Tax time is upon us again already. But forget shoe boxes full of receipts and a mad scramble to meet deadlines. Now is the time to position your business so that this year’s tax return is maximised and you’re well placed for the tax year ahead.
The current year provides a raft of new and unique opportunities for small businesses to reduce their tax liability. The key is to be aware of each chance to save on tax and to check with your accountant or business advisor on whether they’re applicable for your business.
With only weeks left to go, start preparation now by getting all your financial records together. These include receipts, bank statements, contracts and anything else needed to substantiate business income and expenses.
Entrepreneurial encouragement: If your business turned over less than $50,000 this financial year, you could be eligible for the entrepreneurs’ tax offset (ETO). This tax offset reduces the tax payable on profits by up to 25 per cent. For business that turnover more than $50,000, The ETO is progressively reduced until the offset ceases once turnover rises above $75,000.
Investment incentives: The investment tax break provides accelerated deductions that businesses can claim. For those with a turnover of less than $2 million, a deduction of 50 per cent on the cost of eligible purchases such as computers, machinery and some motor vehicles can typically be claimed.
Eligibility requires that assets were purchased prior to December 31, 2009, and installed ready for use within 12 months.
A portion of these accelerated deductions are also available for many businesses that turn over more than $2 million.
Prepay and save: If you have strong cash flow and surplus available cash, consider using some of these funds to prepay expenses. Most businesses with less than $2 million in turnover can prepay expenses and claim tax deductions in the year they’re paid. Stick to expenses for reliable providers who will be around in the year ahead, such as your landlord.
You can even consider expenses that relate to next year, such as insurance. Just be careful not to leave your business short on cash for paying regular expenses as they arrive in coming months!
Good ideas for bad debts: If you’ve suffered the frustration of a bad debt, the good news is that these can usually be claimed as tax deduction. You’ll need to have documented evidence that shows you’ve taken all reasonable steps to try and get the debt paid before writing it off as bad.
The key to this is recording what actions you’ve taken and maintaining documents involved, such as letters or small claims court notices. Then if you’re unsuccessful, the amount is written off your businesses debtor’s ledger for this tax period to count as a deduction against income.
Super idea: Superannuation contributions can be one of the more effective forms of tax minimisation. Find out your contribution limits, and then where it can be afforded make additional contributions up to the limit. Generally these concessional contributions, that you as your own employer can claim a tax deduction for, are limited to $25,000 if you’re under 50 or $50,000 for those over 50.
Expensive perks: Think twice before “renting” that company holiday home or other such perks at a nominal cost. Since the start of this financial year there has been a requirement for shareholders and their associates to pay market value “rental” for private use of company assets. This can include holiday homes, boats, etc. and can quickly increase tax liabilities.
Trusty tax tip: If you have structured your business to include a trust for tax minimisation, the upcoming income distributions need to be determined before the end of financial year. For those using loans and payments to shareholders, be mindful that these could be taxed as unfranked dividends. This will happen unless any new loans are made under a complying loan agreement, or fully repaid by the date of the company tax return lodgment.
For existing complying loans it’s vital that minimum repayments be met and interest charged at the ATO benchmark rate. Also remember to keep loan terms within seven years unless secured by a mortgage over real estate.
Lastly, with the above completed you’re also able to estimate your tax position and make plans for how any amounts owed will be paid from business cash flow, or enjoy pleasant thoughts of how a return can be used in your business. All going well, this year’s shoebox will contain new shoes, not old receipts!
Ref: Nolan, M, 2010, “Reducing the tax load’, My Business – The Magazine for Business Owners, June 2010 edition, pp. 12.