With EOFY rapidly approaching, business owners have a timely opportunity to not only review their tax strategies but fine-tune their operational ones, setting themselves up for future success.
In this Q&A, Falanga & Co Partner, Samuel Falanga discusses some of the most common pitfalls business owners encounter and outlines the strategies to both consider and avoid.
What common tax traps do business owners fall into at EOFY?
Unfortunately, time and again, we see business owners failing to maximise the full potential of their businesses, and this often comes down to poor time management and planning.
By not picking up the phone to your accountant promptly and by failing to maintain updated financials, business owners are hindering their own success. In some cases, they’re unintentionally throwing away money.
That’s why speaking with your adviser as early as possible is important. What’s the point in working hard to make money throughout the year if, when it comes to tax time, you don’t take the right steps to keep as much of it as you can?
The earlier we hear from our clients and the earlier we receive their financials, the better we can do our job to devise and implement the most suitable plans.
Which specific tax optimisation strategies should business owners consider?
There are various approaches to reducing a business’s tax liability. These range from making super payments, deferring business income, asset write-offs, paying out director’s distributions and dividends, and more.
The effectiveness and relevance of each strategy really depend on the specific commercial situation of each business, so it’s important to speak to your adviser before making any decisions.
How can businesses use superannuation as a tax optimisation strategy?
Concessional contributions, including superannuation Guarantee (SG) payments, are tax deductible if paid on time. Topping up your own super balance or those of your employees can, therefore, effectively reduce the assessable income of your business.
Such contributions are only deductible for the year they are made, and it’s important to note that they cannot be claimed until your employees’ superannuation fund receives the payment.
As such, to maximise this strategy, business owners need to ensure contributions are paid well before June 30 to avoid the payment being received in the following financial year.
In other words, you need to be doing this now.
What’s more, you can also make use of ‘carry forward’ concessional contributions into your own super fund. This is where you can use the unused portion of concessional contribution caps from prior years (up to 2019) and bring them into the current financial year.
It might sound complicated, but ultimately this means you can pay yourself more super and take advantage of the favourable tax treatment when making concessional contributions, assuming you have unused cap portions from previous years and your super balance is less than $500,000.
What about deferring income?
If you run a small business with turnover of less than $2 million, you can consider holding off on invoicing until after June 30, assuming you are using a cash basis accounting method.
By deferring collection of these invoices until the following financial year, you can effectively remove them from this year’s assessable income. However, it’s all completely dependent on your specific commercial circumstances.
This strategy won’t be possible if you’re a larger organisation and use accrual-based accounting. Likewise, even if you are a small business using a cash basis accounting method, it still might not be advisable, especially if you have ‘carry forward’ tax losses from previous years. In this instance, it might be beneficial to collect all outstanding invoices before June 30.
What about temporary full expensing and asset write-offs?
Employers can make use of accelerated tax deductions via temporary full expensing, which enables businesses to claim an immediate deduction for eligible assets. This scheme is ending on June 30 2023, and only applies to specific assets which have been purchased and installed prior to this date.
Can business owners pay themselves a wage to reduce tax?
Depending on cash flow, paying directors and associates of the business adequately can also yield significant tax benefits. Broadly speaking, we would recommend to all of our clients that they get paid at least $100,000, as this is where the marginal tax rate of a person is similar to the company tax rate.
What are some strategies which business owners should avoid or be careful using?
The ATO is clamping down on Fringe Benefits Tax (FBT), so it’s essential to keep an updated logbook if you are using or planning to use vehicles for work purchased under a company name.
Additionally, the ATO is heavily focused on anti-avoidance rules and trust distributions, restricting how a business can distribute income to family members, especially those in lower income brackets. Again, the need for adequate documentation is essential here.
Any final thoughts?
While there are many tax optimisation strategies to be aware of, our view is that if it isn’t going to make your business more effective and efficient, don’t spend the money. As I frequently say to our clients, you spend one dollar to save 25 cents, so if you don’t need to spend it, don’t.
Above all, being organised and speaking to your adviser as early as possible is what makes the biggest difference when it comes to maximising tax deductions and reducing taxable income.
How Falanga & Co can help
If you haven’t yet sorted your financials for EOFY or are unclear about what strategies might be available to you, the Falanga & Co team are always here to help.
For existing clients please get in touch with your Falanga & Co accountant today. For those who are not Falanga & Co clients, we invite you to click here to schedule a discovery call with a member of our team.
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