Tax planning


7th June, 2021

Small business tax planning for the financial year ahead

As one financial year ends, it’s time to begin looking towards the next. Here’s how to organise your tax planning this EOFY.

As June 30 draws near many small businesses will be looking back at the rollercoaster that was the last 12 months and hope that they never have to ride it again.

Many businesses have survived purely because of the Australian Government’s JobKeeper stimulus program. However, that assistance has now been rolled back and it’s a return to normalcy.

But for some, it’s far from business-as-usual. Dedicated advertising campaigns encourage us to buy local, holiday at home and eat out at restaurants and cafés. But instead of the expected boom in business, some owners simply can’t keep up.

Ongoing international border closures mean many can’t attract enough staff to cope with demand and need to reduce their operating hours or production output. And while discussions are ongoing about allowing working visitors to return to Australia, this may not occur until the world’s vaccination rates are much higher. Until then, businesses will continue to struggle.

But there are things that every small business can do now to put them in the best position possible to see out the next 12 months and beyond.

Effective tax planning can help legally minimise the amount of tax your business needs to pay at the end of each financial year, and together with recent changes brought in by the Federal Government, here are a few things you can do now to improve the financial health of your business.

First of all – what changes has the Government introduced?

This financial year has seen the corporate tax rate for small and medium companies reduce from 27.5 percent to 26 percent, with a further reduction to 25 percent due in 2021-22.

The small business tax offset has also increased to 13 percent, with a further increase to 16 percent next financial year.

Temporary changes to the way assets and asset pools are depreciated have also been introduced in response to COVID-19.

Small business with an annual aggregate turnover of $10 million or less and who are using the simplified depreciation rules can now accelerate their depreciation.

Assets that are first held and used (or installed for use) between 6 October, 2020 and 30 June, 2022 do not have to meet the applicable asset value threshold in order for the business to claim an instant write-off of the business portion of that asset.

The balance of small business asset pools can also be deducted at the end of the financial years between now and 30 June,2022.

What is tax planning?

Simply put, tax planning is the analysis of your current financial state of affairs and identifying ways of reducing your income tax liability, such as deferring income and bringing forward the payment of expenses and contributions.

Tax planning shouldn’t be confused with tax avoidance or evasion.

Tax avoidance schemes — such as the creation of offshore accounts in tax haven countries — are specifically designed to avoid paying tax or to generate an artificial tax benefit.

The ATO has its own Tax Avoidance Taskforce to keep an eye on activities such as this and can result in offenders being penalised and criminal charges laid.

READ: What will the ATO be scrutinising this year?

What are some common tax planning activities, and when should they be done?

1. You may want to consider deferring some of your income depending on your forecast profit for the next financial year

If you expect your income to be the same or lower next year, sending out invoices in July instead of June will push out that income and the associated tax payable.

On the other hand, if you’re forecasting higher income next year and think this may push you into a higher tax bracket, getting paid as much as possible this year can help keep you under that threshold next year and thereby reduce the amount of tax payable.

2. Buy all those things you need for next year now

New computers, tools, equipment and consumables purchased before June 30 can all be deducted this financial year. This also includes the immediate asset write-off of capital items costing less than $20,000.

3. Pre-pay expenses that have a duration of 12 months or less

This includes rent or short-term leases, insurance and professional subscriptions.

4. Pre-pay the April quarter employee superannuation guarantee

This payment isn’t due until 28 July, however you can claim this as a deduction this year as long as the super fund itself receives the payment in their account by June 30.

5. Write-off bad debts

If you have accounts that were previously included in your assessable income but now believe are not recoverable, you may be able to claim a deduction for these amounts.

Keep in mind that the rules around writing off bad debts are quite complicated, so it’s a good idea to have a chat to your accountant beforehand to ensure that you meet all the required criteria.

Stay in the know

Sign up for added insights and business-critical news from MYOB.

A valid email is required
Congratulations! You've successfully subscribed to our newsletter!
Something went wrong

What are the likely outcomes when tax planning isn’t performed adequately?

On one hand, inadequate tax planning results in your business paying more tax than necessary, either in the current financial year or future years.

On the other hand, overly aggressive tax planning can put you in the ATO’s crosshairs and you may find yourself being audited and potentially paying more tax, plus interest.

Tax planning shouldn’t be a once-off event.

You should schedule time to look over your finances in April or May each year to ensure that existing arrangements suit your current circumstances and are adapted according to your forecast income.

And, as with any financial matters, make sure to have a chat with your accountant.