‘Year-end tax planning’ should start well before 30 June and be ongoing, with many strategies best implemented at the beginning of the financial year. Below are some key strategies and opportunities to minimise your tax liability, maximise your after-tax position, and even boost your cash flow.
Instant asset write-off
Australia’s temporary full expensing measures enable businesses to claim an immediate deduction for the cost of new assets in the first year they are used or installed ready for use. These measures are legislated to end on 30 June 2023. If you’re considering the purchase of new equipment, it’s critical that you assess your options now to potentially take advantage of the temporary full expensing measure before it ends.
Tax rates and franking of dividends
The company tax rate is now 25% for most SME businesses and 30% for larger companies and passive investment companies. However, when the company pays a dividend, it won’t necessarily be franking the dividend at the same rate as the company tax rate. Understanding the potential ‘top up’ tax as a dividend flow thorough your structure to the ultimate shareholders is critical.
The marginal tax rate system also plays a big part in the tax effectiveness of income and gains across your group. If you’re on a high marginal tax rate, you will want to be able to manage the amount of your income subject to the higher rates of tax. Australian resident individuals can potentially access a discount on capital gains they make, effectively reducing the taxable amount of the gain to half. Putting capital gains into the hands of individuals (or trusts that distribute to individuals) is often a sensible structuring approach. If your legal structure is limiting you from achieving optimal tax outcomes, it’s time to revisit it.
This measure enables entities to offset a loss in the current financial year against a profit in a recent year. By doing so, the entity can obtain a refund of the tax paid in the earlier year, a reduced tax liability or a reduction of a tax debt owed.
Be mindful however that this will also reduce a company’s franking account balance which in turn could impact its ability to pay fully franked dividends.
Tax deductible debt
Though maximising tax-deductible debt has always been a key tax planning strategy, it’s increasingly important given rising interest rates. As interest rates rise and total interest paid increases, the potential tax savings from a deduction for interest also increases.
It’s often better to hold business debt at the shareholder level rather than in the entity that conducts the business as this may allow the shareholder to claim the interest deductions. This is particularly the case where the business may be generating losses. It can also be effective where the shareholder has other sources of income and a marginal tax rate greater than the business entity. To claim the deduction, the shareholder should have a fixed entitlement in the business (i.e., owning ordinary shares or units) and be able to control distributions from the business entity.
Traditionally, the ability to contribute large amounts of money to your superannuation fund and claim a tax deduction has been restricted by the concessional contributions cap. The cap, which currently sits at $27,500, is an annual limit on the amount of contributions that can be made to superannuation by (or on behalf of) an individual, and for which a tax deduction has been claimed (either by the individual or another party such as an employer).
Individuals with a superannuation balance of less than $500,000 who have not exhausted their cap in the 2019, 2020, 2021 or 2022 years may be eligible to carry forward the unused portion of their caps and make additional contributions in the 2023 financial year, for which they can claim a tax deduction. If you’ve made little or no contributions since 2019, you might be able to contribute an amount in excess of $100,000 in the 2023 year and claim a deduction for the whole amount. This could result in significant tax savings, particularly for those on a higher marginal tax rate.
Revisiting your trust distributions
Most business owners are familiar with the potential benefits of a discretionary trust. These benefits include asset protection, a framework for succession planning and tax advantages. One such advantage can be achieved by making distributions to beneficiaries on lower marginal tax rates.
The ATO has recently sought to clamp down on situations where distributions are made by a trust to an adult child, but that child doesn’t receive the full benefit. Relying on a provision of tax law known as Section 100A, these types of distributions will be of increasing focus to the ATO for the 2023 financial year and beyond. This could prompt a rethink in your approach to trust distributions within the family. Read our article on income splitting for further details.
While a family group’s approach to trust distribution may need tweaking in light of the clamp down, trusts can still be a very effective structure. I recently spoke to the Australian Financial Review about why, which you can read here.
Selling your business is a significant event and a major consideration when it comes to tax-time. For SME business owners, the tax carrot is in accessing the small business CGT concessions, which in the best-case scenario can make a multi-million-dollar capital tax gain tax free.
Having private assets, investment assets or Division 7A loans in a company you plan to sell could impact your eligibility for the small business CGT concessions.
Being flexible in your trust distribution patterns year-to-year might enable you to save tax on business profits but could also impact on how your small business CGT concessions are applied. With careful planning of distributions over time, significant tax concessions may be available to you.
Effective tax planning is an ongoing exercise that’s best achieved with the assistance of an experienced tax advisor who can tailor advice and strategies to your circumstances. To talk to a professional, contact your local William Buck Tax Advisor.