As we head out of another financial year and into another tax season, now is a critical
opportunity to switch from a reactive to proactive posture when it comes to navigating your and your business’ operations and tax affairs.
Tax and financial planning is focused on establishing a strategy for the year(s) ahead not only ensures you minimise your liabilities and maximise your profits, but also ensure that your operation and cashflow are prepared for what may come.
Why is tax planning important?
Proactive tax planning offers small business owners advantages beyond basic tax compliance. By effectively managing your tax obligations, you can improve your business’s cash flow, reduce liabilities, and free up additional funds for more efficient and strategic use to grow your business. Anticipating potential tax impacts allows you, as a business owner, to make informed decisions that align with both your strategic financial goals.
Strategic tax planning also helps identify tax incentives and deductions that can benefit your bottom line (profitability). These may include depreciating assets, writing off bad debts, or utilizing carry-back loss provisions. Understanding and applying these opportunities allows you to optimize your outcomes and reinvest the savings into other areas of your business.
Managing Your Taxes
Timing cash flow
The timing of your income and expenditure matters most when it comes to the close of a reporting period. Whether that be the end of a month, quarter, or year, planning ahead for the flow of funds can make a marked difference in your tax bill.
A particularly good year of trading can lead to an unexpectedly large tax bill, but a simple matter of timing can save you and your cashflow the bill shock.
Deferring income and prepaying expenses is a straightforward process that all business owners should look to deploying.
Issuing invoices after 30 June where possible generally means that the income on that job will be taxed next financial year, even if the services had been provided earlier.
Conversely, prepaying eligible costs and employee dues brings them forward into this financial year, reducing your profits and saving you tax.
Keeping up to date with lodgements
Submitting tax returns late and missing lodgement deadlines can lead to penalties and interest charges. Our goal is to help you stay organised and ensure your tax returns are submitted on time.
With our expertise and knowledge of the latest tax laws and regulations, we can assist you in accurately reporting your income, deductions, and other relevant information. This helps minimise the risk of penalties and reduce your tax liability.
Common Tax Liabilities to Manage
Effectively managing your small business’s tax liabilities and obligations is a critical key business goal. For most small businesses, common tax liabilities include:
- Income Tax: Calculated on your business’s net profit/(loss). This can change depending on your business structure (sole trader, partnership, trust, or company)
- Capital Gains Tax (CGT): tax is payable when you sell business assets or shares for a profit. The amount of tax payable depends on the asset’s gain (appreciated value) and the period it was held.
As stated above, disposal of a major asset should be calculated before you complete a sale. proactively knowing your expected tax position allows you to:
- dispose of the asset in the most tax efficient way possible
- plan out the timing of paying the tax liability, and
- review of the currently available options you have in minimising the tax on the sale. The CGT Discount, CGT Concessions and Exemptions, Main Residence Exemption;
All of these provisions factor in a timeframe in which the disposal must occur, so speaking with your accountant is the best protection from making a costly tax mistake that you could have avoided.
Tax Tip!: Capital Gains Tax is triggered when a contract is signed and not when settlement occurs. If the asset has been held for less than 12 months, you may want to consider delaying the signing of the contract to take advantage of the CGT 50% general discount.
- Goods and Services Tax (GST): Businesses registered for GST must charge this consumption tax on most goods and services they provide.
- Pay As You Go (PAYG) Instalments: This system helps business owners ‘prepay’ their income tax obligations by making regular payments towards their expected annual income tax liability.
Assess the necessity of paying your June Quarterly PAYG instalments. It might be beneficial to discuss this with your registered tax agent. If your business’s taxable income has decreased compared to the previous year, varying the tax instalment or claiming credits for prior quarters’ tax could improve your cash flow.
We recommend preparing a draft tax calculation to estimate the likely tax payable for the year before lodging a variation of the PAYG.
- Superannuation Guarantee Contributions: Employers must contribute to their employees’ superannuation funds. This mandatory contribution is calculated as a percentage of ordinary time earnings. Some contractors are also eligible to be paid superannuation depending on the terms of their working relationship.
Scheduling these due dates is important to avoid missing payments which can have serious unintended tax consequences including ATO review for SGC statements (superannuation guarantee charge), or bringing forward the deductible expense into the current year.
This is fine for your September, December, and March quarters, but what you may not know is that the June quarter’s super must leave the bank account by 30 June in order for it to be deductible in that year.
Paying the June superannuation in July means that you are adhering to the compliance rules, but not claiming the tax benefit of your compliance until the following year, leaving tax savings on the table.
As such, bringing that payment forward slightly to the final week of June guarantees that you will see the upfront tax benefit.
Elements such as bonuses (another deductible item to reduce your taxable profits) will affect your superannuation liabilities, so it is important to have the relevant discussions by early June as to ensure that your superannuation calculations are prepared and ready to be paid before year end.
