Skip to main content

Running a small business in Australia comes with its unique set of challenges and opportunities. One key opportunity lies in effective tax planning, which can significantly enhance your business’s financial health. This guide covers various strategies that small business owners can leverage to optimize their tax position, including making super contributions, utilizing the concessional carry-forward rules, buying assets, and more.

The Benefits of Super Contributions

Making superannuation contributions can offer significant tax advantages for small business owners. By contributing to your super, you can reduce your taxable income, thereby lowering your tax liability while also building your retirement savings. For instance, if you’re in the top marginal tax bracket of 45% and make a super contribution of $20,000, the contribution is generally taxed at the concessional rate of 15% within the super fund, rather than the higher marginal rate. This means you could save $6,000 in taxes, effectively boosting your retirement savings and reducing your immediate tax burden.

Leveraging Concessional Carry-Forward Rules

The concessional carry-forward rules are another powerful tool for small business owners. These rules allow you to carry forward any unused portions of your concessional contributions cap (currently $27,500 per year) for up to five years, provided your total super balance is less than $500,000 at the end of the previous financial year. This flexibility can result in substantial tax savings and significantly increase your super balance. For example, if you have not made any concessional contributions for the past three years, you could contribute $82,500 in the fourth year and have it taxed at just 15%, compared to your higher marginal tax rate.

Smart Asset Purchases Under Instant Asset Write-Off

Buying assets strategically can also provide tax benefits. The Instant Asset Write-Off scheme allows small businesses to immediately deduct the business portion of the cost of eligible new or second-hand assets costing less than $20,000 each. This immediate deduction can reduce your taxable income in the year of purchase, offering a significant cash flow benefit. For assets costing $20,000 or more, the simplified depreciation rules allow these assets to be added to a small business depreciation pool, where they can be depreciated at a rate of 15% in the first year and 30% each subsequent year. This accelerated depreciation helps you claim higher deductions sooner, further reducing your taxable income.

Deferring Income and Bringing Forward Expenses

Deferring income and bringing forward expenses are effective strategies for managing tax liabilities. By deferring income, you can postpone the recognition of income to a later tax year, potentially lowering your current taxable income and shifting it to a year when you might be in a lower tax bracket. For instance, a freelance consultant who expects a high income this year can negotiate with clients to defer payments for services until the next financial year, thus reducing this year’s taxable income.
Bringing forward expenses involves paying for expenses in advance to claim deductions in the current tax year. For example, if you own a small business and expect higher taxable income this year, you could prepay expenses such as rent, insurance, or professional subscriptions before the end of the financial year. This strategy allows you to claim these deductions now, reducing your taxable income and overall tax liability. By combining these approaches, small business owners can effectively manage their cash flow and tax obligations, ensuring better financial outcomes.

Paying Employee Super Before June 30

It’s crucial for small business owners to ensure that employee superannuation contributions are paid before June 30 to claim a deduction for the financial year. Super contributions are only deductible once they are received by the super funds. Since clearing houses can take time to process these payments, it’s advisable to make the contributions through platforms like Xero by June 18. This ensures that the payments clear into the employees’ (and business owners’) super accounts before the end of the financial year, securing the tax deduction and avoiding any penalties.

Tax Benefits of Bucket Companies

A bucket company can be a highly effective tax management tool for small business owners. By distributing and holding surplus income in a bucket company, the income is taxed at the corporate tax rate, which is typically lower than individual tax rates. This strategy can result in significant tax savings and provide flexibility in managing profits. For example, a family-run business operating as a discretionary trust can distribute a portion of its income to a bucket company. The company then pays tax on this income at the corporate tax rate, allowing the business to defer higher personal tax rates and potentially reinvest the retained earnings. By utilizing a bucket company, small businesses can effectively manage the timing of income, defer taxes, and enhance their overall financial strategy.

Effective Stock Management

Performing a stocktake before June 30 is not only a requirement by the ATO but also a valuable practice for small business owners. It helps you understand your inventory better, identifying what’s outdated or surplus. Consider conducting a stocktake sale in July to move older inventory. There is a tax benefit for writing off out-of-date stock at year end, and your stock can be valued at cost or market value at the discretion of the business owner. However, paying for and purchasing new stock before the end of the year is not a tax strategy as it is added back into your stock on hand.

Accounts Payable & Receivable Management

Effective management of accounts payable and receivable is essential for tax planning. For accounts payable, ensure all invoices have been recorded and check if any invoices have been paid. If they have been paid, apply a credit note and clear them from your accounts payable list. Your business profit for tax purposes is reported on an accrual basis, meaning there is no need to have paid an invoice before June 30. Simply enter the invoice into Xero, ensuring the invoice date is before June 30, 2024.
For accounts receivable, check if your customers have already paid their invoices. If so, apply a credit note and clear out the invoice. Since taxes are paid on an accrual basis, unpaid customer invoices are included in your business income for FY2024. Consider deferring invoicing until after July 1 to push this income into the next financial year.

Conclusion

By understanding and utilizing these tax strategies, small business owners in Australia can effectively manage their tax liabilities and enhance their financial health. Making super contributions, leveraging concessional carry-forward rules, smart asset purchases, deferring income, bringing forward expenses, timely super payments, using bucket companies, effective stock management, and managing accounts payable and receivable are all practical steps that can provide immediate and long-term benefits. Consulting with a tax professional can help ensure you maximise these opportunities while complying with tax regulations. Effective tax planning reduces your tax burden and supports your business’s growth and sustainability.

To discuss these tax planning suggestions in more detail, call Paola & Ross or book an appointment online. Let us help you optimise your tax position and secure a stronger financial future for your business.

Let the expert team at By The Numbers Accounting guide your tax planning decisions to help grow your business and ensure its sustainability.