Tax Planning: Checklist for small business owners
As the financial year approaches its end, it’s the perfect time for small business owners to take control of their tax planning. Proper planning can help minimise tax liabilities and keep more of your hard-earned profits. Here are our top 10 tips to optimise your tax position before 30 June.
1. Boost Your Superannuation Savings
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.
2. Consider Performance-Based Bonuses
Here’s some helpful hints if you are considering paying bonuses for tax savings in the lead up to 30 June.
Bonuses to team members should be performance based for best results since they are designed to be incentives and need to be much more than a tax saver for your business. Rather than pay a year-end bonus across the whole team, associate them with individual performance reviews.
Bonuses to business owners need to be distributed in line with their personal tax position, it may be more tax effective to distribute business profit to owners 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.
3. Directors Fees for Tax-Efficiency
One of many tax saving strategies is to consider paying Directors what is known as a Directors 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 Directors Fees attract super, so you will need to include this when assessing your net profit. Directors 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 Directors Fees, ensure the business has the spare cash to cover the payments.
4. Write Off Obsolete Stock
If your business has a room, storage space or even a factory full of old stock that is obsolete, damaged, no longer of worth and sitting around costing you money, yet another tax saving strategy is to write off old and obsolete stock.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 financial year loss for the business, so keep on top of your annual stock take procedures.
5. Write Off Bad Debts
Towards financial year end, 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. If you have 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.
Note that tax deductions for bad debts 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.
6. Bring Forward 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. Always keep your cash flow in mind. If bringing forward purchases is likely to strain cash flow, it may not be the right time to apply this strategy.
7. Invest in 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.
8. Leverage Prepayments
Prepayments are expenses in the current year that cover things to be done in a later year. This type of expenditure involves the money being outlaid up front, but the provision of goods or services stretches out across a period in the following year(s).
Prepayments are tax deductible across what is referred to as the “eligible service period” or ESP, which is the period during which the thing being paid for is done. Where the ESP is 12 months or less, the prepayment can be deducted in the year the prepayment is incurred (ie date of invoice) under accrual basis accounting.
Examples of prepaid expenses that may be immediately deductible under the 12-Month Rule are: rent, insurances, subscriptions, registrations, memberships, utilities and interest.
9. Optimise 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’s some scenarios to think about.
If you have carried forward capital losses from prior year(s), you may consider selling investments that result in a capital gain to utilise the capital losses. If you will be declaring capital gains on disposal of assets in the current year, you might consider selling investments that result in a capital loss to absorb capital gains.
Where you have had a change of 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 gains on release of investments. Alternatively, if your total taxable income is in a high 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 following year.
Ensure all decisions are wealth based first and foremost. For example, it may not be suitable to consider disposing of a strong investment at the wrong time purely to save on capital gains tax.
10. Maximise Trust Distributions
Business structures that involve a trust 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.
Start Tax Planning Today!
Tax planning is essential. Not only in the lead up to financial year-end, but throughout the year as well. The more you practice tax planning, the more dedicated you will become to saving you and your business real money.
Preparing an Annual Tax Plan in advance of financial year-end will give you time to act and keep those hard-earned dollars in your pocket.
Are you ready to take control of tax strategy?
Review our Business Advisory & Tax packages to discover how Minnik Chartered Accountants can support your success.