Prioritising your taxes until too late can mean you end up missing out on substantial deductions at tax time. For small business, tax planning is an essential part of managing your cash flow and limiting unnecessary expenditure.
With less than six weeks left before the end of financial year, we wanted to share a dozen great tax planning strategies to help you minimise your 2022 tax bill.
1. Bring forward necessary expenses
If you plan to acquire necessary goods or assets in the coming months, bring forward these purchases before June 30. These can include expenses like marketing costs, stationary, supplies and other consumable items.
Providing your business has the cash flow to make these purchases, this will allow your business to receive the tax reduction sooner rather than later.
Keep in mind, this is a tax deferring strategy rather than a tax reduction strategy.
2. Defer income until June 30
Similar to bringing forward necessary expenses, deferring income until after the financial year will also reduce your taxable income for 2022.
An easy way to do this is to delay invoicing clients or receiving debtor payments until after June 30, 2022. If your business uses the accrual method of accounting, you can delay paying tax on your invoices if you receive the payments after the end of the 2022 End of Financial Year.
Before doing so, you should consider what implications delaying income will have on your cash flow.
3. Prepay ongoing expenses
For small businesses with turnover less than $50 million, you can claim an immediate deduction for some prepaid expenses. These may include prepayments for rent, insurance premiums, phone and internet bills, and subscriptions.
Not only will you be able to deduct future expenses from this current year’s taxable income; you may also save money on subscription costs.
These prepayments can cover up to a 12 month period and must end in the next income year.
4. Apply reduction in company tax rates
Businesses classified as base rate entities must now apply the 25% company tax rate for the 2021-22 financial year.
The lower company tax rate has gradually been reduced since 2017 and is down from 26% in the 2020-21 financial year.
Note, to qualify as a base rate entity your business must:
- Have an aggregated turnover less than $50 million
- Have 80% or less of accessible income coming from passive income sources (eg: interest, dividends, rent etc.)
5. Write off bad debts
Before June 30, you should review all your debtors and write off any unrecoverable debts owing to your business.
You will only receive a tax deduction for bad debts in the income year that you write them off, regardless of the time of invoicing.
To claim a reduction for bad debts, you’ll need to prepare a document that provides evidence that the debt is unrecoverable. You will also need to provide evidence showing that you took appropriate actions to recover the debt.
6. Pay employee superannuation
To accelerate your tax deduction, ensure that all the June quarter superannuation payments for your employees are paid by the end of this financial year.
To meet the tax requirements, these payments must be cleared in the business bank account and received by the super fund before June 30.
7. Temporary full expensing
Take advantage of temporary full expensing for all asset purchases and the cost of improvements to existing assets.
This is an immediate tax deduction available for businesses who can claim the total cost of new capital assets acquired and used before June 30, 2023. Unlike the instant asset write-off which was capped at $150,000 per asset, under the temporary full expensing rules there is no limit on the cost of assets that can be deducted.
All businesses with an aggregated turnover under $5 billion can apply for the tax deduction. For businesses with an aggregated turnover under $50 million, the tax deduction can also be applied to the purchase of second-hand assets.
8. Invest in technology/training
Small businesses with annual turnover less than $50 million will get a $1.20 tax reduction for every $1 spent on new technology and training.
This tax incentive applies for spending on digital investments (such as cloud-based software and cyber security), as well as the cost of external training courses for employees.
Keep in mind, you will not be able to claim these tax reductions until your 2023 income tax returns.
9. Defer capital gains and investment income
If possible, defer income from investments and the sale of Capital Gains assets until after June 30.
This can be as simple as pushing back the contract date until July/August when selling assets, delaying the tax costs until the next income year.
10. Maximise personal super contributions
Take advantage of the concessional tax rate on personal super contributions before June 30.
You can contribute up to $27,500 into your super each income year under the concessional tax rate of 15%. Included in this cap is employer superannuation guarantee contributions, contributions from your income before tax (eg: salary sacrificing), and voluntary contributions made from your income after tax.
This strategy can save you upwards of 20 per cent on each dollar you earn, depending on your income tax bracket.
11. Update your motor vehicle log book
If you are claiming for a car, ensure that your motor vehicle log book is up-to-date and has an accurate record of your trips and expenses over at least a 12 week period. This includes recording your odometer reading and keeping any receipts/invoices related to your motor vehicle before June 30, 2022.
Whilst you can also use the cents per km method, those who use their personal motor vehicle frequently for work will like receive a better tax deduction using the logbook method.
12. Government grants
Make sure that you are aware of any government grants that your business may be eligible for.
For advice on which grants might be able to help reduce your tax bill, speak to your accountant or get in touch with us at Elephant Advisory.