Tax planning is essential for many small businesses as it can help you save money and improve your cash flow management in the long run. Many small business owners find that getting a jumpstart on their finances and learning where they can save money before they need to begin thinking about their tax return can really help their projection and future-proofing. Tax planning is an excellent way to remain proactive with this, maximise your returns, and reduce your liabilities.
Today we’re looking at what you can do to plan your taxes as much as possible, including strategies to save money. There are always going to be unplanned surprises to knock your plans off course, but tax planning can put you in a better position to shoulder these burdens as simply as possible without any lasting effects.
Why Is Tax Planning So Important?
Tax planning is incredibly smart and just makes sense for small business owners. While it requires more work initially, doing it correctly will give you plenty of benefits that you can reap the rewards throughout the rest of the financial year.
By planning your taxes, you can improve your cash flow for the rest of the year. The ability to anticipate the potential tax impacts on your business can set you apart from other business owners and help you make better financial decisions without risking spending money you don’t have. Many business owners find success in tax planning, letting them cater to both their short and long-term goals more effectively – so we highly recommend it for any business owner.
Taxes You May Be Liable For
When planning your taxes, you’ll first need to know which taxes you’ll be liable for paying each year. As a business owner, you’ll find that these may differ depending on what market you’re trading in, but here are the most common tax liabilities you’ll need to plan for:
Income Tax
Income tax is based on our net profit and will vary depending on its structure. For example, your income tax will differ depending on whether you’re a sole trader, trust, partnership, or company.
Superannuation Guarantee Contributions
If you have employees, you must contribute to their superannuation funds. This is a mandatory monthly contribution calculated as a percentage of the employee’s ordinary time earnings.
Capital Gains Tax (CGT)
CGT is a tax payable when you sell business assets or shares for a profit. The amount you pay depends on how much you earn in profit and how long you hold it.
Fringe Benefits Tax (FBT)
Some employers choose to offer fringe benefits to their employees, and maybe even their associates. If you choose to offer these in addition to part of their salary, you’ll need to pay tax on these fringe benefits, too.
Pay As You Go (PAYG) Instalments
PAYG is a system set up to help business owners meet their payments on time to prevent them from being handed fines. You can use this system to make regular payments towards your expected annual income tax liability.
Tax Planning Strategies You Might Be Able To Consider
As you can see, there are plenty of taxes you need to consider when planning your financial year. However, it’s incredibly important that you understand your tax requirements to make sure you’re compliant with the Australian Taxation Office (ATO) to prevent fines that can put further strain on your finances.
There are plenty of strategies that you can adopt as part of an effective tax planning strategy, including:
Instant Asset Write-Off
One of the best strategies to adopt when tax planning is the instant write-off of assets, which can offer you an immediate tax deduction for assets that cost less than $20,000 for businesses with an aggregated turnover of under $10 million. This means that you can claim immediate tax relief for:
- The amount of new eligible depreciating assets costing less than $20,000
- The business portion of the cost is eligible for second-hand assets costing less than $20,000
- The small business pool balance if it’s less than $20,000
The instant asset write-off scheme applies to things you’ve purchased for the business between 1st July 2023 and 30th June 2025.
Writing Off Bad Debts
If you have debtors, it’s a good idea to review their ledgers before the end of the financial year to make sure you have enough time to write off anything that you believe is unrecoverable. A tax deduction can be claimed for the ‘write off of bad debts’, which can save you money on things that you won’t be able to claim back. Quite a few business owners don’t remember to do this, meaning they’re being taxed too high on debts that’ll only weigh them down at the end of the financial year.
Capital Gains Tax
CGT is triggered when a contract is signed rather than when the settlement occurs. If you’ve held the assets for almost one year, you might want to delay the signing of the contract until you can get the most out of it. For example, you might be eligible for a CGT 50% discount if you’ve owned the asset for more than 12 months. This means you’ll only need to pay tax on half of the net capital you gain from the asset.
Small Business Energy Incentive
Plans are in place to offer businesses with an aggregated turnover of less than $50 million with another 20% deduction on assets of improvements that can support more efficient energy use. The cap here is $20,000 and applies to assets bought between 1st July 2023 and 30th June 2024. This is a great option for small businesses that are hoping to improve their energy usage anyway, giving you relief on the overall cost of this endeavour.
Impact Of Change On Tax Rates
Another thing you can look out for is the impact of changing tax rates. Depending on when these change, you could use them to your advantage when working out your overall tax position and timings of income, deductions, and declaring your dividends.
Can You Use Tax Schemes To Save Money?
The ATO gives you the right to arrange your financial affairs to keep your tax to a minimum, which can be incredibly helpful when tax planning. You are well within your rights to use tax schemes and plans to save money for your small business, but you have to know whether the schemes you’re using are lawful or not.
What Are Tax Schemes?
Tax schemes are put in place to help you pay as little tax as possible while still staying on the right side of the law. Some examples of tax schemes you could look into include advance deeds, loan payments, tax deductions, credits, or exemptions that are legally available to you to reduce your liability.
What Are Unlawful Tax Schemes?
An unlawful tax scheme, however, is one that deliberately exploits the ATO’s tax and superannuation systems. Some examples of these could be incorrectly classifying revenue as capital, mismatching the source of funds, illegally releasing super funds early, or moving funds through several entities, like trusts, to minimise tax that should otherwise be payable. The ATO has plenty of information on unlawful tax schemes, including the fines and penalties you might be handed if caught using one.
Final Thoughts
Many business owners find that tax planning is an invaluable skill that helps to maximise their cash flow and improve their spending strategy. It can help you save money and help you plan better for your future short and long-term goals, and it can be the difference between haemorrhaging money and being the business that stands the test of time!
There are plenty of schemes you can use to plan your taxes, including using the impact of changing tax rates and writing off bad debts to reduce the amount you’re liable for. Make sure that you’re always using lawful tax planning strategies rather than unlawful ones to prevent being served large penalties.
Book A Free Strategy Meeting With A Business Accountant Today
Tax planning can be a difficult issue to navigate, especially when you’re having to run a small business with endless responsibilities associated with it. However, it’s also essential in saving money in the long run and improving the likelihood of your business thriving, so don’t overlook this area of the business!
A business accountant can help with tax planning and shoulder some of this burden, as well as helping you determine what’s lawful and what’s not, helping you to stay away from large fines and penalties. So, why not book a free strategy meeting with Walker Hill to discuss your options today?