- Fringe Benefits Tax (FBT): If you provide certain benefits to your employees (or their associates) in addition to or as part of their salary, you will be required to pay Fringe Benefits Tax.
Understanding these liabilities and planning for them can help your small business remain compliant with Australian Taxation Office (ATO) requirements and prevent unexpected financial strain.
Common Annual Tax Planning Considerations
As part of an effective tax planning strategy, you should consider several common tax planning considerations to improve or manage your tax outcomes.
Obsolete Stock
Depending on the type of business you operate, you may already be conducting regular inventory stocktakes. An idea for when you conduct your final stocktake of year; Make note of any obsolete inventory that cannot be utilised or sold.
The costs of obsolete inventory can be written off and claimed as a deduction, so be sure to consider rolling in this assessment into your year end planning.
Division 7A
Division 7A is an often-misunderstood piece of legislation and getting it wrong before the year rolls over can lead to adverse consequences on both your personal and business lodgements.
When a Company or Trust loans money to a shareholder or beneficiary, including incidental use of the Company card to buy personal dinners or filling your personal car up, this money will need to be repaid at some point.
Leaving the loan outstanding at 30 June of the following tax year can lead to you being liable for interest charges payable to the business at ATO mandated rates, paid via what’s called a deemed dividend.
This dividend is a non-deductible payment from the business to you, to be picked up in your personal tax return as income, i.e. your business doesn’t get the benefit of the tax deduction, is out of pocket that money, and you could end up paying more tax.
None of this seems fun, so retrospective review of the business’ accounts informs you of the necessary repayments to be made before year end to avoid the issue all together.
Division 7A is under scrutiny at the moment, with a major case taking place between the ATO and the Administrative Appeals Tribunal.
Get in touch with a tax professional to ensure that your business is adhering to ATO guidelines, and avoid any unforeseen audits and negative tax outcomes.
Tax Credits and Incentives
Review and implementation of the available tax incentives is a brilliant means for businesses to develop and support long term growth strategies.
Incentives are designed to encourage businesses to take risks and invest in themselves more without facing the financial blackhole if it doesn’t pan out how you intended.
Research & Development (‘R&D’)
You may have heard R&D before in the context of major ASX businesses burning through cash in order to innovate and develop the next generation of their products.
This opportunity is also available to any Company running a business via the R&D Tax Incentive.
If your business plans on expending more than $20,000 on R&D in a year, this provision allows for the Company to receive a portion of those costs back via a tax offset, i.e. you see the benefit in the business’ tax return.
There are a few qualifiers in receiving this grant, such as the expenditure must be to a registered Research Service Provider (‘RSP’) and be spent on an eligible activity.
Speaking to a tax or R&D specialist should clarify if pursuing this grant is right for your business’ long terms plans and financial capacity.
Instant Asset Write-Off
As part of the 2023-24 Budget, the Albanese Government announced that small businesses with aggregated turnover of less than $10M would be able to immediately deduct the full cost of eligible assets costing less than $20,000.
There are a few exceptions, such as pooled assets, assets used in R&D activities, and others, but this provision can apply to multiple distinct assets, so long as they cost less than $20,000 to acquire and install.
This is a widely applicable and incredibly useful incentive for businesses looking to renew their equipment and claim an upfront tax benefit as opposed to spreading that benefit over years and years via depreciation.
Small Business Energy Incentive
Another 2023-2024 Budget announcement was the Small Business Energy Incentive.
This incentive entails small businesses with less than $50M turnover to claim an additional 20% of their expenses supporting electrification and more efficient use of energy, up to $100,000.
Investments such as installation of batteries to charge in off-peak rates and utilise at peak rates or upgrading equipment to more efficient equivalents fall within this scheme, granting businesses an additional $20,000 in deductions on $100,000 spent.
Note that this measure has not been passed as law as of yet, so keep on eye out on our blog for when it gets ratified.
Avoid unnecessary spending
While tax deductions can be advantageous, it’s crucial to avoid unnecessary spending just to obtain them. Tax considerations are only one aspect of the decision-making process for small businesses. As your accountant, we will guide you on whether certain expenses are justified and aligned with your business goals. We will help you make informed decisions that make financial sense and avoid unnecessary spending that may not provide significant tax benefits.
Final Notes
The Australian tax system is constantly changing and evolving based on the requirements of certain industries and utilisation of current loopholes.
Adopting a proactive approach to tax planning is an essential step in staying ahead of these changes and achieving long term success for your business as well as personally.
Engaging with professional guidance ensures that you stay informed, plan ahead, and align your strategies with your goals, whether that be stability, savings, future security, and more, so get in touch with our team and discuss the future of your business.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
