Every year as June 30 approaches, the tax man looms large in the back of all SME owners’ minds.
In the lead-up, many will be looking to minimise how much tax they need to pay and, particularly this year, to take advantage of government rebates and assistance. In fact, it’s one question we often get asked by the businesses we work with.
But no business should be acting solely in the interest of minimising tax.
The reason for this is simple. Tax incentives should not be the starting point for making smart business decisions. It is something to consider, but the business/investment decision should be considered first.
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For most of us, our business goals will include growing and increasing profits, which means we’ll likely need to accept that additional tax or legal responsibilities come with this.
To minimise tax, you’re likely to be minimising the profit that your business is making.
Don’t be sucked in by incentives
Right now, the government is offering highly publicised additional instant asset write-offs as part of its coronavirus pandemic measures to boost the economy.
However, if you are not already planning to spend that money, and it does not make sense to do so outside of a tax incentive, this incentive isn’t worth taking up.
But this is an uncertain time. Soon JobKeeper will stop, and the pandemic’s long-term effects on our economy are still unknown. With that in mind, spending incentives are best approached with scepticism and careful planning.
One common lure is that it can be really appealing for a business owner, knowing that tax incentive is there, to take an additional loan or novated lease for a new car.
However, unless you need the car (e.g. you might be a tradesperson in need of a new van or ute) it isn’t beneficial for company purposes. You shouldn’t buy a car for a tax write-off.
Look beyond June 30
There is a controversial business adage that any company will need three books:
- For tax (so you pay less)
- For the bank (to get better terms/loans)
- For yourself (reality)
When you balance your books to make the most of all tax offsets, you often have a focus on a singular point in time: June 30.
But a business doesn’t operate like this; it continues on July 1 and beyond. People are looking at the tax before looking at what they really want to do.
Beyond tax, there will be competing interests where it is likely you’ll need to show that your business has strong performance, growth and profits.
This could be if you’re looking to approach the bank for a loan, or even if you’re presenting your company to a potential investor.
A great example occurs in relation to research and development tax incentives.
A lot of companies structure the books so they can claim losses for R&D tax rebates. Keep in mind it’ll mean your company looks bad, and you’re stuck with an entity that isn’t going to be appealing if you’re trying to borrow or raise capital in the future.
Prioritise your business goals
Instead, business owners should prioritise what they are trying to achieve.
What’s your plan in the short-long term? Will you need to approach the bank for a loan, do you need to raise capital, do you want to aim for high growth?
You need a strong business plan and understanding of your fundamentals first. Then manage the tax to support this plan.
When businesses are growing it can be daunting to step up to the next level in terms of legal responsibilities, particularly in payroll tax.
It’s a common misstep for a business in early growth stages to avoid hiring, because they’ll have to pay over the threshold. But this can cost your business big-time in lost productivity.
If you are trying to grow your business these are situations you will need to proactively navigate and potentially invest back into your company so it can grow.
Understanding business fundamentals, growth projections and your responsibilities are part of this, and unfortunately leading a strategy by tax minimisation will likely cost you more in the long term.
It’s always important to remember if you’re paying more in tax, it means you’re making more money.
So, as the end of this financial year looms, approach your tax with your business goals in mind, not just a desire to avoid the tax man.
The information in this article is general information only. It is not professional tax advice and should not be taken as constituting professional advice from the author. You should seek professional tax advice from your accountant that is specific to your circumstances.