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A Guide to Tax Planning for Small Businesses

Everyone can benefit from being proactive and strategic around tax time. So we've pulled together some tax planning tips in the lead-up to 30 June.

End-of-year tax planning might not be the most fun activity you undertake as a business owner but it can definitely be a lucrative one. Planning a few key components in the lead-up to 30 June gives business owners the opportunity to accurately forecast your profitability and legally minimise your tax. 

Although it’s often assumed, effective tax planning isn’t limited to complex, high-risk or sophisticated arrangements. Taxpayers contemplating even the most ordinary transactions should give proper consideration to tax planning (in particular, to capital gains tax issues) to make sure that you maximise your return and avoid adverse tax consequences.

Our accounting and tax advisors have pulled together this tax planning guide for small businesses to give you some tax tips as we all near the end of a very unusual financial year – with a few coronavirus curve balls to consider.

Understand the Tax Planning Process

There’s a common misconception when it comes to the tax planning process that it’s something that can be done after 30 June as part of the year-end compliance process (preparing the financial statements and tax returns). Unfortunately, if you’re leaving your tax planning until this date, it’s too late. 

Critical things such as getting money into super, purchasing assets, incurring expenses, writing off assets (including debtors), setting up new entities, and documenting trust distributions must all happen prior to 30 June to be effective. 

Forecast an Accurate Profit and Loss (P&L)

Needless to say, given that we’re dealing with an income-based tax, there is no point trying to forecast your tax position without properly understanding your taxable income. All businesses should have a P&L forecast at a minimum but, if not, this is an essential place to start when it comes to tax planning. 

It also talks to the timing of when tax planning is most effective. We would typically execute tax planning in April, May or June so that we have the majority of the year as actual figures and therefore only need to rely on forecasting up to 3 months of the year. This is particularly important in the current climate where there is more uncertainty around the numbers than ever. 

Prepare a Forecast Tax Position

Just as important as the execution of tax planning strategies is knowing well in advance what the balance of tax to pay upon the lodgement due date is. I’m sure we would all agree that there is nothing more frustrating than being made aware of a significant tax bill just prior to the due date because an effective planning process was not followed. 

In addition to forecasting the profit position at year end and estimating the tax payable for the year, it’s important to explore whether there is any opportunity to vary the June 2020 PAYG Instalment to assist with cash flow. 

Review COVID-19 Relief Implications

Review any applicable relief packages such as the JobKeeper Scheme, payroll tax waivers, PAYG Withholding cashflow boosts and grants to record the appropriate tax treatment, as well as any changes to the eligibility criteria.

Consider Cash Flow Considerations

In uncertain times, the ability to maximise cash flow is a critical consideration. While we refer to some planning strategies to manage the actual tax liability of an entity, there are other measures that the ATO has introduced to help businesses retain cash until the COVID-19 crisis passes, including PAYG instalments and 4-month deferrals of various tax obligations such as income tax, FBT and activity statements. 

In general, the ATO is being very lenient during this time and is responsive when they are contacted proactively to request assistance. 

Refund PAYG Instalments

It may be possible to claim refunds for instalments paid for the September 2019 and December 2019 quarters. The benefit of any reduction to taxable income may be recognised by varying the PAYG instalment for the June 2020 quarter or upon payment of the balance of tax payable for the year ending 30 June 2020.

Review Stock on Hand

Review stock on hand to determine whether there is any opportunity to revalue stock on hand at 30 June 2020. The benefit of reviewing stock on hand prior to 30 June is that it gives your accountant the opportunity to look at obsolete stock, or stock that is overvalued, and reduce it.  This will reduce your tax obligations.

Review Your Trade Debtors

Review your trade debtor listing for any amounts in excess of 60 days and assess whether any amounts should be written off as a bad debt before year end. In order for the deduction to be utilised in the FY 2020 year, the bad debt must be written off by the 30 June. Also review the listing for any amounts owed by related entities that may pose a Division 7A issue.

Review Your Superannuation Strategy

Discuss key areas of your superannuation strategy with your accounting advisor, taking into account contribution caps and your contribution eligibility.

The contribution caps for the 2019/2020 year are:

  • Non-concessional $100,000
  • Concessional $25,000                      
  • Superannuation rules apply to determine your eligibility to make contributions. Furthermore, changes to the super rules may allow you to make personal concessional contributions that can help offset your personal tax position.

It’s also worth regularly reviewing your approach to superannuation, together with your advisor, so that you can set yourself up for a better retirement. Consider the following as part of your superannuation strategy and ongoing tax planning efforts:

  • Consolidating your superannuation
  • Self-Managed Super Funds
  • Checking the current insurance levels held within your superannuation fund are adequate
  • Reviewing the ability to access the downsizer contribution caps
  • Strategies between your business and superannuation (Eg. SMSF to purchase a business premises and lease it back to the business)
  • Capital Gains Tax Small Business Concessions
  • Making contributions and utilising bring forward contribution rules or catch up concessional contributions
  • Commencing a pension to enter the tax-free environment in superannuation
  • Reviewing your current superannuation investment to determine if it is the best option for your retirement strategy

Review Your Plant and Equipment Items

Review your fixed asset register and any disposed of or obsolete items that can be written off before 30 June 2020. Work with your advisor to update the register for purchases and sales of any assets during the year. 

Review Your Structure

Review your current structure to ensure it’s appropriate and complies with any ATO requirements. It’s important to note that after 30 June you can’t set up a new structure to assist with your tax planning for 30 June 2020, so it’s super important this is done prior to year end. 

Assess your current remuneration and group structure and get advice on whether there are opportunities to restructure your family’s remuneration tax effectively. This will include ensuring an appropriate mix of salary and wages, dividends and trust distributions have been applied in order to minimise your overall tax liability.

Consider Other Opportunities

Finally, assess if there are other considerations such as Fringe Benefits Tax and Payroll Tax, and whether there is an obligation and any opportunity to reduce these taxes.

So, there you have it! Hopefully these tax planning tips have been helpful as heads towards the end of this rather turbulent financial year. If you’re a business owner and are looking for a Melbourne accountant to help you navigate the ins and outs of tax planning, feel free to get in touch. We’d love to help you. 

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