Have you wondered how small businesses reduce their taxes?
Taxes are a potential source of anxiety for the owner of a small business.
You probably wear a lot of hats, and the last thing you want to do is hand over more of the money you’ve worked so hard to earn to the government through your business.
As a fortunate matter, lowering your taxable liability as a business owner can be accomplished through the implementation of a variety of tax reduction measures.
Consider using one or more of the strategies listed below to lower the amount of income that is subject to taxation in the current year.
WHAT EXACTLY IS CONSIDERED A SMALL BUSINESS?
With the exception of the small business CGT concessions, which have a turnover barrier of just $2 million, a small firm is typically described as one that has an annual turnover of less than $10 million.
However, the turnover threshold for these concessions is just $2 million.
The law stipulates that turnover needs to be calculated from the ‘aggregated’ amounts, which basically means the annual turnover (gross income, excluding GST) of every ‘connected’ or ‘affiliated’ business.
This is done to prevent businesses from splitting activities so they can slip below the $10 million thresholds and gain access to the various tax concessions.
SMALL BUSINESS AND TAX
The fact that the government provides tax breaks to the small business sector for a variety of reasons is evidence that the government recognises the significance of the small business sector.
Bookkeeping and tax filing are two areas that need to be kept current and accurate at all times by small businesses.
You should seek the opinion of a qualified tax practitioner, particularly in those locations where more sophisticated tax issues are present.
This comprises personal services revenue, trust declarations and distributions, refinanced debt, losses, restructures, capital gains tax, and trust restructures. Private company loans are also included in this category.
Ways to HELP reduce your tax bill
Reduction in company tax rates for small business
If 80 per cent or less of a firm’s assessable income is “passive income,” then the company will be subject to a tax rate of 27.5 per cent. This rate applies to enterprises with turnovers of less than $50 million.
If you want to organise your business as a Trust, one potential tax-saving method would be to funnel income through a “Bucket Company” and set your annual tax rate to a maximum of 27.5%.
Take note that in order for this company to be eligible for the reduced company tax rate of 27.5%, it must first meet the requirements to qualify as a “base rate” entity.
Note that the corporation tax rate has been lowered from 27.5 per cent to 26 per cent for the upcoming 20-21 fiscal year and that it will be decreased again to 25 per cent for the upcoming 21-22 fiscal year.
CASH FLOW BOOST
Verify that you have received the appropriate amounts for the cash flow boost, and get in touch with the ATO if you discover that you have either received an incorrect amount or have not received credit when you were qualified to do so.
An eligibility companion guide and a PSLA 2020/1 Commissioner’s discretion to give more time for an entity to register for an ABN or submit a notification to the Commissioner of assessable income or supplies have been created by the ATO in order to be of assistance.
Since cash flow boost payments are considered non-assessable and non-exempt income, there will be no tax liability associated with them.
If you send the increase in cash flow from the company to another entity (such as making a trust distribution or paying a dividend to shareholders), the receiver may be subject to tax repercussions.
Taking care of your responsibilities in relation to the Goods and Services Tax (GST) can also be made simpler as a result of the fact that qualifying businesses are only required to account for GST once they have received payment for it. This makes it easier to take care of your obligations in relation to the GST.
You also have the choice to pay the GST in instalments, in which case the ATO will tally up the entire amount of those payments and send it to you. This option is also available to you.
If a small business decides to use part of the things it purchases for its own personal use, it has the option of claiming the full GST credits and then making a single adjustment at the end of the tax year to account for the percentage of private use.
In addition, small businesses have the opportunity to take advantage of pay-as-you-go tax instalments. These instalments enable the company to pay its taxes on a quarterly basis in accordance with a formula that is derived from the company’s most recent tax return assessment. Small businesses can benefit from pay-as-you-go tax instalments.
The previously reported amount of revenue has been adjusted upward to take into account the most recent expansion in gross domestic product. Because of this, you won’t have to carry out any computations in “long-form,” which will result in significant time and effort savings for you.
