Tax strategies and tips for small business
Spending time getting your tax in good shape might not be the most exciting thing on your to-do list, but it is one of the most worthwhile things you can do. Optimising your tax by reducing liabilities means maximising profits and freeing up cash to help grow your business.
Tax planning tip 1: Choose the right business structure
Sole trader: linked to your individual tax return
Sole traders are the most cost-effective structure because it has lower compliance fees. You register your business with the Australian Business Registry for an Australian Business Number (ABN), and you can start trading. Compliance is cost-effective as you don’t need to do a separate tax return. You just account for your business income in your individual tax return.
A major drawback for a sole trader is that the owner is personally liable for the debts and liabilities of the business. This can expose you to claims on your personal assets if your business gets into strife.
Partnership: jointly responsible for debts and liabilities
Partnership can be a good option if you want to go into business with another person. Partnerships are relatively easy to form. You register your business with the Australian Business Registry for an Australian Business Number (ABN), and you can start trading. Similar to a sole trader, the compliance costs are relatively low, as any profits are not taxed in the partnership but in the individual tax return of each partner when received.
Partnerships do have some drawbacks—each business owner is jointly and severally liable for the bad debt and liabilities of the partnership, even if they were built up without your knowledge.
Company: separating business owners from business assets
Companies are a very good way to ensure that the owners of the company are separate from the operations of the company, as the company is considered a separate legal person. There is some asset protection for the directors and shareholders of the company, as there is a corporate veil separating them and the company itself. Apart from tax and superannuation contributions debts, the directors are not liable for the debts and liabilities of the company.
The main drawback of a company structure is that compliance costs are significantly higher than those of a sole trader or partnership. There is also the setup cost, where the company has to be incorporated. However, these costs generally pay for themselves later on as the business grows and requires more flexibility than sole trader and partnerships allow.
Trusts: protects business assets but can be complex
Trusts have been steadily gaining popularity as a trust structure is highly versatile. It gives you asset protection of the owners, similar to a company, but also has more features. A trustee manages a trust, and if there are unrecoverable debts and liabilities that cannot be repaid back to the creditors, the appointer of a trust can change the trustee to another new trustee without compromising the trust structure.
The debts and liabilities can only be claimed against the previous trustee, therefore protecting the assets in the trust. Profit in a trust can also be streamed to the different beneficiaries of the trust, ensuring that the beneficiary with the lowest marginal tax rate receives the most amount of the profit. This makes a trust a powerful tax structuring tool.
The drawback of a trust is that it requires significantly more setup and compliance costs compared to the other structures, and the operation of a trust can be hard to manage without help from a tax professional.
Tax planning tip 2: Prepare a good financial plan and budget
Financial plans and budgets can be an invaluable tool to give business owners an indication of the potential financial outcome of a business and how to manage the cash flow effectively.
By projecting the business’s income and taking into account the costs of the potential business expenses, you can have a strategic view of how the business will be expected to perform in the future.
While a projected income statement is useful, the most important report of a financial plan is the cash flow projection. This lets you know when sales income is expected and expenses will be paid out. This means you can identify where the timing of inflows and outflows will be disjointed and can adequately plan to either raise money or borrow to cover these gaps. As the saying goes, “Cash is King”, and your business will not be able to operate without cash in the bank.
Tax planning tip 3: Ensure compliance with ATO regulations
Running a business can be rewarding, and if the business starts turning a profit sooner rather than later, that is even better. But the economy needs to be regulated, and our taxes fund essential services and regulations—enter the tax office.
The Australian Tax Office (ATO) is empowered by different legislations to collect taxes from businesses. Apart from income tax, which can be complicated, there is also the goods and services tax(GST), capital gains tax (CGT), fringe benefit tax (FBT), and others. Figuring these out can be daunting for business owners without an accounting background or finance degree.
The ATO sets out a tax compliance schedule of when businesses must lodge various statements like your Business Activity Statement (BAS) and pay your tax bill and other fees. Not complying with the tax compliance schedule might incur additional fees for late lodgement, penalties for failure to lodge, or worse still fines and potential deregistration of the business.
You can easily avoid penalties and fines if you are on top of your taxes or engage a professional to help them. You can find out more information at the ATO website.
Additional tax tips and effective tax planning strategies for small business owners
Reduce your taxes with tax planning
Tax planning is most effective when done by an accountant or tax specialist. It involves using reasonable and legal means to avoid tax fraud while reducing your liability and paying less tax. An accountant will analyse your structure, expenses and profits to find areas that can be more tax-effective.
Maximise superannuation contributions
Superannuation contributions provide taxable savings for retirement. A certain level of voluntary superannuation contributions are taxed at a lower rate than you would normally pay because the money comes from your pre-tax income. Increasing your Superannuation contribution may lower your total taxable income and tax liability. The range of tax advantages changes almost every year, so you must know the most recent tax-effective way to contribute to your super.
Take advantage of tax rebates
Tax rebates are deducted from your tax payable. A range of rebates covers certain expenses, spousal super contributions and educational rebates. Again, these can change with each financial year, so it is worth engaging an accountant or doing thorough research to check eligibility criteria and ensure you’re benefiting from all available rebates possible.
Stay up to date with tax legislation
Tax laws change frequently for businesses, so it is essential to educate yourself on the most recent changes regularly. Otherwise, you can end up paying more tax than necessary, missing out on rebates or underpaying and incorporating fines and penalties.
Time your purchases for the end of the financial year
Again, the criteria change frequently, but small businesses find prepaying expenses or purchasing an asset towards the end of the financial year very beneficial. You can claim an upfront deduction if you are using the purchase. An accountant can help guide you and make the most tax-effective decision.
Avoid tax avoidance schemes
The ATO view is that you can manage your taxes but can’t avoid your taxes. The best thing you can do to avoid penalties from the ATO is to keep your affairs compliant. Some tax avoidance schemes and scams are easily recognisable as illegitimate – for example, advice from unqualified people who are not accountants. Others appear professional but are still illegal. Always check with a third-party qualified accountant before making any decisions.
End of tax year checklist
Undertake tax planning by preparing your financial plans and reports
Bring expenses and large purchases forward where possible
Report your BAS correctly
Get your receipts and expenses ready for your accountant
Maximise tax deductions by working with an accountant
Getting up-to-date advice and guidance from a qualified accountant registered with one of several professional associations brings several benefits.
They can help you reduce your overall tax bill through an effective tax planning strategy.
They can ensure your company is compliant with the latest regulations.
They can ensure you keep appropriate tax records and other financial documentation.
You save time trying to educate yourself on all the intricacies of business tax.
You get peace of mind that experts are taking care of finances.
Having a small business doesn’t mean you can’t be clever when it comes to tax. By choosing the appropriate business structure, complying with ATO regulations and engaging the services of a qualified accountant or accounting team, you can be confident you’re avoiding common tax pitfalls and optimising the financial well-being and growth of your business
