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.
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.
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.
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.
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.
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?