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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 IS 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.

The increase in cash flow is exempt from GST, and you are still eligible to claim a deduction for any PAYG withholding that you may have paid.

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.

Directors Penalty Notice

GST

Taking care of your responsibilities with regard to the Goods and Services Tax (GST) can also be made easier thanks to the fact that qualifying firms are only needed to account for GST once they have received payment for it.

You also have the option to pay the GST in instalments, and the ATO will figure out the total amount of those payments on your behalf.

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 firms can take advantage of pay-as-you-go tax instalments, which allow them to pay their taxes on a quarterly basis in accordance with a formula that is derived from their most recent tax return assessment.

The revenue that was recorded has been revised to reflect the most recent growth in gross domestic product. As a result, you won’t need to perform any “long-form” computations, which will save you time and effort.

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).

It is possible for a small business or its owners to erase or decrease capital gains realised when the company disposes of “active” assets, such as a trade or corporate premises.

However, the same CGT concessions do not apply to “passive” assets, such as an investment portfolio.

Businesses that meet the criteria to be considered small business entities (i.e., they run a business and have a revenue of less than $2 million per year) 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.

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 are certain conditions that must be followed in order to be eligible for the capital gain discount of fifty per cent that can be applied to the profit made from the sale of a CGT asset.

The CGT rollover

When a replacement asset is purchased within two years of the sale of a CGT asset, the capital gain that results from the sale of the CGT asset might be delayed.

This means that the gain won’t be realised until the replacement asset is sold.

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.

JobKeeper

Payments made through JobKeeper are taxable, and you are eligible to take deductions for such those as well as payments made to employees and business participants.

If you have been filing JobKeeper claims on behalf of your eligible employees and business participants, you need to make sure that your reporting and paperwork are up to date and accurate, and you should maintain this information for a period of five years after the payment has been issued.

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 some of the behaviours that have been identified.

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 instance in situations 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.

Get in touch with the ATO to correct any errors or mistakes you may have made, as the ATO possesses a limited amount of discretion in regard to overpayments that can be applied under certain conditions.

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.

PRE-PAID EXPENSES

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.

Franking Credits

Employee superannuation payments

You need to make sure that your employee superannuation payments are received by the super fund or the Small Business Superannuation Clearing House (SBSCH) before the end of June in order to be eligible to claim a tax deduction for the current fiscal year.

This deadline is 30 June.

You should try to avoid sending payments to your superannuation account at the very last minute since there may be processing delays that cause them to be 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.

Asset depreciation

Depreciating assets (including motor vehicles) valued at less than $1,000 will be immediately deductible if your company has an annual gross revenue of less than $2 million.

Assets valued at more than $1,000 will be depreciated in one pool at a rate of 15% in the first year, and 30% in subsequent years.

Tools of trade / FBT exempt items. 

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.

Handheld or portable tools of the trade, computer software, notebook computers, personal electronic organisers, digital cameras, briefcases, protective apparel, and mobile phones are examples of items that can be packaged.

In the event that the transaction is properly structured, the employer will be eligible for a tax deduction for the reimbursement payment that they made to the employee (for the cost of the equipment).

Additionally, the employer will be able to claim any GST input credit, and the employee’s total salary package will only be reduced by the amount that the cost of the item excluding GST.

Refer to the page in our FBT Guide for more information about FBT and employer requirements. Alternatively, you can take our FBT Questionnaire to determine whether or not you are required to be registered for FBT.

Defer income

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 forward expenses.

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

In addition, I believe it is prudent to write off all Bad Debts before the 30th of June, and the minutes of a directors’ meeting should identify each Bad Debt as evidence that these sums were written off prior to the end of the fiscal year.

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.

CONSIDER TAX IMPACTS FROM ANY RESTRUCTURING

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.

This rollover is applicable to active assets that are CGT assets, trade stock, revenue assets, and depreciating assets utilised in the course of carrying on a business or held ready for use in that capacity.

However, extreme vigilance is required in this situation.

Given the complexity of the situation, you should first consult with a CPA Australia-registered tax agent before restructuring your business.

REVIEW YOUR PRIVATE COMPANY LOANS

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.

Personal Tax Couple

DON’T FORGET TO KEEP 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.

Therefore, while you concentrate on running and expanding your business, our experts can assist you with organising your records and determining which tax deductions are applicable to your situation.

To make the most of tax season and ensure that you receive your refund as quickly as possible, give us a call today and schedule an appointment.

NEED HELP?

We are able to guide you through the maze of accounting and tax responsibilities that come with operating a business successfully.

We are able to provide you with guidance on the organisation that would be most beneficial for your business.

In addition, we are able to provide assistance in the formation of a company, partnership, trust, or self-managed super fund on your behalf.

Our small business accountants are highly experienced and trained professionals that are committed to meeting all of your small business tax return requirements in a timely manner while also offering 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.

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