In this sponsored post chartered accountant GAIL FREEMAN helps a software developer get his tax bill under control. Do you need help minimising your tax?
Darren has just set up business with other computer specialists as a software developer. It is growing fast and earned a lot of income this year. Darren came to see me, worried about the size of the business tax bill.
He also asked for clarification concerning GST.
“Darren, you are registered for GST on a cash basis as your turnover is less than $10 million, so GST is reported and paid when you are paid by your customers,” I told him.
“You are, of course, also entitled to claim input tax credits when you pay for goods and services.”
“But much of our income comes from selling support contracts for periods from six to twenty four months in advance,” Darren said.
I asked him to confirm that the income was paid for services that were yet to be provided. Darren said: “Yes, that’s right.”
I explained that “as he reports GST on a cash basis that income is still declared in activity statements when it is received. However, the situation is different for income tax.”
I then told him about the famous Arthur Murray case that went before the High Court many years ago.
“The Arthur Murray School provided ballroom dancing lessons which it sold in advance of providing the lessons. The High Court held that the income was not derived until the lessons were used as there was a possibility that if the customer did not wish to proceed with the lessons then a refund could be provided even though there was no obligation to provide a refund under the contract,” I explained.
“Darren, how do you account for these contracts?”
He explained that each contract was separately dealt with, a record was kept of the period that the contract referred to and the services that were provided each month. The purchase and development of the software was accounted for separately.
“Well,” I told him, “because of the way that the contracts were sold and, more particularly, the fact that each payment was accounted for separately and amortised over the life of the contract, the principle in the Arthur Murray case could be applied and the only income that needed to be brought to account each year for tax purposes was income for which the customer had received fair value.”
Darren was thrilled as that would reduce the business taxable income – and hence tax payable – considerably.
If you need help with minimising your tax, contact the specialist team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email firstname.lastname@example.org or visit gailfreeman.com.au
Disclaimer: This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.