HELP FOR CAPITAL GAINS TAX (CGT)
In addition to the normal CGT reduction of fifty per cent that applies to individuals, trusts, and pension funds, special capital gains tax incentives for small businesses are also available (but not companies).
When a firm sells “active” assets like a trade or corporate premises, it is feasible for the owners of a small business or the business itself to wipe out or reduce any capital gains that have been realised as a result of the sale.
However, “passive” assets such as an investment portfolio are not eligible for the same CGT discounts as other types of assets.
Businesses that meet the requirements to be considered small business entities (i.e., they operate a business and have an annual revenue of less than $2 million) or businesses in which the nett CGT assets of the taxpayer (including its connected entities and affiliates) do not exceed $6 million are eligible for the reliefs. Businesses that do not meet either of these requirements will not be eligible.
The 15-year exemption
When a taxpayer who has reached the age of 55 and is retiring sells a CGT asset that they have owned for at least 15 years and disposed of, the taxpayer is eligible for a tax credit.
The retirement exemption
A taxpayer is permitted, up to a lifetime maximum of $500,000, to apply capital earnings from the disposal of a CGT asset against the retirement exemption. Because it is not required to retire, the concession can be used more than once whenever it is needed.
The 50% active asset reduction
There is a capital gain discount of fifty percent that can be applied to the profit gained from the sale of a CGT asset; however, there are certain conditions that must be met in order to be eligible for this discount.
The CGT rollover
When a CGT asset is sold, the capital gain that follows from the sale of the CGT asset may have the possibility of being deferred if a replacement asset is purchased within two years of the sale of the CGT asset.
This indicates that the benefit won’t be realised until the replacement asset is sold and put back into circulation.
INSTANT ASSET WRITE-OFF
The quick asset write-off is one of the most beneficial tax breaks for small businesses. It is a fantastic way for your company to obtain the much-needed capital assets to develop your business while at the same time reducing the number of taxable profits that your company is subject to.
To make matters even better, the tax credit was just expanded to include more money.
It is now possible to quickly write off assets with a cost of up to $150,000 (before, the limit was $30,000 up until March 11, 2020). Up to the 31st of December in 2020, the maximum allowed is $150,000.
A greater number of companies are now eligible to file a claim as a result of the increase in the turnover requirement, which went from a maximum of $50 million to its current value of $500 million as of March 12, 2020.
Among the things you could potentially claim are:
- 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
When computing any claims, you need to be careful to make sure you adhere to all of the guidelines established by the ATO. In addition, you should take the following into consideration:
- Only functioning businesses qualify (it’s not enough just to be a holder of an ABN number).
- It is essential to have a good understanding of the tax advantage. It is not a handout in the form of cash, but rather a deduction from the amount of your taxable profit. If you spend $30,000 on a capital purchase, you will receive a 27.5 percent (26 percent after July 1, 2020) per cent deduction, which is equivalent to a $8,250 reduction in your tax; however, you will still be out of pocket by more than $20,000 on the purchase. This change will take effect on July 1, 2020. If it’s something you were planning to buy anyhow, then we wish you the best of luck and hope you enjoy the benefit. However, if the sole reason you purchased anything or are planning to purchase something is to reduce your taxable income, you should reconsider your decision. Your gain from the year you made the purchase will be gradually eaten away by the government in the form of decreased deductions in subsequent years.
- The amount that you are eligible to claim is not inclusive of GST. This is crucial information for your company if it is registered for the Goods and Services Tax (GST) and is eligible to claim an input tax credit on the transaction. The amount that you are allowed to claim is the price excluding GST.
- It is necessary that the asset have been set up and be in a usable state. This is especially crucial to keep in mind if you made the investment in the asset in the final few weeks of the fiscal year. If you make the purchase before the 30th of June but don’t have it ready for use until the 1st of July, you won’t be able to take the tax deduction against your profits until the following year.
- You are eligible to make a deduction for assets that are used.
- To be eligible for the entire deduction, the asset in question must be put to use in the running of the business; however, if it has also been put to personal use, the deduction will need to be adjusted so as to take this into account.
You are allowed to deduct payments made to employees and business participants as well as payments received through JobKeeper, which are all taxable.
