Do you want to reduce tax before the financial year ends? Like everything about tax, the rules are complex and it’s hard to know where to start or what to do. We risk running out of time, not doing what we can and end up paying more tax whilst still being confused as to why the tax bill is so high.
Having dealt with year-end tax for many years, the way we can save tax can be broken down into three steps. These steps are
Work out what you can pay before 30 June that will increase deductions, reduce profit and reduce tax,
Consider where your profits are going, and
Get organised to ensure you claim all you are entitled to.
Step 1. Work out what you can pay before 30 June that will increase deductions, reduce profit and reduce tax
The main options for doing this are;
1. Pay all outstanding superannuation before 30 June.
Many businesses put off paying superannuation until the deadline 28 days after the end of each quarter, however if you do this for the June quarter, the ATO won’t let you claim this superannuation as a deduction in this financial year. Pay as much outstanding superannuation as possible prior to 30 June to ensure you can claim the superannuation expense in this financial year.
2. Maximise your deductible personal superannuation contributions
Personal deductible superannuation contributions are taxed at 15% whereas companies are taxed at 27.5% and individuals earning more than $37,000 at least 34.5%, meaning if you can make extra deductible personal superannuation contributions, you are likely to reduce tax. There are limits to how much you can contribute and the possibility of contributing more than the standard $25,000 per annum under new ATO rules. See this article for further details.
3. Pay creditors if your tax calculation is on a cash basis
If your tax return is on a ‘cash’ basis rather than an ‘accrual’ basis, ensure as many creditors as possible are paid prior to 30 June as these payments will reduce your business’s profit for tax purposes and tax.
4. Time your expenses
If you have unavoidable short-term expenses, consider bringing them forward to before 30 June so they can be claimed in the current tax year.
5. Take advantage of the ‘instant asset write-off rules’
If you are planning on buying capital equipment in the short-term, consider making this purchase prior to 30 June and take advantage of the instant asset write-off rules. From 12 March 2020 until 30 June 2020 you can claim the full cost for any asset up to a value of $150,000 (excluding motor vehicles, as these have a deductible limit of $57,581). See this link for ATO details.
6. Pay interest in advance
If you have a loan that allows you to pay interest in advance, consider doing this as the interest payment will be tax deductible.
Once you have worked out what you can pay before 30 June to reduce tax, consider the next step,
Step 2. Consider where your profits are going
Depending on your corporate structure, you may have options to pay out profits in ways that reduce tax before the financial year ends.
If using a trust, consider distributing profits to a company or other family members
If you use a trust, have made profits and don’t fall under the ATO’s ‘personal services income’ or ‘personal services business’ rules, consider paying profits to either
a company so that these distributions have tax capped at 30% rather than potentially a higher individual tax rate, or
other family members who may be on lower personal tax rates than you.
If using a company, ensure you pay yourself a wage
Make sure you pay yourself a wage to reflect your work for the company. This will reduce the company’s profit and may save tax. For example, if you haven’t declared a wage already, you can declare a wage of $20,542 and pay no personal tax and reduce the company profit by $20,542 and tax by $5,649.
Paying a wage will also help offset any drawings that you have taken, so that you can avoid owing money to the company.
If using a company, consider having a holding company or trust as the shareholder so that dividends can be paid in the most tax effective way
If you want to get money out of a trading company as an asset protection strategy, you may end up paying more tax than is necessary if individuals own the company’s shares. This is because only the individuals can be paid the dividends and they may be taxed at a higher rate than if the dividends were paid to a holding company or paid to a trust that then distributed the dividends in a tax effective manner. Note this is a complex area and changing the shareholding of a company may result in capital gains tax, so please contact me if you want to discuss this.
If you are a sole trader, your best bet is to consider superannuation contributions, though you may be able to pay other family members for work done
The options to distribute profits for sole traders are far more limited than for trust and companies, meaning the best bet to allocate profits to reduce tax is often to pay these into your super fund up to the annual contributions limit, as discussed above.
Some sole traders may have the option of paying family members for work done, however you mustn’t come under the ATO’s personal service income laws in order to be able to do this. Please contact me if you want to discuss this.
Step 3. Get organised to ensure you claim all you are entitled to
Many business owners end up paying too much tax simply because they haven’t taken a few basic steps to get organised, ensure their records are up to date and ensure they claim all that they are entitled to. Go through the list below and ensure you have everything covered.
Trust distributions
If you use a trust, ensure you have minutes signed prior to 30 June that state who the profits will be paid to, in order to meet ATO requirements. Failing to do this may mean extra tax as the most tax effective allocations of profit may not be decided upon until after it’s too late to do this.
Maximise motor vehicle expense claims
Ensure your vehicle logbook or diary is up to date by 30 June, so that the maximum vehicle costs can be claimed. See this article for further details.
Write off bad debts
Review your debtors and consider whether any can be written off, so that any revenue that won’t be received isn’t included in your profit and loss statement and ends up inflating your tax calculation. Note that this will result in a tax saving only for businesses that calculate tax on an accrual basis. See this tax ruling for details
Ensure you account for all business expenses that you have paid for personally
It’s easy to use the wrong card at a check-out and end up buying work expenses through a personal account, whilst regular expenses such as home internet may be used for work but paid for from personal bank accounts. Ensure you consider all these expenses and add them to your list of expenses. Common examples include work-use of your home internet, use of a home office and purchases of home office equipment.
Book a tax planning session
There’s not long to go until the financial year ends, so if you want to ensure you reduce tax before the financial year ends, book a tax planning session. This is a 40-minute session to review your best options to reduce your tax. You can make a booking with this link https://bit.ly/3hpILFb
Alternatively, ensure you go through the three steps and work out what you can pay before 30 June, what options you have to distribute profits tax effectively and how to ensure you are organised and claim all that you can.
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