The end of the financial year is approaching, which means it’s time for small businesses to save some money with tax deductions.
Let’s be honest – no small business wants to pay more than they have to.
Fortunately, the Australian Taxation Office (ATO) recognises the vital role that small businesses play in the economy, allowing them several tax breaks throughout the year.
Now that the end of the financial year is creeping up, here are some EOFY tax tips that small business owners should take advantage of.
Handy EOFY Tax Tips For SMEs
Prepay Eligible Expenses
If your business made a good profit at the end of the financial year and has some cash flow, consider prepaying expenses.
If you can pay some of your business expenses in advance, you can reduce your assessable income at tax time and claim an immediate tax deduction for prepaid expenses such as:
- business travel
- insurance
- advertising
- software
- rental payments, and
- business-related subscriptions.
However, it’s worth noting that you can only repay these expenses up to twelve months in advance, and the immediate tax deduction will only apply if it’s an excluded expenditure and relates to a pre-RBT obligation.
Increase Your Superannuation Contributions
Making voluntary contributions to your superannuation fund is a great way to meet your tax obligations and keep them below the next income threshold.
By contributing additional funds to your super, you’ll reduce your business’s taxable income and reduce the amount you have to pay on that contribution when you pay tax.
Your superannuation contribution will generally be taxed at the fund rate of 15% instead of your personal marginal tax rate, up to 47%, or your small business tax rate, up to 26%.
Not only will you reduce the amount of tax payable for your business, but it’s also a wise investment for your future and smart tax planning.
You can contribute up to $25,000 to your super fund each financial year. However, as of 1 July 2021, the voluntary contribution threshold amount will increase to $27,500.
However, you’ll need to ensure that you don’t pay any voluntary contributions directly on 30 June because it can usually take five to ten business days for the funds to enter the superannuation account.
Utilise the Instant Asset Write-Off Scheme For Tax Deductions
The instant asset write-off allows small businesses to claim immediate deductions on any new or second-hand assets purchased for their business this financial year.
The instant asset write-off can be used for a variety of new and second-hand assets, provided that the cost of each asset is less than the relevant threshold, including deductions for your car, tools or even office equipment,
Before October 6, 2020, you could only claim immediate tax deductions for assets up to $150,000. However, the 2020 Federal Budget delivered the Australian Tax Office’s (ATO) most significant change yet.
In 2023, you could claim an instant asset write-off for assets without this threshold at all.
This means that until 30 June 2022, this limitless instant asset write-off overrode all other previous instant asset write-off thresholds.
In 2024, the Government announced a reduction of the immediate asset write-off amount to $20,000 for the 2023-2024 financial year. These new tax laws for the end of the financial year are available to businesses with an annual turnover of $10 million or less.
Company Planning and Restructuring For Taxable Income
Our registered tax agent can help your business implement a few things under company planning and restructuring to minimise your tax liability.
Restructuring
If you’re planning to implement company restructuring, make sure to do it before 1 July. By designing the restructure before the end of the the financial year and implementing it at the start, you would only be required to file one tax return for the new entity.
Example:
If the new company were established on 15 May 2021, the new company and the old business entity would need to lodge a tax return for the 2020-2021 financial year.
However, If the new company is set up on 1 July 2021, it would only need to lodge tax returns for the 2021-2022 financial year, and the old business entity would lodge its return for the 2020-2021 tax season.
Write Off Bad Debts
If you can’t retrieve debt from one or more of your customers’ accounts, you could possibly write these debts off with proper tax planning and reduce your taxable income.
Bad debts can range from:
- customer credit accounts,
- customer loans, and
- employee loans.
Writing off bad debts means you can reduce your assessable income because you won’t get that payment anymore. By reducing your income, you can reduce your tax bill.
However, the ATO has strict rules regarding writing off bad debts. Before you can write off customer debt, you’ll have to:
- communicate to the debtor about their outstanding payments (and keep all records of the communication),
- send follow-up reminder notices,
- determine their financial position and whether they are likely to pay their debt, and
- taken all necessary debt recovery steps to retrieve the debt.
If, after following through with all the above, you can prove that you cannot retrieve payment for their outstanding account, you can write off the debt and claim deductions on your tax return.
Be Smart About Drawing Profits
If your business or company made substantial profits during this financial year, you must consider withdrawing this money without impacting your tax benefits.
There are three ways that you can draw money from your company:
- director loans,
- wages, and
- dividends.
But when it comes to the end of the financial year, it’s essential to consider the tax impact of drawing that money out – mainly because you don’t want to be double-taxed.
Without proper tax planning, you could be taxed on the same money in your company and in your personal capacity.
There are a few ways to avoid double taxation, such as creating a loan agreement between the company and the director or shareholder, paying franked dividends, paying wages, or even back paying the money that you’ve taken out.
However, this area of tax law is quite complex, and how you manage it depends on your business’s circumstances. So, you’ll need to chat with a good accountant about the tax implications of drawing money out of your company.
Key Takeaways on EOFY Tips
It’s that time of year again – the end of the financial year. If your small business wants to reduce its taxable income, it must take advantage of the various tax benefits offered by the ATO.
Along with the existing tax breaks, the Australian Government recently made some amendments to soften the economic hardship caused by the COVID-19 pandemic, including the limitless instant-asset write-off.
However, there’s no one-size-fits-all strategy for reducing your business’s taxable income.
At Box Advisory Services, our small team of experienced accountants and tax agents can help you navigate through putting together your tax reduction plan as well as preparing your return during tax season.
To find out how we can help you, book a free consultation with us to assess your situation.
