With the fiscal year almost over, it is time for small businesses to start thinking about tax planning.
Here are our top 10 tips to minimize your tax position before June 30th.
If you’re interested in saving real tax money, make contributing to your super fund one of your strategies not just ahead of the year but all year round so that you have an otherwise high impact on your cash in circulation.
Be careful not to exceed the cap, as it defeats the purpose of the exercise and the excess will be taxed at your marginal tax rate.
Be prepared well in advance of June 30th and make sure your fund receives the contribution to its bank account before that date to secure your withdrawal. Also, be sure to file a letter of intent to request a withdrawal from your super fund.
Did you know that paying year-end bonuses can be more tax effective than keeping profits in business? Here are some helpful tips if you are considering paying upfront bonuses by June 30th.
Team member bonuses must be performance based for the best results as they must be incentives and must represent much more than just a tax saving. Instead of paying a year-end bonus across the team, link it to individual performance reviews.
Business owner bonuses must be distributed according to their personal tax position as it can be more tax effective to distribute profits to them than to keep them in business.
Note that bonuses attract a super-guaranteed contribution. Take this into account when assessing net income for the size of bonus distributions.
3. Directors Fees
Does your company have one or more directors who are not employees? One of many tax saving strategies is to consider paying a so-called board of directors fee. The position of director carries a high degree of responsibility and risk and, if the Constitution permits, directors can be appropriately remunerated.
Note that the board of directors fees are very high. Hence, you need to take this into account when assessing your net profit. Directors ‘fees should be distributed in accordance with the directors’ personal tax position as it may be more tax effective to distribute profits than to keep them in business. Take your cash flow into account when distributing the board of directors fees and make sure the company has the free cash to cover the payments.
4. Obsolete inventory
Does your company have a room, storage room, or even a factory full of old inventory that is obsolete, damaged, out of value and standing around costing you money? Another strategy to save taxes is to write off old and obsolete stocks.
Remember, tax deductions can only be claimed by the company if the obsolete inventory has been sold. If your obsolete inventory has been neglected and is significant, depreciation can create a loss for the company. So keep track of your annual inventory process.
5. Bad debt losses
At this time of year we need to clean the cobwebs, especially for companies that have unmanaged outstanding debtors and that are outstanding for a period of time. Do you have bad debts? That means money that debtors owe you but that you probably never will get. Now is the time to write off bad debts to minimize your tax liability.
What are the rules for claiming bad debt deductions? Tax deductions by the company can only be claimed if there is actually a debt, i.e. money is owed, and if a debt has previously been included in taxable income. Businesses must have made a decision that the debt is unrecoverable, not just in doubt, and have it recorded in writing.
6. Planned purchases
A useful way to absorb excess profit for tax saving purposes is to move forward with any planned purchases that you may have. By planned purchases, we mean necessary expenses that are planned for a specific time in the near future. Think of any planned spending that you could possibly bring forward before June 30th.
Make sure your planned purchases are necessary so that you don’t buy unnecessary items just to save on taxes. Always keep an eye on your cash flow. If bringing purchases forward is likely to be a drag on cash flow, this may not be the time to use this strategy.
7. Fixed assets
As with planned purchases, bringing forward purchases of property, plant and equipment can provide excellent tax benefits as your business nears the end of the fiscal year with an excess profit. By acquisitions of property, plant and equipment we mean expenditure on equipment that is planned for a certain point in time in the near future.
Make sure that your planned property, plant and equipment purchases are necessary so that you don’t buy unnecessary assets just to save on taxes. As mentioned earlier, note the cash flow. If the forward movement of asset purchases is likely to put pressure on cash flow, this may not be the right tax-saving strategy for your business right now.
8. Advance Payments
How can you make the best use of items of expense that are “prepaid” from a tax perspective? Prepayments are made in the current year to cover things to be done in a later year. In this type of expenditure, money is spent upfront, but the provision of goods or services extends over a period of time in subsequent years.
Advance payments are usually tax deductible, which is referred to as “eligible period of service” or ESP. The ESP is the period in which the thing paid for is done. Examples of prepaid expenses that can be instantly deductible are: rent, insurance, subscriptions, registrations, memberships, utilities, and interest.
You may have assets that can easily be sold before the end of the fiscal year, such as B. Shares. It’s the right time to review your asset portfolio for capital gains tax considerations. Here are some scenarios to think about.
If you have carried forward capital losses from previous years, you should consider selling investments that result in a capital gain in order to capitalize on those loss carryforwards.
If you are declaring capital gains on the disposal of assets in the current year, you may also consider selling investments that result in a capital loss in order to absorb some or all of your capital gains.
If you’ve had a change or circumstance or a decrease in taxable income to a lower tax bracket in the current fiscal year, you may have more leeway to effectively declare capital gain upon asset release.
Alternatively, if your total taxable income is in the highest tax bracket in the current fiscal year, you can consider holding your investments until after June 30, when you expect your income to be lower in the next year.
When investing, make sure that all decisions are based on wealth first. Avoid making decisions for tax purposes only. Tax strategy is subordinate to wealth decision making. For example, just like you wouldn’t buy an asset that you didn’t need just to save on income taxes, you wouldn’t consider selling a strong investment at the wrong time just to save on capital gains taxes.
10. Trust distributions
Business structures in which a trust is involved either as a shareholder in a trading company or as a trading company itself provide an effective strategy for minimizing taxes within a family unit. Trusts enable an effective transfer of income to the beneficiary tax.
When reviewing trust distributions with beneficiaries, be sure to read and comply with your trust deed, which sets out the requirements for dissolving the distribution. Make sure your resolutions are in writing before June 30th or as set out in the Trust Deed.
Tax planning is essential. Not only in the run-up to the financial year, but also throughout the year. It may sound like a lot of work, but the more you dig into tax planning, the more dedicated you will become to saving yourself real money. If you create an annual tax plan well in advance of the year-end, you’ll have plenty of time to take action and keep those hard-earned dollars in your pocket!
Leah Oliver, founder of Minnik Chartered Accountants.