Does your business pay a decent amount of tax each year? If it does, you’re doing great! Paying tax is a sign of financial success and business profitability. But before you celebrate another successful financial year, have you considered tax planning strategies and whether you have an effective business structure in place?
Tax planning helps established businesses to keep more of those hard-earned profits and gives cash-strapped entrepreneurs time to plan for any upcoming payments.
The best time to get cracking on tax planning for your business is yesterday, so let’s explore some useful tax planning strategies that can be implemented to reduce your tax bill.
1. Review Your Structure
If you haven’t checked your operating structure in a while, pre-EOFY is a great time to do a review! The structure that your business operates in directly impacts not only the amount of tax that your business pays, but also your ability to access other important business strategies such as the R&D tax incentive or establishing an ESOP for remuneration structuring.
2. Perform Regular Stock Takes
Doing a year-end stocktake is essential for a business as you want to ensure that stock loss, damaged or obsolete items are accounted for and claimed as a tax deduction.
3. Consider Prepayments
Did you know your business can prepay certain expenses such as rent, interest, insurance and other services up to 12 months in advance to take advantage of deductions in the current financial year? (This only applies to small businesses with turnover less than $50 million).
4. The Depreciation Rules Have Changed
Good news for small businesses! If your business turnover is less than $10 million, you can still benefit from instant asset write-offs. For the current financial year, you can immediately deduct the full cost of business assets that cost less than $20,000 each. This applies to assets you buy and start using in your business between July 1, 2024, and June 30, 2025.
For more expensive items, there's a different system where you can claim part of the cost each year. Remember, these rules might change, so it's always a good idea to check with your accountant before making big purchases.
5. Review Your Fixed Asset Schedule
Review any items you could potentially write off to clean up your fixed asset register.
6. Pay Bonuses (Or, at least commit to it)
If bonuses are part of the remuneration for your business, in order to claim the bonus as a tax deduction for the amounts, you need to be committed to making the payment prior to year-end, including making a written record of the commitment.
7. Pay Superannuation (And actually pay it!)
Superannuation is only deductible when paid. Consider paying any super liabilities before year-end to claim the deduction in the current year. Ensure you make the payment prior to 25 June to allow for a superannuation clearing account to process the payment before 30 June.
8. Review Bad Debts
You may be able to claim deductions for income that cannot be recovered from debtors. Unrecoverable income is also known as 'bad debts'. Review your aged receivables before 30 June and write off any bad debts to claim a tax deduction.
If this one went over your head, maybe it's time to consider outsourced bookkeeping for your business.
Tax Planning Strategies if You're Trading as a Trust
If you operate your business as a Trust, you need to distribute the profit before 30 June. As such, there are additional things to consider:
- Who should receive the profits from the trust? The decision needs to be documented in a trust minute prior to 30 June.
- It's important to check that the Trust Deed allows you to distribute the profits to each beneficiary in the manner you propose.
- Is there any ATO administration required, such as a family trust election (FTE)? This can be relevant if your trust receives franked dividends or has losses.
ATO and Section 100A – Trust Distributions to Adult Kids
The ATO is cracking down on situations where trusts make distributions to a beneficiary, and someone else apart from that beneficiary receives the benefit of the distribution. An example is where a distribution is made to an adult child, and the parents keep the money.
Under these guidelines, the ATO are at risk of effectively reversing certain valid trust distributions and tax these amounts to the trustee of the trust at 47% (as though this income was not distributed to any beneficiary).
Most alarmingly, the ATO has, in most cases, an unlimited period of time to review such arrangements. If any of this concerns you, get in touch with your accountant to make sure you’re distributing income correctly and effectively.
Have You Considered Fringe Benefits Tax?
Fringe Benefits Tax (FBT) can apply where a payment is made to an employee but in a different form to salary or wages. The most common benefit provided is a car. There are some exemptions that apply, including:
- Minor and infrequent benefits provided of less than $300; and
- The provision of portable electronic devices mainly for use in the employee’s employment (limit of one per employee per year).
- Currently, employers will not pay FBT on benefits provided for eligible electric cars and associated car expenses!
We recommend reviewing any benefits provided to employees and lodging a nil FBT return. It's important to note that no FBT applies where an employer simply reimburses or pays an employee's work-related expenses while working from home.
Personal Services Income
If you're in a personal services industry such as a medical profession, graphic design or IT consultancy, your income earned is derived from personal skills. These incomes are deemed as Personal Services Income (PSI). The ATO defines PSI as income derived by the personal efforts or skills of an individual.
The ATO looks through any trading structures such as trusts or companies to attribute any PSI earned by an individual from their personal efforts to the individual themselves. Therefore, it’s important to ensure that any profits earned when operating via a trust or company are appropriately paid out to you before 30 June.
Personal Tax Income
Personal tax income (or individual) is based on your wages, salaries, and any other form of income such as capital gains from cryptocurrency or stocks. Our article on tax planning for individuals explains what to expect in terms of declaring income that you haven’t already paid tax on, and how to maximise your tax return so you can claim back money that is yours. Another huge thing to be across is the changes to working from home tax deductions .
Get the Accounting Support You Need to Grow Your Business
No matter what your business or personal circumstances are, there are different points you should consider in order to make the most of your tax return. Whether that relates to your general business tax planning, fringe benefits, personal income tax , or wealth creation strategies , we can help make tax time less of a burden for you.
As EOFY approaches, our Melbourne-based accountants are working with clients to implement tax planning strategies. We forecast your expected results for the financial year, analyse opportunities to reduce tax liabilities, then execute a plan to keep tax to a minimum. If you’re ready to maximise your business’ income tax for FY25, get in touch with one of our accountants now.
