Here are six ways in our EOFY checklist to potentially reduce your small business’s tax liabilities at the end of the financial year.
At a glance: Here’s a snapshot of the advice from our interviewees:
Getting tax-smart begins with keeping on top of your expenses and writing off any bad debt that won’t go away.
Consider using investment accounts to reduce taxable income.
Asset management software can help increase productivity and cut costs.
An accountant can help make sure you’re taking advantage of all the tax laws that apply to your small business.
EOFY is fast approaching, which means it’s critical to get across your business’s finances and start the new financial year with the right foot forward. That could mean using cash flow management tools to streamline your business, calculating your working capital or learning how to open a business account to simplify financial management. It’s also the time to make sure you’re not paying more tax than you should. In this EOFY checklist, two tax advisors have shared their tips for minimising tax liabilities at EOFY.
1. Track your expenses
Like so many things in small business, being tax-smart means keeping an eye on all the small things that add up.“One of the best ways to minimise your tax liability is to keep track of all of your business expenses throughout the year,” says Davie Mach, Director and Client Manager at Box Advisory Services. “This includes things like office supplies, travel costs and any other expenses that are necessary for running your business.“
By keeping more meticulous records, you will be able to deduct a significant amount from your taxes come tax season.”It’s never too late to start tracking your expenses. You’ll get the benefit of the rest of the financial year’s expenses and develop a good habit for the next financial year.
2. Write off bad debts
Occasionally, customers may accrue debt to your business they are unlikely to pay. Greg Mawer, Director at Accumulate, recommends writing off these ‘bad debts’ prior to 30 June to avoid increased tax liability.“To do this effectively, you need to include the original income in your tax return, determine the debt is made and write off the bad debt,” he says. “This reduces your taxable income and your tax bill.”
3. Consider investment strategies
The Australian Government’s moneysmart.gov.au outlines how small business owners can claim tax deductions for the cost of buying, managing and selling an investment. All capital gains – or investments sold for more than the cost to acquire them – must be included in your tax return. However if you’ve had the investment for longer than one year, you could be eligible for the capital gains tax discount, where only half the capital gain is taxed.
Using superannuation to reduce taxable income can also be an option, according to Greg. “Superannuation is a great vehicle for long-term, low-tax investing,” he says. The limit for deductible contributions for the 2022/23 financial year is $27,500.“ If you are a small business owner approaching retirement or have a one-off capital gain, high income or some spare cash, contributing to superannuation can save significant tax.”
4. Prepay expenses
It may be possible for small business owners to prepay certain expenses before the new tax year begins. “If you had a good year financially but expect next year will not be as profitable, consider paying for next year’s expenses prior to 30 June,” says Greg. “There are special rules for small businesses with a turnover of less than $50 million. These businesses can claim a deduction for prepaid expenses in the year they are paid, as long as they are not prepaid for more than 12 months and are used by the end of the next tax year.”
5. Use asset management software
Centralising information is key to easily and correctly claiming asset depreciation come tax time. “Proper asset management can not only centralise information, but also increase productivity, cut costs, and reduce loss and theft,” says Davie. If you think that laptop won’t make a dent in your tax bill, take a critical look at all the items you use in running your business and start tracking them properly.
“Asset management software is an initial expenditure that pays off in the long run,” adds Davie. “You can reduce costs from unexpected repairs or replacing lost equipment because you know where each asset stands at any given time, and routine maintenance scheduling helps prevent problems with equipment before they happen.”
6. Seek a professional’s perspective
Sometimes, and especially when dealing with a tricky topic such as tax liability, you need a third-party perspective to provide clarity. That’s where a professional accountant comes in.
“Hiring an accountant can save you a lot of headaches come tax time,” says Davie. “They will be able to help you maximise your deductions and make sure that you are taking advantage of all the tax laws that apply to your small business. “While hiring an accountant may cost you some money upfront, it will definitely save you money in the long run.”
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