Ten Tax Tips for Small Business
Small business entities (SBE’s) A businesses with annual turnover of under $2 million – have access to a range of concessions which not only help reduce their taxable income but are also designed to make tax administration easier. Mr Taxman, Adrian Raftery, author of 101 Ways to Save Money on Your Tax – Legally! 2013-14 edition (Wrightbooks, June 2013, AU$24.95), gives some excellent tips for small business owners to action and minimise your businessâ tax bill this year.
1. Buy a new business asset for under $6,500 and claim it as a tax deduction this year
There are some great tax concessions out there for SBE’s but none greater than the immediate write-off available this year for the purchase of new business assets that cost less than $6,500. There is no limit to the amount of assets that you can purchase under this concession. Business can also immediately write-off the first $5,000 of any new vehicle purchased but be wary of potential FBT implications if the car is purchased via a company or trust.
2. Build your nest egg quicker by paying 15% rather than 46.5% by putting money into super
Putting money into superannuation is one of the best, and legitimate, ways to minimise your income tax bill. Small business owners can have their business contribute up to $25,000 per year into super which is only taxed at 15 per cent within the fund and claim a tax deduction for the contribution (potentially 30 per cent for companies and 46.5 per cent for sole traders). Note that in order to obtain a tax deduction in this financial year for any superannuation contribution, the contribution must to be received by the superannuation fund by 30 June.
3. Claim back last year’s tax paid from the taxman to maximise year end expenditure
Previously, tax planning has been restricted to smoothing taxable income against future years. However under proposed legislation companies can now smooth their income against prior years, with the introduction of the new “carry-back tax losses” law where they can claim revenue losses up to $1 million (subject to its franking account balance) against tax paid in the previous year, increasing to two years from 2013 /14. (Note: this concession, once passed, is only available to companies and not businesses operating as a sole trader, partnership or trust).
4. Scrap obsolete stock or plant and write-off those bad debts
Got some old plant or stock that your business simply can’t sell? Then physically write it off before 30 June and get a tax deduction for it this year. You can value trading stock at the lower of actual cost, replacement cost, or market selling value. This valuation can be applied to each item of trading stock. Like obsolete stock, for a business to get a tax deduction on its bad debts it must physically write off the debt prior to 30 June. Note that the debt must have been originally shown as income in order for the write-off to be allowed. Put your decision in writing such as a board minute. You also need to show that you have made a genuine attempt to recover the debt to prove that it is bad.
5. Defer income and bring forward expenses up to 12 months in advance
It is always a good idea to try and defer your taxable income to next financial year. For those operating on a cash basis then simply delay the “receipt” of the income. If you operate on a non-cash basis then you may want to defer your invoicing till next year. An immediate deduction is available to SBE’s for the prepayment of allowable deductions such as lease payments, interest, rent, business travel, insurances and subscriptions up to 12 months in advance by 30 June.
6. Split your income with your lower earning spouse and pay less tax as a family
It amazes me how many smart business people are really dumb when it comes to reducing tax. Too often I see them paying 46.5 percent tax on income, which could be in put under their lower taxed spouse (0 percent or 16.5 percent) or company (30 percent). If you are paying a wage to your spouse from your business, ensure that you can justify the amount paid based on the time and the skillset required.
7. Claim a deduction for expenses not paid at year end
Just because you haven’t paid for something doesn’t mean that you can’t claim it. Businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not been paid by 30 June including:
- Salary and wages - claim the number of days that employees have worked up to 30 June, but have not been paid until the new financial year;
- Directors fees - claim a tax deduction for directors fees that are “definitely committed” to at 30 June and has passed an appropriate resolution to approve the payment;
- Staff bonuses – claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June where the business is “definitely committed” to the expense;
- Repairs and maintenance – claim repairs undertaken and billed by 30 June but not paid until next year.
8. Write up your family trust resolutions before 30 June
After years of abuse, it is mandatory for those with family (or discretionary) trusts to have a written trustee resolution before 30 June showing the intended distribution of income to family members. Careful tax planning is required otherwise it may cost your family thousands in unnecessary (and unwanted) taxes.
9. Private company loans to shareholders
If you have borrowed funds from your company, ensure that the appropriate principal and interest repayments are made by 30 June. Non-compliance with the strict ATO rules will result in the entire loan amount being deemed as an unfranked dividend paid and taxed at marginal rates. The private use of certain company assets (such as boats and cars) is now also potentially caught by the taxman unless a market rental fee is paid.
10. Donât spend purely for a tax deduction
There are so many people that get caught out at this time of the year in spending money purely to get a tax deduction. If you are running a business via a company then you are only getting 30 percent back. If you want a $100,000 tax deduction then I will gladly invoice you and accept payment. Why spend money when you only get a fraction back? Don’t get caught out by the fancy marketing of retailers in coming weeks. Always think of my A-B-C motto: Absolute Bloomin Cash.
This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.
These tips were provided by Mr Taxman, Adrian Raftery, author of 101 Ways to Save Money on Your Tax – Legally! 2013-14 edition (Wrightbooks, June 2013, AU$24.95). @mistertaxman www.mrtaxman.com.au