Small and medium businesses have access to a range of concessions that not only help reduce their taxable income but are also designed to make tax administration easier.
Here are 10 tips for small business owners to minimise their business’s tax bill.
1. Scrap obsolete stock or plant and write off bad debts
Got some old plant or stock that your business simply can’t sell due to COVID-19? Then physically write it off before June 30 and get a tax deduction for it this year. You can value trading stock at the lower of actual cost, replacement cost, or market selling value. This valuation can be applied to each item of trading stock.
Similarly, a lot of customers are facing financial difficulty during this pandemic and simply can’t pay, so for a business to get a tax deduction on its bad debts it must physically write off the debt prior to June 30. Note that the debt must have been originally shown as income for the write-off to be allowed. Put your decision in writing such as a board minute. You also need to show that you have made a genuine attempt to recover the debt to prove that it is bad.
2. Buy a new business asset for under $165,000 and claim it as a tax deduction this year
There have been some great tax concessions over the past few years for small businesses with none greater than the immediate write-off available for the purchase of new business assets that cost less than $150,000. Apart from motor vehicles (where it is limited to the business portion of the car limit of $57, 581), there is no limit to the amount of assets that you can purchase under this concession, but beware that you are only getting a percentage back and your cashflow will suffer. If your business is registered for GST, the threshold is effectively $165,000 as you can claim the 10% GST credit (up to $15,000) and get an immediate write-off for the balance in this year’s tax.
3. Build your nest egg quicker by paying 15% rather than 47% by salary sacrificing into super
Salary sacrificing into superannuation is one of the best, and legitimate, ways to minimise your income tax bill. Small business owners can have their business contribute up to $25,000 per year into super, which is only taxed at 15% within the fund, and claim a tax deduction for the contribution (27.5% for small companies and potentially 47%t for sole traders). Note that in order to obtain a tax deduction in this financial year for any superannuation contribution (including all other non-related employees), the contribution must be received by the superannuation fund by June 30.
4. Defer income and bring forward expenses up to 12 months in advance
It is always a good idea to try to defer your taxable income to next financial year (except when the marginal tax rate increases). For those operating on a cash basis, simply delay the “receipt” of the income. If you operate on a non-cash basis then you may want to defer your invoicing until next year. An immediate deduction is available to SMEs for the prepayment of allowable deductions such as lease payments, interest, rent, business travel, insurances and subscriptions up to 12 months in advance by June 30.
5. Split your income with your lower-earning spouse and pay less tax as a family
It amazes me how many smart business people are really dumb when it comes to reducing tax. Too often I see them paying 47% tax on income, which could be in put under their lower-taxed spouse (zero percent or 16.5%) or company (27.5%). If you are paying a wage to your spouse from your business, ensure you can justify the amount paid based on the time and the skillset required.
6. Claim a deduction for expenses not paid at year end
Just because you haven’t paid for something doesn’t mean that you can’t claim it. Businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by June 30, including:
- Salary and wages – claim the number of days that employees have worked up to June 30, but have not been paid until the new financial year;
- Directors’ fees – claim a tax deduction for directors’ fees that are “definitely committed” to at June 30 and have passed an appropriate resolution to approve the payment;
- Staff bonuses – claim a tax deduction for staff bonuses and commissions that are owed and unpaid at June 30, where the business is “definitely committed” to the expense;
- Repairs and maintenance – claim repairs undertaken and billed by June 30 but not paid until next year.
7. Write up your family trust resolutions before June 30
After years of abuse of these measures, it is mandatory for those with family (or discretionary) trusts to have a written trustee resolution before June 30 showing the intended distribution of income to family members. Careful tax planning is required otherwise it may cost your family thousands in unnecessary (and unwanted) taxes.
8. Private company loans to shareholders
If you have borrowed funds from your company, ensure that the appropriate principal and interest repayments are made by June 30. Non-compliance with the strict ATO rules will result in the entire loan amount being deemed as an unfranked dividend paid and taxed at marginal rates. The private use of certain company assets (such as boats and cars) is now also potentially caught by the taxman unless a market rental fee is paid.
9. Don’t spend purely for a tax deduction
So many people get caught out at this time of the year by spending money purely to get a tax deduction. If you are running a business via a company then you are only getting 27.5% back. If you want a $100,000 tax deduction then I will gladly invoice you and accept payment. Why spend money when you only get a fraction back? Don’t get caught out by the fancy marketing of retailers in coming weeks. Always think of my A-B-C motto: Absolute Bloomin’ Cash.
10. Get a great accountant
Most businesses have received as much as $50,000 in the cashflow boost from the government during COVID-19 but did you know it was tax-free? Avoid paying too much in tax or leaving yourself open to a visit from the taxman. Great accountants are like surveyors … they know where the boundaries are. And their fees are tax deductible!
This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.
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