Have you wondered how small businesses reduce their taxes?
Taxes can be stressful for a small business owner. You likely wear many hats, and the last thing you want to do is give more of your hard-earned business income to the government. Thankfully, there are many tax savings strategies to reduce your taxable liability as a business owner. If you need ways to reduce your taxable income this year, consider some of the following methods below.
WHAT IS A SMALL BUSINESS?
From a tax perspective, a small business is usually defined as one with an annual turnover of less than $10 million, except with the small business CGT concessions, where the turnover threshold is just $2 million.
To stop businesses splitting activities so they can slip under the $10 million threshold and gain access to the various tax concessions, the law stipulates that turnover needs to be calculated from the ‘aggregated’ amounts, which basically means annual turnover (gross income, excluding GST) of every ‘connected’ or ‘affiliated’ business.
SMALL BUSINESS AND TAX
The importance of small business is demonstrated by the fact the government gives the small business sector a break on a range of tax matters.
Small businesses need to ensure their bookkeeping and lodgments are correct and up to date. You should obtain professional tax advice, especially in areas where more complex tax issues arise. This includes refinanced debt, losses, restructures, capital gains tax, personal services income, trust declarations and distributions, and private company loans.
Ways to HELP reduce your tax bill
Reduction in company tax rates for small business
The company tax rate for businesses with less than $50 million turnovers is 27.5% if 80% or less of a company’s assessable income is “passive income” .
If you use a Trust structure, one strategy is to allocate profits to a “Bucket Company” and cap your tax at 27.5% for the financial year. Note that this company must qualify as a “base rate” entity to be eligible for the lower 27.5% company tax rate.
Important note: the corporate tax rate for the 20-21 financial year is 26% (reduced from 27.5%), and 25% in the 21-22 financial year.
CASH FLOW BOOST
Check that you have correctly received cash flow boost amounts and contact the ATO if you find that you have either received an amount in error or have not received credit when entitled. To assist, the ATO has produced an eligibility companion guide and PSLA 2020/1 Commissioner’s discretion to allow further time for an entity to register for an ABN or provide notice to the Commissioner of assessable income or supplies.
Cash flow boost payments are classified as non-assessable, non-exempt income so no tax will be payable. The cash flow boost is not subject to GST, and you are still entitled to a deduction for PAYG withholding paid.
If you distribute the cash flow boost from the business to another entity (for example, making a trust distribution or paying a dividend to shareholders), there may be tax consequences for the recipient.
Taking care of your GST obligations can also be simplified, as eligible businesses are only required to account for GST once payment is received. You can also pay GST in instalments, and the ATO will work out for you how much the instalments are. A small business can also, if using some items privately, choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.
Another concession available to small businesses is pay-as-you-go tax instalments, where you can pay a quarterly instalment calculated based on your most recently assessed tax return. The income recorded is adjusted to align with the latest increase in gross domestic product, and will save you the time and the effort of ‘long-form’ calculations.
HELP FOR CAPITAL GAINS TAX (CGT)
The special small business CGT concessions are in addition to the 50% general CGT discount applying to individuals, trusts and super funds (but not companies).
Four CGT concessions may be available to eliminate or reduce capital gains made by a small business or its owners where it disposes of “active” assets, like a trade or business premises but does not extend to passive assets such as an investment portfolio.
The reliefs are available to businesses, which are small business entities (i.e., they carry on a business and satisfy the $2m turnover test) or where the net CGT assets of the taxpayer (plus its connected entities and affiliates) do not exceed $6m:
The 15-year exemption
Available where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years.
The retirement exemption
A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000. As it is not necessary to retire, the concession can be utilised more than once.
The 50% active asset reduction
The capital gain arising from the disposal of a CGT asset may be discounted by 50%, but there are specific rules about what qualifies.
The CGT rollover
A capital gain arising from the disposal of a CGT asset may be deferred a replacement asset is acquired within two years – the gain is deferred until disposal of the replacement asset.
INSTANT ASSET WRITE-OFF
One of the best tax breaks for small businesses is the instant asset write-off, which is a great way for your business to acquire much-needed capital assets to build your business and, at the same time, reduce your taxable profits.
Better still, the tax break has recently been made more generous. Assets costing up to $150,000 can now be written off immediately (previously $30,000 up to 11 March 2020). The $150,000 limit applies until 31 December 2020.
In addition, more businesses can make a claim as the turnover threshold increased to $500 million from 12 March 2020 (up from the previous limit of $50m).
Items you could claim include:
- Cash registers and other POS devices
- Cars, vans and utes
- Fittings and fixtures for your premises
- Plant and machinery for your trade
- Computers, laptops and tablets
- Security systems
- Accounting software
You must be careful when calculating any claims to ensure you follow all rules set by the ATO, and you should note:
- Only functioning businesses qualify (it’s not enough just to be a holder of an ABN number).
- It’s important to understand the tax break. It is not a cash hand-out but a deduction from your taxable profit. If you spend $30,000 on a capital purchase, you will receive a 27.5% (26% from 1 July 2020) per cent deduction, which equates to an $8,250 reduction in your tax – so you will still be out of pocket by over $20,000 on the purchase. If it’s something, you were going to purchase anyway, good luck and enjoy the benefit. But if you’ve acquired something, or are planning to acquire something, purely to save tax, you might want to think again. What you gain in the year of purchase will gradually be clawed back through reduced deductions in future years.
- The amount you can claim is GST exclusive. This is relevant if your business is registered for GST and can claim an input tax credit on the purchase. The amount you can claim is the GST exclusive price.
- The asset must have been installed and ready for use. This is particularly important if you purchased the asset just before the end of the financial year. If you purchase it before 30 June but don’t have it available for use until July, you can only claim the deduction against profits in the following year.
