Taxes can be a significant source of stress for small business owners in Australia. With the numerous business responsibilities, finding ways to reduce tax liability is crucial to maintaining profitability.
Fortunately, there are several strategies small businesses can implement to lower their taxable income legally. This guide will explore practical ways to reduce your tax bill and ensure you take full advantage of available tax benefits.
Let’s get straight to the point
Australian small businesses can reduce their tax liability through strategic planning. Key tactics include selecting the right business structure to benefit from lower tax rates, utilising the instant asset write-off for immediate deductions, and claiming pre-paid expenses.
Maximising superannuation contributions under the concessional cap and leveraging Capital Gains Tax (CGT) concessions, such as the 15-year exemption for retiring owners, can also provide significant savings.
Effective cash flow management through Pay-as-You-Go (PAYG) instalments and income deferral helps minimise taxes. Accurate record-keeping and consulting a tax professional are essential to optimise these strategies.
What Is Considered a Small Business in Australia?
1. Understanding the Turnover Threshold
In Australia, a small business is generally defined as one with an annual turnover of less than $10 million.
However, it’s important to note that for some specific concessions, such as the small business CGT (Capital Gains Tax) concessions, the turnover threshold is just $2 million. This turnover must be calculated on an ‘aggregated’ basis, which includes the gross income (excluding GST) of all ‘connected’ or ‘affiliated’ businesses.
This rule is in place to prevent businesses from artificially splitting their operations to qualify for tax concessions.
How Can Small Businesses Reduce Taxes?
1. Reduce Your Tax Rate with a Company Structure
One effective way to reduce tax liability is by choosing the appropriate business structure.
If your business earns less than $50 million in turnover and 80% or less of your income is ‘passive income,’ you may qualify for the lower company tax rate, which is currently 25%.
Using a Trust structure to funnel income through a “Bucket Company” can also be advantageous, allowing you to cap your annual tax rate at 25%.
2. Claim Deductions for Business Expenses
1. Instant Asset Write-Off
The instant asset write-off scheme allows businesses to immediately deduct the cost of assets purchased for business use rather than depreciating them over several years. Currently, the threshold for this write-off is $150,000 per asset.
This means if your business purchases qualifying assets such as vehicles, office equipment, or machinery, you can reduce your taxable income by the full cost of the asset in the year of purchase.
However, ensure the asset is in use by the end of the financial year to qualify for the deduction.
2. Pre-Paid Expenses
Small businesses can claim an immediate deduction for pre-paid expenses that cover 12 months or less. For instance, if you pre-pay rent, insurance, or memberships before the end of the financial year, you can claim these expenses in the current year’s tax return.
3. Maximise Superannuation Contributions
1. Concessional Super Contributions
Making concessional super contributions is another effective tax-saving strategy. The current concessional contributions cap is $27,500 per financial year.
Contributions up to this cap are taxed at a concessional rate of 15%, which can be lower than your marginal tax rate.
Ensure your super contributions are received by your employees’ super funds before the end of the financial year to claim a deduction in that year.
Take Advantage of Capital Gains Tax (CGT) Concessions
1. The 15-Year Exemption
If you’re over 55 and retiring and have owned a CGT asset for at least 15 years, you may be eligible for the 15-year CGT exemption. This allows you to sell a business asset without paying CGT, provided the proceeds are used for retirement.
2. The 50% Active Asset Reduction
Small businesses can also benefit from a 50% reduction in the capital gain on the sale of active assets, such as business premises or equipment. This concession applies if the asset has been used in the business for at least 12 months.
3. CGT Rollover
If you sell a business asset and purchase a replacement asset within two years, you can defer the capital gain under the CGT rollover provisions. This means you won’t pay CGT until the replacement asset is sold.
Use the Small Business Income Tax Offset
The Small Business Income Tax Offset provides a tax offset of up to $1,000 per year for small businesses with a turnover of less than $5 million. This offset is calculated based on the tax payable on your business income and can significantly reduce your overall tax liability.
Manage Your Cash Flow
1. Pay-as-You-Go (PAYG) Instalments
Small businesses can manage their cash flow more effectively by opting for PAYG instalments, which spread your tax payments across the year rather than paying a lump sum at the end. This system is based on your most recent tax assessment and can be adjusted if your income fluctuates throughout the year.
2. Defer Income
If feasible, consider deferring income until the next financial year, especially if you expect your tax rate to be lower or if you have other deductions that will reduce your taxable income. This strategy can help minimise your current year’s tax bill.
Record-Keeping and Compliance
Maintaining accurate and up-to-date records is crucial for tax compliance and maximising deductions.
Ensure all transactions are well-documented and that you keep receipts, invoices, and other relevant documents for at least five years. Accurate record-keeping will also make it easier to identify potential deductions and reduce the risk of errors in your tax return.
Conclusion
Reducing your tax liability as a small business in Australia involves strategic planning, understanding the tax laws, and taking advantage of available concessions.
While the strategies outlined in this article can provide substantial tax savings, consulting with a qualified tax professional or accountant is essential.
They can offer personalised advice tailored to your business’s circumstances and ensure you comply with all legal requirements while optimising your tax position.
By staying informed and proactive, you can minimise your tax burden and keep more of your hard-earned money, allowing your business to grow and thrive in a competitive market.
Frequently Asked Questions
What Is Income Splitting, And Is It Legal In Australia?
Income splitting involves distributing business income among family members to reduce the overall tax liability. It is legal when done within the ATO’s guidelines, typically by paying family members a reasonable wage for their work in the business.
How Can Small Businesses Benefit From Carrying Forward Tax Losses?
If a small business incurs a loss in one financial year, it can carry forward that loss to offset taxable income in future years, reducing tax liabilities.
What Records Should Small Businesses Keep To Maximise Deductions?
Businesses must keep detailed and accurate records of income, expenses, receipts, and invoices. This ensures they can substantiate claims during an ATO audit and claim all eligible deductions.
Is Gst Registration Beneficial For Tax Purposes?
While businesses earning over $75,000 annually must register for GST, even smaller businesses might benefit by claiming GST credits on purchases.
Should Small Businesses Work With A Tax Professional?
Yes, a tax professional can help identify deductions, ensure compliance with ATO regulations, and develop tax strategies tailored to your business needs.
