YEAR end is fast approaching and it’s time to focus on finalising financial results and preparing for what is ahead. 

We know that year-end is more than just closing the books. Your financial snapshot will shape the next 12 months. Whether you’re planning for refinancing, a sale, an acquisition, or other significant capital investments, getting your numbers right is crucial for success.Another priority at year-end? Keeping your tax bill down, most dealers know that tax is one of their largest expenses, however if tax planning is not done properly, there could be severe cash flow consequences as well, especially this financial year. Dealer

Profits have been plummeting, stock values have been normalising, so managing your tax deferrals and tax liabilities will be key for 2025.

We have put together a checklist of key financial and income tax items that will have a significant impact on your year-end numbers.

FINANCIAL CONSIDERATIONS

To be in good shape at year end, you need to clean up the balance sheet and ensure monthly reconciliations are up to date minimising any surprises or issues that have been carried forward from month-to-month, including:

1. Review and reconcile all scheduled accounts including clearing up unmatched entries, debit/credit amounts related to vehicles incorrectly stocked in, write off additional costs/losses from sale transactions, etc. 

2. Apply your dealership’s provisioning policies particularly for doubtful debts, demo and used provisions, and parts obsolescence, note:

• Ensure aged and non-performing customer receivable accounts are provided for
• Include receivables written off as uncollectible at year end so you can claim the deduction in your income tax return
• Ensure the inventory provisions are adequate to cover anticipated adjustments of stock to market value/replacement price at year end

3. Factory receivables – ensure there are controls in place to monitor compliance with all incentive programs; factory incentives make up a large part of the bottom line. The factory can audit factory incentive claims at any time and will charge back if the dealership violates program provisions.

4. Review the floorplan schedule and account reconciliation for:

• Debit balances where vehicles have been paid off more than once/overpaid and funds have not been returned by the finance company
• No unintended conversion issues. If conversion is identified, get on the front foot and notify the financier and rectify the issue immediately. It’s better to have this tidied up before year end as it will sit in your published accounts for the next 12 months.

5. Review all accruals and prepayments accounts and schedules for errors, ensure complies with the dealership’s accounting policies, specifically:

• No general provisions and that a legitimate liability exists for the accrual booked
• Obtain your warranty statements from suppliers to reconcile your warranty provisions
• Used vehicle statutory warranty in accordance with the dealership’s accounting policy
• Annual leave and long service leave are based on payroll reports
• Prepayments are actual prepayments and confirm tax deductibility from your tax advisor

6. Other significant adjustments:

• Loan covenants are incredibly important to owners/directors so ensure:
  • calculated correctly
  • assets and liabilities that impact covenant calculations are classified correctly (e.g. liabilities that are refinanced within 12 months of balance sheet date which can impact classification at year end)
• Accounting for leases is an area where an unexpected adjustment often occurs, so revisit lease accounting entries and balances to ensure they are correct.
• Impairment of goodwill or other intangibles (trademarks, company names, etc.)
• Impairment of land and buildings – ensure fair value accounting and valuation analysis is comparable and current
• Impairment in investments in related companies
• Impairment or any provisions required for intercompany loans
• ‘Fair value’ adjustments of investment properties through the P&L
• Any lifestyle assets in the balance sheet and tax exposure
• Going concern/solvency considerations
  • Working capital deficit
  • Deficiency in net assets
  • Ability for the company to meet its obligations in the next 12 months

Maya Sutanto

TAX CONSIDERATIONS

The keys to keeping your tax bill down and staying on top of cash flow requirements include the following:

1. Used and Demonstrator vehicles valuations (IT 2648) – allows for three methods of valuing trading stock: cost, replacement value, and market value. The ruling also requires the following:

• Replacement value should be an independent valuation or from a published industry guide
• Demonstrator vehicles require an independent valuation
• Used vehicles can use independent valuation or a published industry guide. The valuation approach can change from year to year.
• Independent valuations:
  • Must be truly independent. 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.
  • The independent valuer must be paid and a tax invoice issued to the dealership.
  • Ensure the valuer signs every page of the valuation schedule.
  • 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.
  • Ensure GST is deducted from the valuation (i.e. the GST exclusive value is used).
  • Ensure all reconditioning costs are included in the vehicle costs prior to valuation.
  • Tools of trade are depreciable items not trading stock (e.g. parts, utes, vans, courtesy buses). Likewise, you cannot depreciate your trading stock.
  • Refer to the annexure: Independent Valuation Wording per IT 2648

2. Spare parts obsolescence – obsolete stock or stock that is becoming obsolete should be identified (typically parts stock aged 12 months with no movement).

