Everyone is looking forward to the end of the financial year.
Whether you’re a small business owner or an employed worker, it’s important to understand what benefits and deductions can help you save money on your taxes.
Here are some tips for SMEs (small-to-medium enterprises) that will help you get through tax season without too much stress!
Keep Your Financial Data Organised
Check you have all necessary records, including a list of expenditures incurred in the last 12 months (it’s easy to forget!)
If your small and medium-sized enterprises hold records manually, give them to your accountant at the end of the year. Ensure individual documents are filed with your regular filings to the ATO to make your accountant’s task easier. This can lower your costs.
Many small companies file digital records online and have a cloud-based (online) accounting system. If your business does this, check that all records are up to date.
- Make sure all the transactions have been allocated correctly to match up with the right tax period.
- Please include a list of all assets owned by the company, along with their original and current values. (It’s always good to know where your money is going)
- If you have any outstanding debts owed on items or services, make sure they’re listed too.
- Include an asset schedule that lists each debt separately as well as how much needs
Immediate Asset Write-Offs
The threshold for immediate asset write-offs has increased to $150,000 in the June 2021 tax year. Eligible businesses can claim this asset write-off for both new and second-hand assets.
Eligible businesses have an overall turnover of less than $500 million from the 2021 tax year.
If your small business is eligible, you can claim an immediate tax deduction on purchasing assets up to the threshold value.
Capital Gains Tax (CGT) Changes
If you sell an asset for more than book value, you are deemed to have made a profit on a sale, subject to capital gains tax.
If you have incurred any loss on the sale of business assets, you can deduct that from any capital gains made before calculating your capital gains tax.
There are other exemptions for small businesses, including a reduction in tax rates and an increase in the threshold at which capital gains tax is applied.
Your Tax Deductions
Small companies engaged in a small business activity can deduct the cost of carrying out this activity from their assessable income.
These include cash expenses and non-cash expenses like depreciation on your business assets. With the change in immediate asset write-off values, this is an area to pay attention to.
Ensure you keep personal bills separate from business expenses. Some at-home expenses can be charged against your business. Speak with your tax advisor or the ATO to clarify these items.
Income Tax Offset
In the tax year to June 2021, you are entitled to an income tax offset of 13% of your business turnover is less than $5 million. The maximum offset permitted is $1,000.
For the June 2022 financial year, this offset raises to 16%of business income. Turnover and maximum offset remain at $5 million and $,1000 respectively.
To be eligible for the income tax offset, you need to be in business as a sole trader, in a partnership or receive business income from a trust.
Using Business Funds for Personal Use
You should not use business funds for personal use. This complicates the record-keeping and accounting for the business. What can happen is these personal use items end up being allocated as shareholder loans or shareholder dividends and can lead you to have higher personal tax to pay, but not necessarily having the personal funds to pay it.
It causes problems. If you use business funds for personal spending, it is best to stop this practice and see if the business can increase your income.
The golden rule is to keep business and personal finances separate.
Cloud-Based ERP Software for Small and Medium Enterprise
Enterprise Resource Planning software integrates major business activities, including accounting, stock control, accounts payable and receivable, and payroll, providing a safe and secure tool for most small and medium enterprises.
Using cloud-based ERP software for small and medium enterprises has become popular in recent times. It enables you to access your accounting and business records from anywhere, and your staff can keep everything up to date. This is particularly helpful when working from home or in a remote location.
The best ERP software for small and medium enterprises can be scheduled for regular backups keeping financial data both secure and protected. And you won’t outgrow it as your business grows.
Simplify accounting with online tools
Both EOFY and BAS (business activity statement) time will be simpler if you separate your banking from your business banking. This helps you capture all your business expenses in one place while avoiding the risk of accidentally claiming for a purchase that’s not connected with your business. Having a separate business bank account also helps you manage your business cash flow.
If you’re registered for online banking, you may have access to tools that will assist you with everyday bookkeeping and gathering information for your tax return. For example, Westpac online business banking offers:
- Third-party access to bank accounts – including a ‘view only’ option – to let you share cash flow information with your bookkeeper or accountant
- Bank feeds2 that can connect your business bank accounts with your small business accounting software (such as MYOB, QuickBooks and Xero)
- An online invoicing tool connected to eligible transaction accounts1 can help with invoice reconciliation and the preparation of financial statements and returns.
These online banking features are designed to save time and streamline admin while assisting with BAS and tax return preparation.
Meet your superannuation requirements
Businesses with superannuation guarantee (SG) obligations are required to pay employee contributions of 9.5%. Meeting your obligations early, by 30 June 2020, will allow you to claim a tax deduction in your 2022 income tax return rather than having to wait until the following year.
