With the end of financial year fast approaching, business owners should now be thinking about simple, smart and legitimate ways to reduce their tax bill and get all those financial ducks in a row.
Looking to minimise business tax in 2021? Here’s a guide to some of the strategies you can use.
1. Is your business a “small business entity”?
Small businesses can access a range of tax concessions from the ATO. To qualify as a “Small Business Entity”, the business must have an aggregated turnover (your annual turnover plus the annual turnover of any business connected / affiliated with you) of less than $10 million and be operating a business for all or part of the 2021 year.
2. Reduction in company tax rates
The 2021 company tax rate for businesses with less than $50 million turnover is 26%, if 80% or less of a company’s assessable income is “passive income” (such as interest dividends, rent, royalties and net capital gains).
If you use a Trust structure, one strategy is to allocate profits to a “Bucket Company” and cap your tax at 26% for the 2020 year. Note that this company must qualify as a “base rate” entity to be eligible for the lower 26% company tax rate. Please discuss with us whether your company will qualify.
3. Temporary full expensing for asset purchases
Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets.
For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.
To claim the full expense, you should buy these assets and use them or have them ready for use before 30 June 2021.
4. Maximise deductible super contributions
The concessional superannuation cap for 2021 is $25,000 for all individuals.
Note that employer super guarantee contributions are included in these caps. Where a concessional contribution is made that exceeds these limits, the excess is included in your assessable income and taxed at your marginal rate, plus an excess concessional contributions charge.
For the contribution to be counted towards the employee’s 2021 contribution cap, it must be received by the fund by 30 June 2021.
5. Tools of trade / FBT exempt items
The purchase of Tools of Trade and other Fringe Benefits Tax (FBT) exempt items for business owners and employees can be an effective way to buy equipment with a tax benefit.
Items that can be packaged include handheld/portable tools of trade, computer software, notebook computers, personal electronic organisers, digital cameras, briefcases, protective clothing, and mobile phones.
If structured correctly, the employer will be entitled to a tax deduction for the reimbursement payment to the employee (for the equipment cost), claim any GST input credit, and the employee’s salary package will only be reduced by the GST-exclusive cost of the items purchased.
6. Bring forward expenses
“Small Business Concession” taxpayers can make prepayments (up to 12 months) on expenses (e.g. loan interest, rent, subscriptions) before 30 June 2021 and obtain a full tax deduction in the 2021 financial year.
If cash flow allows, consider making payments for repairs and maintenance or consumable items (such as marketing materials, consumables, stationery, printing, office and computer supplies. If you spend the money before 30 June 2021 you’ll get the deduction this year.
7. Pay employee superannuation now
To claim a tax deduction in the 2021 financial year, you need to ensure that your employee superannuation payments are received by the super fund or the Small Business Superannuation Clearing House (SBSCH) by 30 June 2021.
You should avoid making last minute superannuation payments as processing delays may cause them to be received after year-end. If for any reasons you end up having to make last minute payments and you would like to claim them as deductions for the current year, contact us immediately and before you make any payments for possible resolutions.
8. Defer income and capital gains
If possible, arrange for the receipt of investment income (e.g. interest on term deposits) and the contract date for the sale of Capital Gains assets, to occur AFTER 30 June 2021.
Remember that the contract date is generally the key date for working out when a sale occurred, not the settlement date.
9. Motor vehicle expenses
To ensure you don’t miss out on claiming motor vehicle expenses, you’ll need to have kept an accurate and complete Motor Vehicle Log Book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2021. You should make a record of your odometer reading as at 30 June 2021 and keep all receipts/invoices for motor vehicle expenses.
An alternative (with no log book needed) is to simply claim up to 5,000 business kilometres (based on a reasonable estimate) using the cents per km method.
10. Investment properties
If you own a rental property and haven’t already done so, arrange for the preparation of a property depreciation report to allow you to claim the maximum amount of depreciation and building write-off deductions on your rental property.
Consider maximising your deductions by pre-paying interest or paying for repairs and maintenance.
11. Private company Division 7A loans
Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principal and interest repayments are made by 30 June 2021. Current year loans must be either paid back in full or have a loan agreement entered in before the due date of lodgement for the company return, or risk having it counted as an unfranked dividend in the return of the individual.
12. Year-end stocktake / Work in progress
If applicable, you need to prepare a detailed Stock Take and/or Work in Progress listing as at 30 June 2021. Review your listing and write-off any obsolete or worthless stock items.
Talk to us about your different options for valuing Stock, and how they affect your tax payable.
13. Write off bad debts
Review your Trade Debtors listing and write-off all bad debts BEFORE 30 June 2021. Prepare a management meeting document listing each bad debt, as evidence that these amounts were written off prior to year-end and enter these into your accounting system before 30 June 2021.
14. Finally, a reminder about Trustee Resolutions
If you operate your business through a Discretionary (“Family”) Trust, ensure that the Trustee Resolutions are prepared and signed BEFORE 30 June 2021. Please see us for more information about these resolutions.
Our tax specialists conduct tax planning sessions from April to June. The earlier this occurs the better, as you’ll have more time to take advantage of strategies to minimise business tax, minimise personal tax and take advantage of superannuation opportunities.
To organise a meeting to work through your year-end business tax planning, contact Marsh & Partners on 07 3023 4800 or at email@example.com.
You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.
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GENERAL ADVICE WARNING: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. We suggest you obtain specific financial advice from a licensed financial advisor.