- You can claim a deduction for secondhand assets.
- To claim the full deduction, the asset has to be used in the business, and if there has been personal use, the deduction needs to be pro-rated to reflect this.
JobKeeper payments are assessable, and you can claim deductions for the payments made to employees and business participants. If you have been making JobKeeper claims for your eligible employees and business participants, ensure that your reporting and documentation is up-to-date and correct, and keep this information for five years after the payment was made.
The ATO has identified behaviours of concern including falsifying records or revising activity statements to meet the fall in a turnover test or failing to pass on the full $1500 JobKeeper payment to eligible employees. The ATO has signalled a focus on the application of the decline in a turnover test, for example, where actual and projected turnover has significantly diverged as well as issues identified in PCG 2020/4 Schemes in relation to the JobKeeper payment.
Contact the ATO to rectify any errors or mistakes, as the ATO has limited discretion in relation to overpayments which can be exercised in certain circumstances.
PAYG instalment indexation suspended
The government is in the process of passing legislation that suspends the indexation of PAGY and GST instalment amounts for small businesses in 2020–21. Taxpayers may still vary their quarterly instalments. The changes will apply to instalment quarters commencing on or after 1 July 2020 if the Bill receives Royal assent before 21 August 2020, or otherwise on or after 1 October 2020.
A small business can also get an immediate tax deduction for certain pre-paid business expenses made before the end of the financial year. If a payment covered an expense that has gone into the new financial year (such as insurance premiums, rent or membership of a trade or professional body), you could claim that deduction in the last financial year. Check your payments for the period before 30 June to see if anything qualifies.
Concessional superannuation cap.
For people aged 49 years or over on 30 June 2014, the concessional superannuation cap (the money you can put into super before tax) is $35,000 per year and $30,000 for those under 49. If you go over this limit, you’ll pay more tax, so I would consider putting in as much as feasible under that.
Employee superannuation payments.
To claim a tax deduction for the current financial year, you need to ensure that your employee superannuation payments are received by the super fund or the Small Business Superannuation Clearing House (SBSCH) by 30 June.
You should avoid making last-minute superannuation payments as processing delays may cause them to be received after year-end. If for any reasons you end up having to make last-minute payments, and you would like to claim them as deductions for the current year, contact us immediately and before you make any payments for possible resolutions.
If your business turns over less than $2 million, depreciating assets (including motor vehicles) valued at less than $1,000 will be immediately deductible, and assets valued at more than $1,000 will be depreciated in one pool at a rate of 15 per cent in the first year, and 30 per cent in future years.
Tools of trade / FBT exempt items.
The purchase of Tools of Trade and other FBT exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.
Items that can be packaged include handheld/portable tools of the trade, computer software, notebook computers, personal electronic organisers, digital cameras, briefcases, protective clothing, and mobile phones.
If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.
For more information about FBT and employer obligations, refer to our FBT Guide article or take our FBT Questionnaire to find out if you need to be registered.
Where practical, I’d recommend considering deferring further invoices and/or receiving cash/debtor payments until after 30 June. This will defer the tax on this income.
Bring forward expenses.
I would think about purchasing consumable items (e.g. stationery, printing, office and computer supplies) before 30 June. You can claim back on these on your tax return.
Year-end stock take/work in progress.
If applicable, prepare a detailed stocktake or work in progress listing as at 30 June. Once this is complete, I’d think about reviewing my listing and writing off any obsolete or worthless stock items.
Write-off bad debts.
I also think it’s wise to write off all Bad Debts before 30 June, with minutes of a directors’ meeting listing each bad debt as evidence these amounts were written off before year-end.
Investment property depreciation.
If you own a rental property, consider getting a Property Depreciation Report, so you can claim the maximum amount of depreciation and building write-off deductions.
CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING
Small businesses can change the legal structure of their business without incurring any income tax liability when active assets are transferred by one entity to another.
This rollover applies to active assets that are CGT assets, trading stock, revenue assets and depreciating assets used, or held ready for use, in the course of carrying on a business.
However, caution must be exercised. Business restructuring is complex, so you should first speak to your CPA Australia-registered tax agent.
REVIEW YOUR PRIVATE COMPANY LOANS
The income tax laws can potentially treat the following as an unfranked deemed dividend for a taxpayer unless an exemption applies:
- a payment or a loan by a private company to a shareholder or an associate (like a family member)
- the forgiveness of a shareholder’s or associate’s debt
- the use of a company asset by a shareholder or their associate, or
- the transfer of a company asset to a shareholder or their associate.
The most common exemption is to enter into a written loan agreement requiring minimum interest and principal repayments over a specified loan term, which may be seven or 25 years depending on whether the loan is secured.
There are various things a private company can do before its 2019–20 income tax return needs to be lodged to minimise the risk of a shareholder or an associate deriving a deemed dividend.
Depending on the circumstances, these strategies may include repaying a loan, declaring a dividend or entering a complying loan agreement before the return needs to be lodged.
DON’T FORGET TO KEEP RECORDS
When it comes to running a small business, keeping on top of your paperwork may be the last thing on your to-do list. So while you focus on running and growing your business, our team can help with getting your records in order and discovering the right deductions.
To make the most of tax time and get your refund as fast as possible, call us and lock in an appointment today.
We can help you navigate the accounting and tax responsibilities that come with running a business. We can advise you on the best structure to set up your business. We can also assist you in the setting up of a Company, Partnership, Trust or Self Managed Super Fund.
Our small business accountants are experienced and qualified accountants dedicated to providing timely and proactive solutions for all your small business tax return needs. Our experience covers the whole realm of tax and associated accounting and business advisory, from compliance to growth and tax-effective strategies. Contact the Bookkept team for more information.