Tax Planning Checklist for Small-Business Owners
As the End of Financial Year draws closer here are some important tips to help small businesses minimise their tax position before 30th June.
If you are wanting to save some real tax money, contributing to your super fund should be one of your strategies, not just in the lead-up to year end, but throughout the year as well, so that you spread out an otherwise high impact on your cash flow.
Take care not to exceed the concessional cap, as this will defeat the purpose of the exercise, the excess being taxed at your marginal tax rate.
Be prepared well in advance before the 30th June to ensure your fund receives the contribution to its bank account before this date to secure your deduction. Also, be sure to submit a notice of intent to claim a deduction to your super fund.
It can be more tax-effective to pay year-end bonuses than retain earnings in the business. Here are some helpful hints if you are considering paying bonuses in the lead-up to 30th June.
Bonuses to team members must be performance-based for best results since they are designed to be incentives and need to be much more than a tax saver. So, rather than pay a year-end bonus across the team, associate them with individual performance reviews.
Bonuses to business owners need to be distributed in line with their personal tax position, as it may be more tax-effective to distribute profit to them rather than retain in the business.
Be aware that bonuses attract super guarantee contribution, so include this when assessing net profit for the extent of bonus distributions.
If your business has one or more directors that are not employees, one of the many tax savings you could apply is to consider paying directors what is known as a director’s fee. Holding the position of director carries high responsibility and risk, and if the constitution allows it, directors may be suitably remunerated.
Keep in mind that director’s fees attract super, so you will need to include this when assessing your net profit. Director’s fees should be distributed in line with directors’ personal tax position, as it may be more tax-effective to distribute profit than retain in the business. Consider your cash flow when distributing director’s fees and ensure the business has the spare cash to cover the payments.
Does your business have a room, storage space or even a factory full of old stock that is obsolete, damaged, no longer of worth and sitting around costing you money? Yet another tax saving strategy is to write-off old and obsolete stock.
It is important to clean out the cobwebs every year at tax time, particularly businesses where outstanding debtors haven’t been managed, and remain outstanding over a period of time. Do you have any bad debts? Meaning money that debtors owe you but that you’re unlikely to ever receive. Now is the time to write-off any bad debts to assist with minimising your tax liability.
It is important to remember that tax deductions by the business can only be claimed where a debt actually exists, i.e. money is owed, and where a debt has previously been included in assessable income. Businesses must have made the decision that the debt is not recoverable, and not merely doubtful, and have this recorded in writing.
A useful way to absorb excess profit for tax saving purposes is to bring forward any planned purchases that you might have. By planned purchases, we mean necessary spend that is planned for some point in time in the near future. Think about any planned spend that you could potentially bring forward to before 30th June.
Ensure that your planned purchases are necessary, so that you are not buying unnecessary items purely to save tax. Keep your cash flow in mind at all times. If bringing forward purchases is likely to strain cash flow, it may not be the right time to apply this strategy.
Similarly, to planned purchases, bringing forward fixed asset purchases can result in fantastic tax benefits if your business is approaching financial year end with excess profit. By fixed asset purchases, we mean spend on equipment that is prearranged for some point in time in the near future.
Make sure your planned fixed asset purchases are necessary, so that you are not buying unnecessary assets purely to save tax. As mentioned, be mindful of cash flow. If bringing forward asset purchases is likely to put pressure on cash flow, it may not be the right tax saving strategy for your business at this time.
Prepayments are spent in the current year that covers things to be done in a later year. This type of expenditure involves the money being outlaid upfront, but the provision of services or goods stretches out across a period in the following year or years.
Prepayments are usually tax deductible across what is referred to as the “eligible service period” or ESP. The ESP is the period during which the thing being paid for is done. Examples of prepaid expenses that may be immediately deductible are: rent, insurances, subscriptions, registrations, memberships, utilities and interest.
You might have investments that have the capacity to be disposed easily prior to the end of financial year, such as shares. It’s important to consider reviewing your wealth portfolio from a capital gains tax perspective. Here are a few scenarios to ponder about.
If you will be declaring capital gains on disposal of assets in the current year, you could also consider selling investments that result in a capital loss to absorb some or all of your capital gains.
Where you have had a change or living situation or a decrease in taxable income to a lower tax bracket in the current financial year, you may have more room to tax effectively declare capital gain on release of investments.
Alternatively, if your total taxable income is in the highest tax bracket in the current financial year, you may consider holding on to your investments until after 30th June where you expect your income will be lower in the next year.
When it comes to investments, ensure all decisions are wealth-based first and foremost. Avoid making decisions for tax purposes only. Tax strategy is secondary to decision making for wealth. For example, in the same way you wouldn’t purchase an asset that you don’t need purely to save income tax, you wouldn’t consider disposing of a strong investment at the wrong time purely to save on capital gains tax.
Business structures involving a trust either as shareholder of a trading entity, or being the trading entity itself, offer effective strategy when it comes to minimising tax across a family unit. Trusts enable the streaming of income to beneficiaries’ tax effectively.
When considering trust distributions to beneficiaries, remember to read and comply with your trust deed, which will specify distribution resolution requirements. Ensure your resolutions are prepared in writing before 30th June, or as specified by the trust deed.