You must make sure that your reporting and paperwork are current, accurate, and complete if you have been submitting JobKeeper claims on behalf of your qualified employees and business participants. You should also keep this information on file for five years after the payment has been made.
The Australian Taxation Office (ATO) has identified behaviours that raise concerns, such as 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.
These are just a few examples of the behaviours that have been uncovered so far.
The Australian Taxation Office (ATO) has indicated that it will be focusing its attention on the application of the decline in a turnover test, for example in scenarios in which actual and projected turnover has significantly diverged, as well as issues found in PCG 2020/4 Schemes in relation to the JobKeeper payment. This comes after the ATO indicated that it would be focusing its attention on the application of the decline in a turnover test.
Get in touch with the ATO to address any errors or mistakes you may have made, as the ATO holds a limited degree of discretion about overpayments that can be used under certain conditions. If you have made any overpayments, get in touch with the ATO as soon as possible.
PAYG instalment indexation suspended
PAYG and GST instalment levels for small firms will not have their indexation increased beginning in 2020–21 as a result of legislation that the government is now working to pass.
Taxpayers are still permitted to adjust the number of their quarterly payments.
The alterations will take effect for instalments quarterly beginning on or after July 1, 2020, provided that the Bill receives the Royal assent by August 21, 2020; otherwise, they will take effect for quarters beginning on or after October 1, 2020.
When certain pre-paid business expenses are made by a small firm before the end of the fiscal year, the owner may be eligible for an instant tax deduction for the amount.
You are eligible to make a claim for a deduction for the previous fiscal year for any payment that covered an expense that was carried over into the new fiscal year (for example, insurance premiums, rent, or membership dues to a trade or professional group).
Check all of your payments that were made between 1 July and 30 June to see if any of them qualify.
Concessional superannuation cap
The maximum amount of money that can be contributed to a concessional superannuation fund each year is $30,000 for those who are under the age of 49, while the maximum amount that can be contributed by those who are 49 or older is $35,000.
If you go over this amount, you will be subject to further taxation, so you should really consider putting in as much as you can while still remaining under that limit.
Employee superannuation payments
If you want to be able to claim a tax deduction for the current fiscal year, you need to ensure that your staff superannuation payments are collected by the super fund or the Small Business Superannuation Clearing House (SBSCH) well before end of June.
The deadline for this is the 30th of June.
You should make every effort to avoid making payments to your retirement account at the very eleventh hour because there is a possibility that there may be processing delays which will result in the payments being received after the end of the year.
If, for whatever reason, you find yourself in the position of having to make payments at the very last minute and you would like to be able to deduct those payments from your tax bill for the current year, please get in touch with us as soon as possible and before you make any payments so that we can discuss possible resolutions. If you would like to be able to deduct those payments from your tax bill for the current year, please get in touch with us as soon as possible.
If your company has a yearly gross revenue of less than $2 million, then depreciating assets (including motor vehicles) with a value of less than $1,000 will be instantly deducted. This includes the value of the assets.
All assets with a value more than $1,000 will be combined into one pool and subjected to depreciation at a rate of 15% for the first year, followed by a rate of 30% for each year thereafter.
Trade tools and FBT exempt products
The acquisition of tools of the trade and other products that are exempt from the goods and services tax (GST) by business owners and employees can be an efficient approach to acquiring capital assets while enjoying a tax advantage.
Some examples of products that can be packaged are protective garments and mobile phones, to name a couple. Briefcases, digital cameras, personal electronic organisers, handheld or portable tools of the trade, computer software, notebook computers, and personal electronic organisers are some other examples.
If the business transaction is carried out in the appropriate manner, the employer will be able to claim a tax deduction equal to the amount of the reimbursement payment that they gave to the employee. This deduction will be applicable only in the event that the business transaction is organised in the appropriate manner (for the cost of the equipment).
In addition to this, the employer will be able to claim any GST input credit, and the total wage package that the employee receives will only be reduced by the amount that the cost of the item is after GST has been deducted from it. This is an important change.
