Small business tax planning ideas

Hands up if you like paying taxes. *crickets* That’s what we thought. 

We know that our taxes are used for the greater good of the community. Taxes are used to build roads, schools, public hospitals and other necessary infrastructure. But that doesn’t mean we want to pay more than we’re obligated to pay. 

In 2020, we saw lots of changes to tax law due to the pandemic. This gives Australian small businesses the chance to apply some shrewd small business tax planning to set themselves up well into the future. 

Here’s some of our best ideas to help you minimise your tax bill as a business owner.

What does the tax office consider a small business? 

Did you know that, according to the Australian Tax Office (ATO):

• there are approximately six million small business entities
• small businesses employ around five million Australians, and
• contribute around 30% of all income tax collected?

That’s a hefty tax contribution and it’s one particularly good reason why you need to get it right. 

A small business includes:

• companies with a turnover up to $10 million
• individuals associated with small businesses (including partnerships, trusts and companies)
• sole traders receiving business income up to $10 million.

For the 2020/21 financial year, the corresponding tax rate has been reduced from 27.5% down to 26%.

Business tax planning idea 1: Review your business structure

You may have started your business as a sole trader or in a partnership. But as your business has grown, it may make more sense from a tax and financial perspective to consider other business structures that might be more suitable as your business revenue and team grows. 

Changing to a business structure or perhaps even a trust could help to save on tax for your business or allow you to better distribute your income. 

But there is some work involved in making the change, so be sure to speak with a qualified tax and business accountant before changing your business structure.

Business tax planning idea 2: Know all your tax deductions

With all the changes announced in the Federal Budget back in October 2020, you may not be across all the deductions you’re now entitled to claim. While it’s true some are short term measures to continue to stabilise our COVID ravaged economy, we don’t want you to miss out on anything. And this year’s Federal Budget will be announced in the coming weeks in May too. 

Having a great small business accountant is now more important than ever to ensure you are across all of the benefits that are available to your business. 

The team at Kelly+Partners are always across the latest changes and are a great place to start to understand how to set your business tax planning up for success. 

Business tax planning idea 3: Defer income 

Deferring income moves your tax payable to future years. You can defer income by not issuing any more invoices and/or not accepting debtor or cash payments until the new financial year.

If you are looking to do this, then it can be helpful to get advice from a qualified tax accountant as they can help with forward planning and knowing whether it is the right approach for you and your business.

Business tax planning idea 4: Increase expenses 

Thinking about buying lots of business and office consumables such as stationery, computer and printing supplies or marketing materials? Buy these items before June 30 to claim the tax deduction this financial year.

Business tax planning idea 5: Pay superannuation

Make sure you pay your employer and self employed super contributions before June 30. It’s worth noting the superannuation fund must receive the funds prior to June 30 for tax deductions to apply, so don’t leave it until the last moment.

It’s also important to watch those superannuation caps.

From July 1, 2017, the ATO capped concessional contributions, including employer contributions, at $25,000, regardless of the individual’s age. However, from July 1, 2021, concessional contribution caps are set to increase from $25,000 to $27,500 per year.

Business tax planning idea 6: Write off bad debts

You know the ones. You’ve chased them up many times. You’ve sent strongly worded emails. You’ve already invested way too much time and you know you’re never going to get your money. So take a deep breath and just write it off as a bad debt. 

Get it all done before June 30 and you can claim it as a tax deduction.

Business tax planning idea 7: Small business income tax offset

The small business income tax offset, or the unincorporated small business tax discount, can reduce your tax by up to $1,000 per year. 

To be eligible, you must be a sole trader, or have a share of net small business income from a trust or partnership and your business must have an aggregated turnover of less than $5M.

The current rate of offset for the 202/21 financial year is 13% but will increase to 16% from 2021/22 and onwards.

Business tax planning idea 8: Instant asset write-off

In response to the pandemic, the government announced changes to asset write off eligibility during 2020. Further extensions were announced during the 2020 Federal Budget. 

According to the ATO:

Eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.

Instant asset write-off can be used for:

• multiple assets if the cost of each individual asset is less than the relevant threshold

• new and second-hand assets.

Changes announced in the budget in response to COVID

For assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the instant asset write-off:

• threshold amount for each asset is $150,000 (up from $30,000)
• eligibility extends to businesses with an aggregated turnover of less than $500 million (up from $50 million).

Business tax planning idea 9: Investment income and Capital Gains tax (CGT)

Deferring any income, including investment income, shifts your tax payable to future years. If you can, try to organise for the receipt of any investment income to happen after June 30. 

And what if you’re selling an asset and want to minimise your CGT? As the contract date is the important date when establishing when a sale occurred, (and not the settlement date as many assume), set the contract date to after June 30. 

Read more about minimising your investment property tax here. 

Business tax planning idea 10: Investment property depreciation

If you own an investment property, you should be preparing an annual Property Depreciation Report. This lets you claim the maximum amount of depreciation and building write off deductions.

While these are all great ideas, they won’t apply to all small businesses. So, if you’re keen to pay less tax, contact us to arrange to talk to an expert financial advisor who doesn’t want you paying more tax than you have too either. 

Already a Kelly+Partners client? Get in touch with your Client Director to discuss your options.