If you’re a small business owner, tax planning can help you save money, enhance your financial stability and increase your retirement savings. While you can’t control the increasing cost of doing business, tax planning is something you can control and benefit from. Here are a few ways you can benefit from planning for the 2024–2025 financial year while complying with current tax regulations.
Time your business income
As you approach the end of the financial year, consider how you can postpone income until the next financial year. For example, if you use cash accounting, you can delay invoicing for goods and services delivered in the current financial year, with the aim that invoices are paid for in the next financial year. If you use accrual accounting, waiting until July to invoice will move the revenue to the next financial year. The simple reason for delaying your tax is the time value of money – the concept that a sum of money has greater value now than the same sum will in the future due to its potential earning capacity.
Be careful with this strategy, as delaying your income can cause cash flow issues. So you’ll want to weigh the costs and benefits.
Prepay your expenses in the current financial year
By prepaying expenses in the current financial year, you can reduce tax payable by deducting these expenses from the current year’s tax return. This lowers the taxable income for the financial year and reduces the tax owed. Here are a few ideas for expenses you could prepay:
- Property leases
- Insurance premiums
- Subscriptions
- Utilities
- Maintenance contracts
- Equipment lease payments
- Software licences
Again, you will want to consider the cash flow implications of prepaying your expenses.
Use the instant asset write-off as part of your tax planning
While it has changed over the years, you can now write off $20,000 per asset during the year it is purchased using the instant asset write-off.[1] If your business has an aggregated turnover of less than $10 million, you can immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed and ready for use by 30 June 2025. The $20,000 threshold applies for each asset, so you can instantly write off multiple assets.
Assets valued at $20,000 or more cannot be deducted in the current year. These can be placed into the small business simplified depreciation pool (for businesses with an aggregated turnover of less than $10 million per year) and depreciated at 15% in the first income year and 30% each income year following.
Choose the optimal business structure
Choosing the right business structure is an important part of tax planning for SMEs.
Having a company structure instead of being a sole trader provides tax benefits. Base rate entities (under the $50 million aggregated turnover income threshold) have a flat tax rate of 25% on profits. In contrast, the highest marginal income rate for sole traders and partners is 45%. Plus, companies can offset the tax losses from one company against profits made by another if there is a nexus between these two entities. There’s also the potential to carry losses forward from the past into more profitable future years.
Family and discretionary trusts are financial structures that can provide tax advantages to SME owners and their families. A discretionary trust enables the person (or persons) managing the trust to choose trust beneficiaries and the amounts they receive. Family trusts are a form of discretionary trust to hold a family’s assets, including a family business. One or more family members can manage the trust for the entire family and determine the benefits for family members.
Unlike a company, a discretionary trust is not required to pay income tax. Instead, trust beneficiaries pay tax on their share of the trust income when they pay personal income tax (at their marginal tax rate). With a family trust, the trustee can distribute assets to family members to minimise the overall tax the family pays.
Tax benefits of superannuation and retirement planning
Concessional superannuation contributions are generally taxed at 15% up to the $27,500 annual cap (or 30% if your earnings are above $250K annually) within the super fund. This means you can save the difference between your marginal tax rate and the 15% superannuation tax rate. For example, if you earn below the $250K threshold, and your marginal tax rate is 37%, you will pay much less in tax by putting it into superannuation compared to taking the money as current income.
As a business owner, if you draw a salary from your business, you can also make employer contributions to your superannuation fund. You can arrange to have a portion of your pre-tax salary paid directly into your superannuation fund. This reduces your taxable income.
Small business owners who do not receive superannuation from an employer can make personal contributions to their super funds and claim a tax deduction for these contributions (up to a $27,500 cap in each financial year, which will increase to $30,000 on 1 July 2024 for the 2024/25 financial year). By making concessional contributions, you reduce your assessable income, lowering the income tax you owe.
While there is a concessional contribution cap of $27,500 per financial year, you can carry forward unused concessional cap amounts from prior years for up to five years if your total super balance is under $500,000. This makes it possible to contribute more than the cap in a financial year and get tax benefits.
Reap the benefits of tax planning
Getting started with business tax planning requires concrete decisions and action. Many small business owners are so busy with their day-to-day work that they overlook the tax planning steps that can save money and improve financial stability.
The team at Equil Advisory are ready to discuss effective tax planning and how we can help make it happen. Get in touch to start reaping the benefits.
[1] Announced in the Federal Budget and subject to legislation passing.