• For obsolete parts stock, a specific tax election under section 70-50 of ITAA 1997 allows for a deduction of the obsolescence. This election is a must for all dealership groups.
• The tax election for obsolete parts stock requires solid support:
  • A parts stock report of realizable value at year-end
  • The stock identified should be less marketable because of changed circumstances
  • A true reflection of the taxpayer’s taxable income for an income tax year will not be achieved if the stock identified is valued at cost
  • Refer to the annexure: Suggested wording for Trading Stock Election Pursuant to Section 70-50 of ITAA 97
• You should also determine if obsolete stock can be returned to the manufacturer for a credit or whether it is required to be scrapped.

3. Holdback (IT 2648) – 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.

4. Bad debts – 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. The bad debt must be physically written off and documented on or before 30 June on the debtors ledger or by resolution by the directors. Don’t forget to claim back the GST.

5. 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:

• Harrier National provision (IT2648)
• First service provision
• Used Vehicle statutory warranty
• Long Service Leave
• Annual Leave
• Sick Leave
• Other general provisions

6. Typical Non-deductible items for dealerships are as follows:

• Goodwill impairment
• Amortisation of intangible assets (possible rate differential between accounting & tax)
• Fines
• Entertainment that is not subject to FBT (50/50 method or actual)
• Certain building depreciation
• Note GIC is not deductible as of 1 July 2025

7. Some typical Deductible/Non-assessable items for dealerships are as follows:

• Work in Process Labour
• Prepayments are generally not deductible with exception to payments under $1,000 or those required by law, for example:
  • Workers’ compensation
  • Land tax and council rates
  • Registration/CTP payments
  • Warranty Income (IT2648)
  • Div 43 Capital Works deductions (i.e. building write-off)

• Factory incentives are assessable if they are definitive (‘earned’) and calculable at year end. 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.

• Capital assets where an instant asset write off was claimed and was disposed of during the year may result in an assessable gain

8. Debit loan accounts in companies and trusts – 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:

• These loans must have a formal loan agreement in place with terms, calculation of interest and principal in accordance with Division 7A, and executed prior to the relevant date set out in Division 7A
• No interest or repayment is required in year 1
• The interest may be deductible to the borrower if the funds are used for income producing purposes
• Repayment of the loan may be accomplished by a cash injection by the shareholder or via a franked dividend.
• Relating to dividends:
  • Gap tax may be payable by the shareholder, dependent on tax rates
  • The effectiveness of dividends is contingent on the availability of franking credits and the extent the company can pay dividends under the Corporations Act.

Recently, the decision of the courts (with appeals pending) has raised uncertainties in relation to UPE’s and their future determination as a loan for Division 7A purposes. Additionally, there has been increased ATO scrutiny regarding the enforcement of section 100A. The rules relating to UPE’s are complex, so it is recommended that you speak to your tax advisor sooner rather than later. 

Paul Kennedy

YEAR END ACTION PLAN

1. ‘Spring clean’ your balance sheet before year-end to ensure 13th month adjustments are not a surprise and present your accounts at year end as the “best version of you” as a business
2. Perform tax estimate calculations including identifying significant income tax non-deductibles and provisions to determine where you stand, and actions that can be taken to manage income tax liabilities.
3. Prepare a cash flow projection to ensure the owners/directors can meet their tax obligations. Lodging tax returns early and varying tax instalments may be a significant benefit.
4. Maintain a tax effective and commercial distribution strategy with your tax advisor well before year-end, including Division 7A agreements/determinations/resolutions, and franking credit ledger maintenance.
5. Schedule inventory stocktakes and valuations and ensure procedures and documentation will be in accordance with tax legislation.

ANNEXURES

1: Independent valuation wording:

2: Parts Trading Stock Election wording:

ANNEXURES

1.Independent valuation wording:

“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.

Yours faithfully”

2. Parts Trading Stock Election:

“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 stock 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”By MAYA SUTANTO and PAUL KENNEDY