Please visit the article in our FBT Guide that corresponds to your question if you need any further information regarding FBT or the requirements that are placed on employers. You also have the option of filling out our FBT Questionnaire, which will allow us to determine whether or not it is needed of you to be registered for FBT. This decision will be made based on the information that you provide.
In situations where this is feasible, I would suggest giving some thought to postponing the issuance of additional invoices and/or the receipt of cash or payments from creditors until after the 30th of June.
This will put off paying tax on this money for a while.
Bring expenses ahead
Before the 30th of June, I would give some thought to buying consumable items such as stationery, printing supplies, office supplies, and computer equipment. You can get a refund on these if you claim them on your tax return.
Year-end stock take/work in progress
If necessary, compile a comprehensive stocktake or listing of the work that is still being done as of the 30th of June.
After this is finished, I will give some thought to evaluating my listing and removing any things from stock that are either obsolete or no longer of value.
Write off bad debts
The minutes of a directors’ meeting should list each Bad Debt as confirmation that these sums were written off before to the conclusion of the fiscal year. In addition, I think it prudent to write off all Bad Debts before June 30.
Investment property depreciation
When active assets are transferred from one entity to another, small businesses have the flexibility to change the legal structure of their organisation without incurring any income tax liability as a result of the move.
Think about the tax effects of any restructuring
Small businesses have the option to change the legal form of their organisation without incurring any income tax liability as a result of the move if active assets are moved from one company to another. This is because active assets are considered to be business income.
This rollover can be utilised for active assets that include CGT assets, trade stock, revenue assets, and depreciating assets that are utilised in the process of carrying on a business or held ready for use in that capacity.
However, the circumstance calls for the highest possible level of alertness.
Given the complexity of the situation, you should first consult with a CPA Australia-registered tax agent before restructuring your business.
REVIEW YOUR LOANS FROM PRIVATE COMPANIES
Unless an exemption is applicable, the following are all things that the income tax regulations have the ability to classify as presumed dividends that are unfranked for a taxpayer:
- a sum of money paid out or money loaned by a private corporation to one of its shareholders or associates (like a family member)
- the cancellation of debt owed by a shareholder or affiliate of the company
- the utilisation of a firm asset by a shareholder or their associate without authorisation from the company
- the act of transferring ownership of an asset held by a firm to an existing shareholder or affiliate
The most typical way to avoid this requirement is to enter into a written loan agreement with the lender that stipulates the minimum amount of interest and principal that must be repaid within a given loan term, which can range anywhere from seven to twenty-five years depending on whether or not the loan is secured.
A private firm can reduce the likelihood of a shareholder or an associate receiving a considered dividend by taking a number of preventative measures before the filing deadline for its income tax return for the 2019–20 tax year, which is April 15, 2019.
Before the time when the return is to be filed, one of these techniques could consist of paying off a loan, announcing a dividend, or entering into a conforming loan agreement, depending on the specifics of the situation.
REMEMBER TO KEEEP RECORDS
It’s possible that staying on top of your paperwork will be the very last thing on your to-do list when it comes to running a small business.
Because of this, while you focus on running and growing your company, the specialists at our company can aid you with organising your records and deciding which tax deductions are appropriate to your circumstances.
Give us a call right now to set up an appointment so that we can help you get the most out of tax season and ensure that you get your return as early as humanly feasible.
We are able to help you navigate the complex accounting and tax duties that come along with successfully operating a business on your own behalf.
We are able to offer you advice regarding the organisation that would be most useful to your company and we will do so in the following way:
In addition, we are able to assist you in the establishment of a corporation, partnership, trust, or self-managed super fund on your behalf. This service is available to you at no additional cost.
Our accountants for small businesses are highly experienced professionals who have received extensive training. They are dedicated to satisfying all of the criteria for filing a small business tax return in a timely manner while also providing proactive solutions.
If you require help with your bookkeeping, you can give us a call at (03) 8568 3606 or email us at [email protected].
Our expertise spans the entirety of the tax, accounting, and business advice fields related to taxes, including regulatory compliance, corporate expansion, and tax-efficient strategy.
For further information, get in touch with the Bookkept staff.