Small business entities (SBE’s) – 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. Dr Adrian Raftery, a senior lecturer at Deakin University and author of 101 Ways to Save Money on Your Tax - Legally! 2014-2015 edition (Wrightbooks, June 2014, AU$24.95), gives some excellent tips for small business owners to action and minimise your business’ tax bill this year.
1. Buy a new business asset for under $1,000 and claim it as a tax deduction this year
There have been some great tax concessions over the past few years for SBE’s with none greater than the immediate write-off available for the purchase of new business assets. However draft legislation is in place to reduce the threshold for this concession from $6,500 to only $1,000 for business assets purchased after 1 January 2014 so don’t get caught by wily retailers trying to tell you otherwise! There is no limit to the amount of assets that you can purchase under this concession. Businesses also can no longer immediately write-off the first $5,000 of any new vehicle purchased. If your business is registered for GST, then you can buy a business asset for less than $1,100, claim the 10% GST credit and get an immediate write-off for the balance in this year’s tax.
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 ($35,000 for those aged 60 and over) 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. Pay higher income earners a bigger salary this year
That’s right – pay them more this year resulting in having to pay tax. Why? With the introduction of the new two per cent Temporary Budget Repair Levy, together with an 0.5 per cent increase in the Medicare Levy, the highest marginal tax rate for those earning above $180,000 will effectively be 49 per cent from 1 July 2014 (from the current level of 46.5 per cent). With the deficit levy planned on being a temporary measure for three years, it might be an idea for high income earners to withdraw more from their business in the 2013-14 tax year rather than pay the extra 2.5 per cent next year.
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 (except when the marginal tax rate increases – see tip 3). 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 til 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. Don’t 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! 2014-2015 edition (Wrightbooks, June 2014, AU$24.95).