With tax season coming up, and there can be a lot of confusion about when you should start planning your tax. Which is why we created this Small Business Tax Planning Guide.
As you already know the 30 June is the last day of the financial year. It’s the cut-off date for anything that would be included in your tax return for the year.
So even though your tax return generally isn’t due until October, it is best not to leave thinking about your tax until 30 June, because by then it’s too late.
That’s why we highly recommend that you start planning in May. This way, you have at least a month to ensure that you’re lodging your tax the right way.
One of the ways in which you can do that is through Tax Planning. You’ve probably heard that term before but let’s start by taking a look at what Tax Planning actually is. Tax Planning involves structuring your finances in the most efficient way, in order to manage the amount of tax that you pay.
It involves using legal strategies to reduce your taxable income and increase your tax deductions. This way, you can lawfully pay less tax for the financial year.
The Australian Taxation Office website states “You have the right to arrange your financial affairs to keep your tax to a minimum – this is often referred to as tax planning, or tax-effective investing. Tax planning is legitimate when you do it within the letter and the spirit of the law.” Which is great, because there are plenty of aboveboard strategies you can implement. If you’re concerned that you may have engaged in a tax strategy that is not legal, we recommend getting in touch with the ATO immediately, as the ATO is far more likely to be lenient on those who are upfront, than those who get caught out.
In this Small Business Tax Planning Guide, we’ll cover the basics of the top five legal Tax Planning Strategies to help you reduce your tax.
Top 5 Tax Planning Strategies For Business and Business Owners
- Deferring Income
- Business Deductions
- Capital Gains Tax
Remember, not every option will suit you or your business, and it is always best to seek tailored financial advice when it comes to your Tax Returns and Tax Planning.
With that said, let’s take a look at each of these categories and what they might mean for you.
One way that you can plan your tax, is through deferring your income. This is a way of lowering your payable tax for the current year. You will still need to pay this tax, but you might be able to pay it in the following year.
There are several ways that you can do this:
If you have investments, you will probably get taxed on your interest. If you are looking to defer, you might be able to arrange for them to mature after the 30 June. This way, they fall into next years taxable income, not this year.
Now, this might not work for everyone, but (if your cashflow allows it!), consider invoicing clients after the 30 June. Just be aware that some tax savvy clients might insist on a pre-June invoice for their own tax purposes.
Keep in mind that deferring is useful for the current financial year, but you will still need to pay this tax in the following financial year, which might be something to consider when thinking about this option.
Business deductions are a Tax Planning Strategy which can be helpful in a number of ways. Consider which of the following options might apply to you and your business and how you can use it effectively.
Okay, so you have a work vehicle that is due for a service, your machinery that need a tune-up. Instead of waiting until after June, consider getting all these maintenance tasks done Pre-June. This way, they become tax deductible for this year.
2. Bad Debts
This is a big one. Take a look at you trade debtors and review your books. If you have any bad debts that you will have to write-off, make sure you do it pre-June.
3. Obsolete or Slow-Moving Stock
If you have obsolete stock (stock that has no value any more), then you can write-off its value for a deduction. If you have slow-moving stock, on the other hand, you can write it down to a net realisable value (an accurate estimate of how much you will earn from this stock).
Now, we have a whole section for this, but we had to include it here too. See, if you pay your employee’s superannuation contributions before the 30 June, you can avoid the Superannuation Guarantee Charge.
When it comes to business deductions, make sure that you consult with an accountant or financial planning advisor, to ensure that you are adhering to the legislation of your industry and stage of business.
Capital Gains Tax
Depending on your situation, capital gains tax can be something to keep in mind when doing your Tax planning. There are several ways that you can utilise capital gains tax, although the size of your business will play a role in which options are available to you.
1. Capital Gains Tax Discount
This particular discount (Capital Gains Tax Discount) is only available when you sell an asset that you have held for over 12 months, but it can be a very useful way to reduce your taxable income.
2. Capital Gains Purchases
If you make a capital purchase (buying a business asset), you might be eligible to get an instant asset write-off of up to $30,000. This increases expenses and reduces taxable income meaning you pay less tax overall.
Trust funds, or investments, are a great way to increase your income through your interest. That said, you need to be very careful with how you manage these funds.
1. Distribute your income
It is very important that you distribute your income when it comes to any trusts in your name. Undistributed income can be taxed in a higher tax bracket, which is detrimental to you.
2. Be Informed
It might sound obvious, but the wording and exact definition of your trust fund is important, especially when it comes to tax. You need to make sure that this is carefully reviewed, so that you know what you owe tax on, and what you don’t.
If you properly utilise your superannuation, it can help you reduce the amount of tax that you are required to pay.
1. Pre-paying superannuation
A good option that might be available, is paying your superannuation upfront. As long as you don’t contribute more than the annual concessional contribution cap (the maximum annual contribution), this is a good option for lowering your taxable income.
If you make a personal contribution to your superannuation, you might qualify for the co-contribution payment. This is great because not only does it increase your superannuation, but it decreases your tax too.
How Can You Start Implementing These Changes?
So, you’ve gone over our list and you want to start implementing some of these changes to your tax. But where do you start?
- Start now, before 30 June
- Look at your current taxable income or business profits
- Determine whether or not your profits are too high
- Consider making a capital purchase to get an instant write-off
- Consider pre-paying your superannuation
- Contact your accountant or financial advisor to see which of the above options are available to you
Remember, the earlier you start, the more likely you are to be able to take advantage of Tax Planning before the end of this financial year.
If you want to get started, but need a hand, don’t hesitate to contact us for confidential and tailored tax advice.