It’s only the beginning of May but if you haven’t already, now is the time to start thinking about the end of the financial year.
It may still seem some time away but those eight weeks will skip by and we’ll be there before you know it.
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Last minute tax planning can be a recipe for poor decisions and you need to work through the cashflow implications on anything you decide to do.
There’s no point saving some tax if you create a cashflow crisis in the process.
Tax planning falls into three baskets – health and hygiene, timing and efficiency and permanent savings. You need to analyse each area before the end of the financial year.
Health and hygiene – there’s no excuse for any business not completing this review prior to year-end.
This is about making sure that your business has attended to its tax housekeeping.
Included in this are:
- Writing off any damaged or obsolete stock.
- Writing off any bad debts.
- Scrapping any obsolete plant and writing it off your asset register.
- Ensuring any loan payments necessary to satisfy Division 7A loan agreements are made.
- Complete any inter entity management charges.
All of these actions need to be taken before June 30 and your accounts need to reflect that the actions were completed, eg a bad debt that is written off should be reversed out of your debtor’s ledger before June 30.
Timing and efficiency – this is all about causing your tax liability to fall at the best time for you.
It may be through the bringing forward of expenses or deferring income. The efficiency part includes ensuring that tax is being paid by the entities or people where you can enjoy preferential tax rates.
Think about the following:
- Declaring bonuses before June 30, even though they may not be paid until after that time.
- Declaring director’s fees.
- Ensuring June quarter SGC payments for employees is made before June 30.
- If you are a Small Business Entity (SBE), prepaying some of your expenses before June 30.
- Payment of dividends.
- Committing to necessary consumable expenses pre June 30.
- Trustee resolutions to distribute trust income.
- Deferring income until after June 30, where possible.
Some of these strategies revolve around deferring income to the following year and bringing forward expenses and tax deductions into the current year.
Don’t always accept this as the right strategy. If you are in a start-up business and not generating a profit yet, you may not want to defer your taxing point.
While saving tax always seems like a good idea, consider the rate of the tax saving. It will be a mix of personal and possibly company tax rates.
Saving a tax dollar this year where the benefit may only be 20 cents in the dollar is poor economy if next year you will pay 46 cents on the same tax dollar.
Tax timing requires you to have a view about your current year position and any differential position for the following year.
Permanent savings – these always sound attractive but you need to have the cashflow to manage them and be comfortable with both the short- and long-term outcomes.
These strategies include:
- Maximising your superannuation contributions.
- Consider holding your life insurance through your superannuation fund.
We’ll look at some other opportunities before year-end but this gives you something to start working on.
Keep in mind your cashflow position. You need to work out the cashflow effect of any decisions you might take.
The more available cash you have, the easier it will be to make all of this work. So perhaps now is the time to start following up your debtors and chasing some of those old accounts.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.