While the end of the financial year is fast approaching, there is still time for business owners to be proactive with their tax planning. This can help to maximise returns and reduce liabilities.
Importance of tax planning for small businesses
Proactive tax planning provides small business owners with a range of benefits that reach beyond simple compliance. By managing your tax obligations, you can effectively enhance the cash flow of your business, reduce liabilities and free up additional funds for more efficient and strategic use. Anticipating the potential tax impacts on your business can allow you to make more informed decisions that cater to both your short and long term goals.
Strategic tax planning can also help you identify tax incentives and deductions that will benefit your bottom line. These can include depreciating assets, writing off bad debts or utilising carry-back loss provisions. Understanding these opportunities and applying them allows you to save optimise your outcome and reinvest these savings into other areas of your business.
Tax Liabilities
Managing your small business’ tax liabilities and obligations is a vital part of its operations. Common tax liabilities include:
- Income Tax: This is based on the net profit of your business and varies depending on its structure—whether it’s a sole trader, partnership, trust or company.
- Capital Gains Tax (CGT): Tax is payable when you decide to sell business assets or shares for a profit. The tax amount depends on the asset’s gain and the duration for which it was held.
- Goods and Services Tax (GST): Businesses registered for GST must charge this tax on most goods and services they sell or supply.
- Pay As You Go (PAYG) Instalments: This system helps business owners meet their obligations by making regular payments towards their expected annual income tax liability.
- Superannuation Guarantee Contributions: Employers are required to contribute to their employees’ superannuation funds. This is a mandatory contribution and is calculated as a percentage of ordinary time earnings.
- 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.
To ensure your small business remains compliant with Australian Taxation Office (ATO) requirements, understanding these liabilities and planning for them can prevent unexpected financial strain.
As part of an effective tax planning strategy, you should consider the following opportunities:
Instant asset write-off
Temporary full expensing of assets ceased to apply after 30 June 2023, however legislation is currently before parliament to provide an instant asset write-off for certain business assets. An immediate tax deduction is allowed for the purchase of business assets that cost less than $30,000 for businesses with an aggregated turnover of under $50 million. This means an immediate tax deduction can be claimed for:
- Business portion of new eligible depreciating assets costing less than $30,000
- Business portion of the cost of eligible second-hand assets costing less than $30,000, and
- The small business pool balance if less than $30,000.
This scheme applies to assets acquired between 1 July 2023 and 30 June 2024.
Small business energy incentive
Legislation is currently before parliament to provide businesses with an aggregated annual turnover of less than $50 million with an additional 20% deduction of the costs of assets or improvements to existing assets that support electrification or more efficient energy use. The deduction is capped at a maximum of $20,000 and applies to assets acquired between 1 July 2023 and 30 June 2024.
Writing off bad debts
Businesses should review their debtor’s ledger prior to 30 June and establish whether any of their customers’ debts are unrecoverable. If this is the case, the tax deductions can be claimed for the ‘write off’ of bad debts. GST adjustments can also be made for the write-off of bad debts in the June 2024 Business Activity Statement.
Impact of change in tax rates
Businesses should consider the impact of the reduction to individual income tax rates from 1 July 2024. The change could impact the overall tax position when considering the timing of income, deductions and declaring dividends.
Review your June PAYG instalments
Review the need to pay your June Quarterly PAYG instalments. This is something you might want to talk to your advisor about. If the taxable income of your business has decreased from a prior year, then varying the instalment of tax or claiming credits for prior quarters’ tax may help with your cash flow.
We would recommend that you prepare a draft tax calculation to confirm the likely tax payable for the year prior to lodging a variation of the PAYG.
Capital Gains Tax (CGT)
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.
Other strategies
There are a number of other strategies that businesses can use as part of their year-end tax planning. These include:
- Writing off the value of obsolete trading stock before 30 June – or recognising the value of trading stock at either cost, market selling value or replacement value.
- Making cash repayments of Division 7A loans to companies before the financial year-end to avoid the need to declare dividends to shareholders.
- Paying employee superannuation by 30 June rather than 28 July to claim a tax deduction in the current financial year.
- Making concessional superannuation contributions for business owners or additional salary sacrifice contributions up to the superannuation cap of $27,500.
- Using prior years unused concessional superannuation caps under the Concessional Catch-Up rules. This is subject to eligibility criteria which you should discuss with your advisor.
- Bringing forward and incurring any expenses before 30 June.
From a governance perspective, it is also important for employers to ensure that their Single Touch Payroll is finalised and all government revenue agencies (such as Payroll Tax) reconciliations have been completed and lodged.
For more information on tax planning, contact your local William Buck advisor.
