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Tax planning: Checklist for small-business owners

Leah Oliver
02 June 2021 5 minute readShare
Tax planning

With the financial year almost over, it is time for small businesses to think about tax planning. Here are 10 tips to minimise your tax position before 30 June.

  1. Superannuation

If you are interested in saving some real tax money, make contributing to your super fund 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 of 30 June and 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.  

  1. Bonuses

Did you know that 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 30 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.  

  1. Director fees

Does your business have one or more directors that are not employees? One of many tax saving strategies 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.

Be aware 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.

  1. Obsolete stock

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.

Remember, tax deductions by the business can only be claimed where the obsolete stock has been disposed of. If your obsolete stock has been neglected and is substantial, the write-off can present as a loss position for the business, so keep on top of your annual stocktake procedures. 

  1. Bad debts

At this time of year, we need to clean out the cobwebs, especially so for 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. 

What are the rules around claiming deductions for bad debts? 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. 

  1. Planned purchases

A useful way to absorb excess profit for tax saving purposes is to bring forward any planned purchases that you may 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 30 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. 

  1. Fixed assets

Like planned purchases, bringing forward fixed asset purchases can present excellent tax benefits if your business is approaching financial year end with excess profit. By fixed asset purchases, we mean spend on equipment that is planned for some point in time in the near future.

Ensure 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.

  1. Prepayments

How can you best make use of expenditure items that are “prepaid” from a tax savings point of view?  Prepayments are spend 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 goods or services stretches out across a period in the following year(s).

Prepayments are generally 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. 

  1. Investments

You may have investments that can be disposed of easily before end of financial year, such as shares. It’s the right time to review your wealth portfolio from a capital gains tax perspective. Here are some scenarios to think about.

If you have carried forward capital losses from prior year(s), consider selling investments that result in a capital gain to utilise these carry-forward capital losses. 

If you will be declaring capital gains on disposal of assets in the current year, you might 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 circumstances 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 30 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.

  1. Trust distributions

Business structures that involve 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 30 June, or as specified by the trust deed. 

Tax planning is essential. Not only in the lead-up to financial year end, but throughout the year as well. It may sound like a lot of work; however, the more you practice tax planning, the more dedicated you will become to saving yourself real money. Preparing an annual tax plan well in advance of year end will give you enough time to take action and keep those hard-earned dollars in your pocket!

Leah Oliver, founder of Minnik Chartered Accountants

Tax planning: Checklist for small-business owners
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Leah Oliver

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