As the income tax year draws to a close yet again, many pharmacy owners will take on the daunting task of looking through their financial records and start to consider the extent of taxes to be paid on hard-earned profits.

Fortunately, there are legitimate and acceptable strategies to help your pharmacy reduce its tax footprint come 30 June.

A further question often posed by all business owners, not just on June 30 but all year round, is whether your pharmacy is meeting all taxation and regulatory obligations.

Did-you-know? The ATO have recently extended reporting requirements which will now impact all pharmacy owners?

How do I minimise my tax footprint?

The starting point in this conversation is projecting what the pharmacy’s expected full-year trading result will be. Pivotal here will be having current and accurate data regarding your pharmacy. Using this information, owners can then understand and predict how the full-year position will look. Your budget may even be useful here in determining future trading and how it may impact taxable income.
 

Following this, there may be an opportunity for pharmacy owners to consider strategies to help minimise income tax payable.

In actual fact, some of these practices can be performed at any point during the year and are not isolated to simply 30 June.
Please see the list opposite for some key opportunities for pharmacy owners to consider.
 

1. Stocktake and inventory valuation

Keeping track of your trading stock is particularly important in the running of any business. But how often are owners reviewing this information for accuracy and how often are we considering obsolete or unsellable stock? Practically speaking, any increase in your trading stock’s value over the year is considered assessable income, while a decrease is an allowable deduction. Pharmacy owners should review their inventory reports to ensure all stock physically exists in the store and is appropriately valued. Consider any obsolete, damaged or out-of-date stock and the true value — if any — it has to the pharmacy.

2. Bringing forward expenses

There may be some scope to bring forward expenditure that was going to be incurred by the business regardless, such as stationary costs, training or even prepaying interest costs of the pharmacy. By incurring such expenses now, rather than in the new financial year, the tax deduction will be used to reduce current year profits.

3. Customer accounts

It is common practice to offer our customers credit for sales made but not yet collected in cash. However, how often are you reviewing your customer accounts for amounts that would be considered bad or uncollectable? Consider amounts which the customer has not returned to the pharmacy or that cannot be traced. Rather than amounts that are merely ‘doubtful’, a tax deduction is available for genuine bad debts. It is imperative to review your customer accounts and write off amounts that are uncollectable.

4. Superannuation

In previous years, a common strategy for pharmacy owners was to make contributions into superannuation as a way of reducing personal taxable income. In recent years, we have seen substantial and widespread changes to the superannuation regulatory environment. All pharmacists should be contacting their financial planners or advisors to discuss if this is still an acceptable tax minimisation strategy.

Other Tax Tips for Pharmacy Owners.

Understanding Tax for pharmacy business ownersDoes the federal budget affect Pharmacy Businesses?

On 2 April, the 2019–20 Federal Budget was issued with very few newly announced tax-related measures. Perhaps the key measure affecting pharmacy owners was the extension of the instant asset write-off. With effect from 2 April 2019 to 30 June 2020, businesses with a turnover of up to $50 million will be able to immediately claim an immediate deduction for depreciable assets costing up to $30,000 (previously $25,000). The impact of single touch payroll Single touch payroll (STP) is a real-time reporting system introduced by the ATO which came into effect on 1 July 2018.

From 1 July 2019, all businesses are required to report payroll payments directly to the ATO for every pay-run made, this has now been extended to all employers, with some specific concessions to closely held payees. Even those with only one staff member.

So how does this change impact your pharmacy?

Broadly, STP does not affect how and when you pay your employees. It only impacts how you report on those payments. As reporting is digital, all pharmacy owners will need to review their existing accounting system to ensure it is STP compliant and in fact, may be required to move away from outdated desktop accounting platforms. The changing corporate tax rate In recent years there has been much change and deliberation regarding the reduction to the corporate tax rate in Australia, which has unfortunately created some confusion. To clarify for pharmacy owners, legislation at the time of writing provides that from the 2018 income tax year, ‘base rate entities’ will be eligible for the reduced corporate tax rate of 27.5%.

Just what is a base rate entity?

The ATO provides that a base rate entity is:

  • a company with an aggregated turnover of less than $25 million; and
  • no more than 80% of its assessable income is base rate entity passive income, such as interest or rental income.

So, in the event the pharmacy is owned by a company and the majority of income earned is that from the trading of the business, the likelihood is that the reduced company tax rate of 27.5% will apply.
There is no doubt, understanding the complexities associated with the Australian taxation landscape is a challenging adventure but it is manageable.

It is always important to act and ask questions early in the hope of avoiding a large and perhaps avoidable tax bill come time to lodge your tax. 

Ask yourself: Is my pharmacy compliant and in accordance with current tax legislation? — don’t let the results surprise you!

If you need further assistance to regarding any of the content discussed in this article, get in contact with your local RSM Pharmacy Business Expert >>.

This article was originally published in Gold Cross Products & Services Pty Ltd • ITK Issue 66 • June–July 2019