You'll never hear tax planning spoken of as a business joy. But tax planning is not only a financial imperative, it has other benefits including an ability to give business owners a good night's sleep – these owners know they are not paying more than their share of tax, know that they can handle any audit, know where the money has gone and what is owing to them, and know what is required to make the coming financial year a success.
By engaging good record keeping, communication, forward planning and a strong relationship with your accountant, business can keep right on top of tax time and avoid obvious traps.
The following strategies are a good starting point for making tax time one of the best times of year for your business:
Tax Tip: Small business can pre-pay expenses
If you are a small business – the Australian Tax Office definition says that means you have less than $2 million in sales per annum – then paying your expenses in advance can have tax advantages. Banks will often give business the option to pre-pay interest on loans. If you can manage it the bank is doing you a huge favor because pre-paying is a tax-deductible expense that helps reduce your tax burden. Other tax deductible expenses include pre-paying rent (this will require some negotiation with your landlord) and expenses such as stationary or IT equipment.
Tax Tip: Defer income into the next financial year:
If you are in the position to do it, deferring income into the next financial year is a common way of reducing your tax bill for the current financial year. It depends upon the business and your relationship with customers/clients. You usually defer income simply by delaying an invoice – because the tax point only occurs when you invoice a customer. So holding that invoice off until July is a way of managing your business’s taxable income for this year. (In some cases you will need to be careful not to upset clients by deferring invoices, as it may not suit them to be invoiced late. In those situations communication is key and you may find that your client relationship over-rides any financial benefits of deferring.) Of course, cashflow considerations also need to be taken into account.
Tax Trap: Not formalizing loans
A familiar trap for private companies is failing to put loans to shareholders and associates on commercial terms. It’s an easy trap to fall into when loaning to long-time friends, associates or family, but a verbal or casual agreement can cost you unnecessarily. For tax purposes loans need to be put in commercial terms and interest charged in accordance with Tax Office guidelines.
Tax Tip: Pay super contributions early
Legally, superannuation contributions must be paid within 28 days of the quarter ending, but that would mean a payment in July – and mean that deductions would not be available until the next financial year. Super is not tax deductible until it is actually paid, therefore business will benefit from paying the June quarterly contribution slightly early, before 30 June.
Tax Trap: Not identifying debtors
Business is often guilty of not "writing-off" its debtors in time in the hope that they will turn around. But sometimes it's best to cut your losses. A full review of debtors should be taken well before 30 June so you have the time to document and write-off before the end of the financial year. This also applies to obsolete trading stock, which may be scrapped or written off – but only by 30 June.