Advivo Business Advisors and Accountants explain how having effective tax planning strategies will assist to minimise your tax.
Effective tax planning minimises tax liability so that you are not paying more tax than necessary. We have compiled some strategies which you may find useful for your business. These can be implemented at any time and are also good business practices. But with the end of the financial year fast approaching, you may wish to take advantage of some of these strategies as soon as possible.
Review debtors – write off any uncollectible amounts as bad debts
Managing and reviewing your debtors will allow you to be paid quicker and help minimise bad debts. Creating a recurring schedule for collecting debtors will also help maintain a stable cash flow. Send regular reminders to debtors and ensure you have the wording right. These can often be set up to automatically send from your accounting software.
If a debtor owes you money and it becomes unlikely they will pay, you can write that amount off as a bad debt. This removes that amount from the outstanding debtor balance and expenses it appropriately. The bad debt should be written off before 30 June 2021 to secure a tax deduction for the 2021 year. The GST component of the bad debt may be claimed as a credit on the BAS.
Paying superannuation guarantee for June quarter before 30 June
To get a tax deduction in the 2021 year for the June 2021 quarter superannuation (due 28 July 2021), it must be paid from the bank account before 30 June 2021 and received by staff superannuation funds by 30 June 2021.
Please note that the superannuation guarantee rate (currently 9.5%) increases to 10% from 1 July 2021. We suggest reviewing and updating your payroll system so that superannuation is calculated at the new rate in the new financial year. If you use Xero like many of our clients do, this will happen automatically and you won’t need to do anything to update the payroll system.
Businesses with turnover under $10m may prepay expenses up to 12 months in advance before 30 June and claim the tax deduction in the current year. Expenses that may be prepaid include rent, interest, insurance and subscriptions and memberships.
Review depreciation schedules
Depreciation schedules break down the depreciation of an entity’s plant & equipment and fixed assets. They allow entities to keep track of their assets and evaluate their value over time. Importantly, an entity may be able to use different rates of depreciation for tax deduction purposes than they do for tracking the asset values in their books. Regularly reviewing an entity’s tax depreciation schedule will help ensure the maximum deductions are being claimed. Items that have been scrapped or are obsolete should be written off to claim the remaining written-down value of those items as a tax deduction.
Full expensing of depreciating assets
Most businesses can claim an immediate deduction for the full cost of depreciating assets purchased from 6 October 2020. The deduction is available in the year the asset is held and used or installed ready for use. The Government announced at the recent Federal Budget that the full expensing rules will be extended to 30 June 2023. When the depreciating asset (that has been fully expensed) is eventually sold, the sale proceeds will be taxed.
We suggest reviewing your plans for acquiring depreciating capital assets for your business in the current and future years. If you already have such plans, you may take advantage of the above tax opportunity by purchasing those assets and having them installed ready for use before 30 June 2021 to claim the deduction in the 2021 year. We would not recommend simply purchasing these assets solely to claim the full expensing deduction.
Please note that cars will still be restricted by the car depreciation limit – $59,136 (excluding GST) for the 2021 year, $60,733 (excluding GST) for the 2022 year. If a car costs more than the above limits (depending on the year of purchase), you cannot claim full expensing for the portion above those limits.
Please also note that certain categories of assets do not qualify for full expensing:
- Capital works assets
- CGT assets
- Trading stock
- Assets allocated to a low-value pool or software development pool
- Assets not used or located in Australia for the principal purpose of carrying on a business
- Certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets) – unless you are a small business entity who chooses to use the simplified depreciation rules to these assets
Company loss carry-back
Companies can “carry back” tax losses incurred in the 2020, 2021, 2022 and 2023 years to offset against profits in the 2019, 2020 and 2021 years. That results in a refundable tax offset. The refundable tax offset will be limited to the company’s franking account at the end of the year the claim is made.
The loss carry-back measure is optional – companies that do not use this measure may carry forward their tax losses to future years.
Consider if there are any benefits to paying dividends
Dividends are a distribution of company profits to shareholders and there could be pros and cons associated with a company paying dividends depending on the circumstances. If your company pays a set dividend each year, it could be beneficial to review your dividend strategy considering both the company situation, as well as the tax position of the shareholders or ultimate beneficiary receiving the dividend. A company may not always have visibility over the tax position of its shareholders, but many families owned and small to medium enterprises do, so it makes sense to consider this as part of an overall tax strategy.
Performing a stocktake can involve confirming the quantity and value of your inventory, raw materials and work in progress if appropriate. Stocktakes should be performed routinely and ideally at least at the end of each financial year. Importantly, stocktakes can help identify margin creep, discrepancies in records or processes, fraud, old and obsolete stock which may need to be written off, and ensures the stock on hand figure is accurate. By confirming the stock on hand figure you’re also helping to ensure you’re not paying too much tax. If you find stock on the books which no longer exists, it’s possible that the stock should be expensed which can reduce tax. If discrepancies are identified it’s important to understand the reason for these and implement an appropriate solution so as they don’t continue to occur.
Having an effective tax planning strategy for your situation can be the difference between a good year or a bad year, so it’s important to get yours right. The success of your business depends on how well you have planned and executed your management strategy. We have an experienced team of accountants, consultants and business advisors who work with you to plan your business growth. Our team offers ongoing hands-on support to make your vision happen. We have found that small to medium businesses that use our business advisory and coaching services gain valuable insights that takes their business in rewarding new directions and helps them discover weaknesses before they affect profitability.
Our experienced team here at Advivo Business Advisors and Accountants are here to assist with your tax planning strategy and help take your business to the next level. Contact us today.
Please note that this information is specific to the 2020-2021 financial year and some or all of the information in this article may no longer be relevant or accurate. Please refer to the present year’s update for current information.