At this time of year we get lots of enquiries from clients wondering what they should do to minimise their tax before 30 June. The most common idea business owners have is to purchase capital equipment such as vehicles, computers, etc. While the idea is great, in most cases, it will do little to reduce taxable profits in the current year. Some simple ideas are:
- Delay the timing of income. For those using cash accounting whereby income is recognised when it is received, it sometimes isn’t a bad thing if customers are slow to pay. Alternatively, for those using accrual accounting whereby income is recognised when the customer is invoiced, processing delays (for whatever reason) which result in invoices being issued in July can help. Delaying income can impact on cash flow so delaying the recognition of income should be done with careful consideration
- Bring forward expenses. This tip is probably better than delaying the recognition of income. If you know you are going to incur an expense in say July or August, can it be brought forward to June? Quite often, the only real impact on business operations is that things need to be stored for longer. Examples, include stationery, telephone bills, vehicle & general repairs, superannuation.
- Many lenders will allow a borrower to pre-pay interest. You are able to pre-pay up to 12 months interest before 30 June and claim a tax deduction now. Another advantage of doing this is the amount of interest is then fixed and not affected by any increases in rates. The down side is that if you choose not to pre-pay again next year, then you won’t have any interest deduction for that year.
- Superannuation is a great way to minimise tax. Super is taxed at a flat 15% which is a saving of 16.5% for most people compared their marginal rate. Sure it is locked away until retirement but by then it should be worth much more. It is vital to make sure the contribution limits (generally $25,000) are not breached because any excess contributions are effectively taxed at 46.5% and potentially 93%. Lots of small business owners, particularly tradies, free admit to not liking super. This is is mainly due to a loss of control of the funds and the concerns about perceived risks associated with the share market. However, once your balance is high enough there are a variety of ways to take back control of the funds including investing in direct property via a SMSF.
- Review depreciation schedules to identify any equipment which has been scrapped/destroyed. If you no longer own an item, it should be removed from depreciation schedules to enable the balance of the original cost to be claimed immediately.