Fast tax minimisation strategies

Fast-tax-minimisation-strategies-blog

As the financial year rapidly accelerates to a close, here are a few tax minimisation tips that will get you on the way to a far more manageable tax bill for this year.

Low cost equipment

If you are a small business with turnover under $2 million, take advantage of the big write-off announced in the 2015 budget.

Assets acquired under $20,000 are fully deductible, so now is the time to invest if you need to.

Prepayments

If you are a small business, you can prepay up to 12 months worth of expenses prior to 30 June, and the full amount will be deductible in this year.

Typical examples of this include insurance, and/or organising to prepay interest with your bank. If you have spare cash and need to get your income down, this is a good way to work it.

Remember to track all your prepayments with online accounting software like MYOB.

Bad debts

Most businesses pay tax on an accrual basis, which means when you raise invoice, you pay the tax. This really hurts when a customer isn’t going to pay the invoice!

To counter this, make sure you actively pursue your debts, and where it is clear that you can’t collect it, formally write it off on your books of account to ensure you are not paying tax on that income.

Tax Ruling 92/18 provides some guidance around this process.

Stock on hand

Every item of stock (or inventory) that you have on hand at the end of the year is an item of expense that you can’t deduct until next year.

There is good reason for ‘end of financial year’ sales, so get your stock levels down for the 30 June deadline.

Superannuation

Paying your employees superannuation is one of those few expenses that are only deductible when paid. Given you have to pay in July anyway, why not process the superannuation early and get the tax deduction this year? A trap to be aware of, it needs to be received by the fund by the 30 June, not just paid to the fund!

It is also a good time to think about yourself here, can you increase your superannuation? Contributions up to the concessional cap (between $30,000 and $35,000 depending upon your age) are tax deductible.

Relatives

Do you have family or relatives that help in your business? If they perform bona fide work, with some exceptions, you can pay them a market value wage which will reduce your income, and increase theirs, which is particularly helpful if they are on a much lower tax bracket than you.

Dividends and trust distribution minutes

If you run a company or trust, you must proactively make decisions about how income is distributed prior to 30 June.

Don’t let this slip, as optimising income through a dividend or trust distribution can  make a huge difference to your overall tax burden for the year, while not signing the documentation in time can result in entirely unfair outcomes and even a 48.5 percent tax rate on income.

Good structuring

By far the best way to minimise your tax is to make sure you are correctly structured.

Not all structures are equal in the tax outcome they provide, so making sensible decisions when setting up your business go a long way to ensuring you don’t pay an excessive amount of tax over the years. For example, a company has a capped tax rate of 28.5 percent for small business, as opposed to paying tax personally.

There are lots of traps to be aware of with structuring, including considering the application of numerous anti-avoidance laws, and getting the right balance for your personal circumstances which can dramatically change the relative benefits of different structures. Make sure you see an advisor.

Structuring right does involve balancing lots of personal factors and circumstances, so make sure you consult your tax agent to get it right.

While not something you can do in a hurry, why not start the conversation about minimising your tax right now?

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  • http://businessadviceandtax.com.au Duncan Smith

    Sean,
    Good Article.
    Ongoing Tax Planning is paramount.
    I ask my Clients to prepare a Personal Budget.
    Can the business support their personal spending/mortgages/investing?
    Let hope so.
    In August, the Salary for the current FY (FY17) is determined but not set in stone.
    Lets say a Director’s Salary is $80,000 and family members genuinely working in the business get a total of $20,000.
    For example sake, Tax on $80,000 is $20,000.
    $25,000 W1 and $5000 W2 is reported on each quarterly BAS.
    As you say, every Director/Shareholder should understand the balance and workings of their Franking Account.
    Lets hope the company is profitable.
    You make a good point that the Salary and Dividends should be considered together.
    You mention that Structure is important.
    I believe that a Business Owner should have a Company from day one and not operate as a Sole Trader.
    I recall that Sole Director Companies have been allowed for over a decade – from a risk perspective Business Owners should review the Director Structure. It is often that only a husband or wife should be the Director but not both.
    Each Business Owner should consult with their Adviser on the structure of their business.
    A Stocktake is important at 30 June and agreed to MYOB.
    There may be Theft and/or obsolete items.
    It may be possible to take up Payables at 30 June for tax purposes even if a Payables Ledger is not kept during a FY.
    All Business Owners should be reviewing their Depreciation Schedule with their Tax Agent and ensure that non-existing items are written off.
    A Small Business Pool with a balance less than $20,000 may be written off – this concession finishes on 30 June 2017.
    Business Owners should invite their Tax Accountant into their MYOB file and undertake ongoing tax planning by having the Tax Accountant conduct a review at least quarterly.
    Duncan Smith
    Business Advice + Tax
    Saturday 05 November 2016

    • Stefanie Di Trocchio

      Thanks for your comments, Duncan. We agree – working through these issues with your accountant, bookkeeper or business advisor is the best way to work through these issues.