Note that employee super contributions aren’t tax-deductible until they have been paid, so ensure all contributions are completed by the end of the financial year.
Moving forward, be prepared – failure to prepare is being prepared to fail
One common mistake most small business operators make is using GST collected to manage business cash flow and then come unstuck when the ATO must pay these amounts.
The best way to prepare for tax payments is to set them aside as you collect them. Your taxes are then being accumulated, ready to pay, which is a discipline that makes budgeting easier.
My first advisor suggested I do this, and it was one of the best tips I received. Once this money is placed into the account, see it as untouchable and not as money to be used. By the end of the financial year, you will be glad to have your taxes ready saved.
Know the value of your depreciating assets
Another tax opportunity for SMEs with a turnover under $2M are available tax deductions on any depreciating assets up to the value of $6,500, purchased before 31 December 2013.
Business assets that may fall into this value category include office equipment, computers, printers, work tools, etc. Make sure you keep track of assets within this value category for potential tax deductions. The instant asset write-off is a temporary tax deduction scheme for all businesses with an annual turnover of less than $5 billion.
Keep your income-producing assets up-to-date
You can reduce operating costs, increase productivity and free up cash by structuring your financing and repayments to suit your tax and cash flow needs. Make an effort to keep your income-producing assets up-to-date, as this helps keep your business operationally efficient and maximise cash flow.
Write off bad debt
According to the latest Dun & Bradstreet Trade Payments Report, the average number of days business-to-business payments being made has increased, now sitting at an average of 56 days. So if you’re still chasing invoices from the last financial year, now is the time to write them off.
Bad debts are tax-deductible and can be used to offset your taxable income.
Reassess your cash position
Starting the year with a healthy cash position is crucial. Ensure you review your cash management processes and consider the most appropriate funding solutions. There are several cash flow finance tools to help you better manage cash flow and funding.
Invoice finance is gaining in popularity as it provides advances of up to 95% against receivables without needing real estate security and is scalable in line with the company’s sales growth.
Have an accounting spring clean
As several tax and superannuation changes take place from 1 July onwards, make sure you review and update your accounting systems to include these changes; as you do not want to have to back pay items such as missed super contributions or lose other potential tax-saving opportunities next end of year financial year.
Stricter rules for capital gains tax concessions
Small businesses should be aware that starting next year, they will face stricter rules for capital gains tax (CGT), as flagged by the federal government in the May budget.
From 1 July, the government will seek to amend the CGT concessions rules for small businesses so that business owners can only access the concessions for assets used in a small business or relation to ownership interests in a small business.
Small business CGT concessions are available to businesses with an annual turnover of up to $2 million or assets under $6 million.
“The concessions assist owners of small businesses by providing relief from CGT on assets related to their business, which helps them to re-invest and grow, as well as contribute to their retirement savings through the sale of the business,” the government said in the budget.
“However, some taxpayers can access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.”
Consider how you value your trading stock
Small businesses should also consider how they value their trading stock. That choice can help minimise a business’ tax bill, as Theo Sakell, tax partner at Pitcher Partners, previously explained to SmartCompany.
“Where you hold trading stock, you can choose to value trading stock at year-end cost, market selling value, replacement value or obsolete stock value,” Sakell said.
“This can have the effect of either bringing forward deductions or shifting the amounts to the following year.”
Businesses can switch between the methods each year and can use different methods for different items. And if stock is old or obsolete, businesses should write it off in full.
Small businesses should also be looking to write off any bad debts that they have not recouped in the current financial year. This involves documenting what the debts are and the efforts you have made to recover them.
Bad debts must be physically written off before the end of June — not a few months down the track when you get around to doing your tax return.
Business owners should also make sure the debt in question had previously been included in the business’ assessable income.
This could be an issue for cash-based businesses that only recognise income when they are paid. In these circumstances, the debt would not have previously been included in assessable income, and therefore the business would not be eligible to write it off.
Don’t spend for the sake of spending
Some business owners may be tempted to spend some extra cash before the 30 June deadline. However, Price says they should think carefully before doing so.
“Just because businesses have money in the bank, they think they should spend it before tax time,” Price says.
“Don’t spend it unless you understand your numbers because it can leave you in a bad cash flow position.”
Price advises pre-EOFY spending of surplus cash should be limited to “vital equipment” that can directly increase a business’ revenue, such as a photographer buying a new camera.
For businesses looking to spend any extra cash, Price says a wage bump should be considered.
