *** off for little reward or worse, even go backward

 

[coastymike]

tax always comes second to making a profit.

concentrate on the business and making profits. then look at structuring. is a sole trader right or not ? is asset protection important ? depends on what you are doing and other asset held in your own name.

trusts may be appropriate for a small business. maybe not. asset protection might be the primary consideration. is it PSI (personal services income). if so a trust won't help with tax minimisation. personal services business or true business profits then a trust might help.

lots of issues to consider. get a good team on board and you should be fine. but number 1 priority make the business work.

 

[Terry_w]

What about an example?

$60k capital gain
$20,000 income wages
$40,000 business income.

$10,000 business expenses


Income = apply 50% discount to CG + the rest
= $30k + $20k + $40k = $90k

Deduct business expense now = your income becomes $80k

or

Delay expenses till next year, your income this year will be $90k

Next year your income may be
$20,000 income wages
$40,000 business income.
Total $60k

so you have to decide whether to incur the expenses now with a higher income, or next year delay till next year.

Just jump onto one of the online calculators and work out the differences.

 

[Paul@PFI]

If I was advising a business client one strategy that hasn't been mentioned is maxing super for the financial year where the cap gain arises. The marginal tax rate savings could be significant.

Another strategy is to sell other assets at a loss (ie shares)

Minimising business income without triggering non-commercial loss problems is also wise. Seek advice on effective tax strategies for the business before acting on this as Mike has already indicated.

 

[want2bewealthy]

Thanks guys. May I ask, what is a non commercial loss? Because if I do buy all my gear this financial year I will make less than I spend. It's a personal services business. Others know it as Gardening

Thanks!