YEAR END TAX PLANNING FOR SMALL BUSINESS (Businesses with turnover less than $10 Million)
Every Business (and every individual) has the right to arrange their affairs so that they pay the least amount of tax within the parameters of the law.
Each year we help our business clients reduce their tax bill by providing a number of recommendations structured to their specific circumstances. We would encourage all businesses to take advantage of this service – you may end up saving thousands of dollars in tax.
There are a number of tax strategies available, and detailed below are the most common ones that are relevant for many businesses. However, you should always seek our advice before implementing any of these to ensure they are the best options in your specific circumstances.
1. Employee superannuation should always be paid on time.
These payments are due each quarter, within 28 days of the end of the quarter. If not paid by the due date, you cannot claim a tax deduction. To put that into perspective, if you pay $5,000 in superannuation late for each quarter, you will pay $5,500 more income tax than you should in a year.
Consider making monthly payments instead of quarterly ones – this will also smooth out your cashflow as well as reduce the likelihood of late payments.
2. Pay June quarter superannuation before the end of June.
Even though the due date for this is not until 28 July, paying before 30 June gives you a tax deduction in this year.
Note that tax deductibility is determined by the date the superannuation fund receives the payment (not when you make the payment) so we always recommend you make this at least one week before the end of June. If you use a superannuation clearing house, you may need to pay it even earlier.
3. Maximise your concessional contributions.
You can contribute up to $25,000 per year to your superannuation fund and claim a tax deduction in your business or individually. While the fund will have to pay 15% contributions tax, this will be a significant saving from 27.5% company tax or up to 47% individual tax. Potentially, for a couple you could save as much as $16,000 in tax.
4. $20,000 immediate asset write off.
Any business asset purchased before 30 June that costs less than $20,000 can be written off fully this year. Note for most small businesses, a supplier invoice dated prior to 30 June will be sufficient (payment can be made later).
Note that this tax concession ends on 30 June – this is the last year you can claim this. After 30 June the immediate write off threshold will fall to $1,000.
Note also that any business with turnover (gross sales) of less than $10 million qualifies for this small business tax concession in the 2018 year.
If cashflow is an issue financing these asset purchases may be a suitable option. We can organise a finance broker to work with you if required.
5. Defer income
It is always beneficial to pay taxes later – you get to hold onto and use your money for longer. For this reason you should consider delaying raising invoices for work in progress until after 30 June – tax on this income won’t be payable until the 2019 tax year.
6. Pre-paying expenses
You can prepay up to 12 months of expenses before 30 June and claim the tax deduction this year.
Consider such expenses as rent and insurance – we could also look at your accounting fees as well if that suits your circumstances. We can arrange finance of these accounting fees to assist your cash flow if required.
This strategy is also about paying taxes later.
7. Pre-paying interest
Along the same lines as prepaying expenses, prepaying interest on business loans also provides the same advantage.
8. Bringing forward expenses
You can also generate a similar advantage by ordering items in June that you would otherwise purchase in the following tax year (say July-September).
Consumables such as computer supplies, office supplies and stationery, getting your work vehicles serviced or replacing the worn tyres, or getting those minor repairs or replacement tools of trade are all options.
Note for most small businesses you will be able to claim the expense if you have a supplier invoice dated on or before 30 June, even if it is not paid until after that date.
9. Write off bad debts
Review your aged debtors (receivables) listing and write off any that are uncollectible. You need to be able to demonstrate that you have unsuccessfully sought to recover the debt, so keep documents/emails to verify this.
You should also have minutes of a director’s meeting that records each bad debt to be written off, and this needs to be done before 30 June.
Note that we have a number of possible solutions to ensure you keep bad debts to a minimum, including debtor monitoring and collection services, and securing debtor accounts through registration on the Personal Properties Securities Register. Please contact our office if you would like more information on these services.
10. Write off obsolete stock and revalue slow moving and old stock
If you have stock that cannot be sold, you can write off the cost as a tax deduction.
You can also revalue stock at below cost if you think you can only sell it for a lower price.
Once again, it is important to have documentary evidence to support your actions.
11. Claim a deduction for expenses not paid at year end
Businesses can claim a deduction for certain expenses that have been “incurred” but not paid by 30 June –
- Salary & wages – any days an employee has worked to 30 June but not paid until after that date.
- Director’s fees – claim if “definitely committed” to at 30 June, as evidenced by a directors resolution or meeting minute.
- Staff bonuses – claim if “definitely committed” to staff bonuses and/or commissions even if unpaid at 30 June – documentary evidence such as a resolution dated before 30 June essential.
12.Ensure your personal salary remuneration does not result in a tax loss for the business.
If your salary is over $20,000 but the business has a tax loss you will end up paying more tax this year in total than you need to.
This is also the case if you and/or the business have prior year tax losses that don’t get fully offset by this year’s profit.
13. Write up trust resolutions for your family trust before 30 June.
It is a legal requirement to document family trust distributions by 30 June each year. Failure to do so could result in tax to the trustee of 47%.
In addition careful planning is required to ensure the greatest overall tax advantage is gained through these distributions, considering all the circumstances of the family group.
14. Ensure any company loans to shareholders are repaid, either in full, or with the required annual repayment.
Failure to do this, even for inadvertent amounts withdrawn from a company, can result in tax of 47% of the loan (depending on individual marginal tax rates).
15. Never spend money just for a tax deduction.
The best you can get back is 47% of what you spend – in other words, you will be out of pocket up to 53c in every $1 you spend. Unless it provides some other benefit, that is just throwing money away.
16. Can your PAYG Instalments be varied down?
If you have had a tough year, or you initiate some of the tax minimisation strategies outlined above, we may be able to vary your June PAYG Instalment.
We may even be able to get a refund of instalments paid in prior quarters. This will prevent you pre-paying more tax than needed.
IMPORTANT: the implementation of these strategies should be made with a view to your cashflow. However, with some careful strategic planning all businesses should be able to legally reduce their income tax liability to some extent, without “breaking the bank”.
Please contact us as soon as possible to arrange a meeting to review your year to date results and explore the best strategies to implement for your specific circumstances.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Australia. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Advisor. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omission of financial services licensees.