“If I had extra cash to spend, I’d pay myself a higher wage. I’d rather put it in my back pocket than spend it on something I don’t need.”
Sort out your trust distributions
For people running their business through trusts, you need to ensure you have distributions decided and documented before the end of the financial year, advises Howlett.
“Going back many moons, it was not uncommon for the distributions to be made with an accountant when doing tax returns, but for the last four to five years, it had been the case the ATO will scrutinise decisions around trust distributions made before EOFY,” he says.
Similarly, if you are a trust beneficiary, ensure you consider the expected tax distribution you receive from a trust instead of the expected accounting or cash distribution.
Pay staff super on time
In a situation Howlett says happens “all the time”, businesses are reminded that superannuation payments for staff are only tax-deductible if paid during the current financial year.
“You’re required to pay super, and if it’s not paid by 30 June, no deduction,” he says.
“I’m forever seeing people surprised they don’t get the deduction when they haven’t paid their super by the end of the financial year. Super needs to be paid to staff 28 days after the end of each quarter.”
“For any quarter you miss that deadline, it’s not tax-deductible.”
Get your story straight
Grieg warns businesses should be on top of what documentation they have provided to authorities such as the State Revenue Office come tax time, warning “you can’t tell one authority one thing, and one the other”.
“Remember what you put in your BAS [Business Activity Statement and FBT [fringe benefit tac] return and income tax return, as they are all going to be scrutinised by the ATO, and a lot of disclosures are matched,” she says.
She warns there is a lot of data matching between bodies such as SROs and the ATO, specifically around GST on properties.
Howlett agrees, saying businesses are “continuing to see the tax office better-utilising technology to highlight discrepancies between tax returns and other available information.”
SMEs were warned in 2014 that the ATO would use data-matching technology to crack down on residential and commercial property sales.
“No one should underestimate the sheer volume of data the ATO now collects and with the ever-increasing sophistication of techniques to analyse and ‘slice-and-dice that data, the tax affairs of Australians will come under closer scrutiny,” tax writer Terry Hayes said at the time.
Travel deductions on motor vehicles
Another one of the “big things” commonly misunderstood is motor vehicle expenses deductions, says Grieg, who says even if a car is bought for a business, there’s “always going to be some private use”.
“To claim GST, make sure you have a substantiated and documented recording method that correctly discloses the private use component of the car,” she says.
“Keep documentation current. If you don’t keep receipts, keep a logbook diary that shows you attended this meeting at this time, and include parking records. Too often, people muddy the waters between personal use and business use.”
The ATO advises businesses can “generally claim expenses for a motor vehicle owned or leased by your company or trust as long as the expenses are incurred as part of the everyday running of the business”.
“These expenses can include the costs of providing a motor vehicle to an employee (or their associate) as part of their employment,” says the ATO.
Know what’s on the ATO’s watchlist
Businesses were warned in early March the ATO is keeping tabs on people’s social media accounts, with Howlett telling SmartCompany at the time that the ATO was “very concerned about tax avoidance and making sure people are doing the right thing, so they’re trying to get better at looking at what’s publicly available.”
“They’re looking for inconsistencies in what people are reporting and what their social media reveals their lifestyle to be like.”
At the time, the ATO revealed it has been “investing in data collection analysis to find cases of people’s declared income not matching their lifestyles”.
Additionally, Grieg says things like travel substantiation and work-related expenses “always get a guernsey”. The ATO has recently issued a warning to SMEs around work-related expenses, stating it would be keeping an eagle eye on areas such as meals, phone use, and self-education expenses.
Be aware of the HECS threshold
For business owners with student loans looking to increase their salary come tax time, Healthy Business Finances accountant Stacey Price warns that an often-overlooked factor is the HECS repayment threshold, which could mean less money in the pockets of those with outstanding student debts.
The current taxable income threshold for repayment of the HECS-HELP scheme is $55,000. However, the government plans to lower this threshold to $42,000 in 2018.
“For business owners with a HECS debt who are looking at changing their salary, be aware you could be putting yourself in a bracket where you have to start paying it back,” Price told SmartCompany.
“Upping your wage could mean less money in your pocket, thanks to HECS.”
See your accountant
Many businesses may be guilty of only seeing their accountant once a year, around May and June, but Grieg stresses the relationship needs to be ongoing.
“One of my main messages is that you shouldn’t see your accountant just once a year; it has to be an ongoing relationship,” she says.
“If a small business has an accountant and you’ve not touched base with them at least a few times over the past few months, then you’re not doing the right thing to make sure you’re in a good position come tax time.”