End-of-year tax planning might not be the most fun activity you undertake as a business owner, but it can 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 tax planning is just about claiming a deduction for business, it often involves complex, high-risk or sophisticated arrangements.
Our accounting and tax advisors have pulled together this tax planning guide for small business, to give you some tax tips as we near the end of another financial year.
Understanding Small Business Tax Planning
There’s a common misconception when it comes to tax planning 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. 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 and May 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.
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 all agree that there's 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 PAYG Instalment to assist with cash flow .
Review Stock on Hand
Review stock on hand to determine whether there is any opportunity to revalue stock on hand at 30 June. 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 current Financial Year, the bad debt must be written off by 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 financial advisor and accounting advisor, taking into account contribution caps and your contribution eligibility.
The contribution caps for the 2024/2025 year are:
- Non-concessional (after tax) contributions: $110,000
- Concessional (before tax) contributions: $30,000
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
- Strategies between your business and superannuation (E.g. SMSF to purchase a business premises and lease it back to the business)
- CGT 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 strategy to determine if it is setting you up for success in your retirement.
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. Work with your advisor to update the register for purchases and sales of any assets during the year.
Review Your Business and Remuneration Structures
Review your current structure to ensure it’s appropriate to support the business commercially, protects assets as well as legally minimises your tax. After 30 June you can’t set up a new structure to assist with your tax planning for the current year, so it’s super important this is done prior to end of the financial year.
Assess your current remuneration and group structure and get advice on whether there are opportunities to restructure remuneration for key people and shareholders tax effectively. This will include ensuring an appropriate mix of salary and wages, dividends and trust distributions have been applied.
Understand FBT Exemptions
When approaching Fringe Benefits Tax (FBT), it's crucial to understand which benefits are subject to FBT. Minimising FBT liabilities can be achieved by opting for exempt benefits or incorporating salary packaging strategies that favour more tax-efficient benefits. Maintaining precise records and ensuring compliance with FBT regulations are essential to avoid penalties.
Tax Planning Can Reduce Payroll Tax Risk
When planning for payroll tax, it’s vital to understand your obligations based on state-specific thresholds and rates. Reducing payroll tax liabilities and risk can be achieved through proper classification of employees vs. contractors , utilising exemptions and concessions for eligible employees, and implementing tax-efficient salary packaging strategies.
Regular payroll audits and careful planning for business growth are essential to ensure compliance and optimise payroll tax liabilities, helping manage overall labour costs effectively.
Get in Touch with BlueRock's Tax Planning Experts
So, there you have it! We hope these tax planning tips are helpful. 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 via the form below. We’d love to help you.
