When it comes to doing your business’s taxes you may not set the tax rate, but you do have control over the numbers as well as how and when they are reported.
Take a look at how profitable businesses minimise their tax legitimately and legally, retaining more of their cash for surviving setbacks and funding future growth:
Right business structure
The first step for rightsizing business taxes is to ensure it operates within the appropriate structure. Whether you are a sole trader, partnership, trust or company can substantially impact your tax liabilities.
Consider too whether you need to be registered for GST, and examine your relationship with staff. Are they employees or contractors? This will determine whether you are liable to pay their Superannuation Guarantee contributions.
Strong record keeping
Simply put, you can’t claim what you can’t find! Yet many accountants and bookkeepers still see clients turning up with a shoebox full of receipts, which is a great way to lose legitimate claims through illegible receipts or forgotten cost allocations.
Ensure all business outgoings are digitally recorded and itemised. Keep a mileage logbook for any business-related travel. And, importantly, note what each expense was incurred for. This can impact how much tax is payable (for example, fringe benefits tax liabilities on client/employee entertainment).
Many businesses don’t even realise they are paying more tax than they need to, simply by overlooking legitimate claims.
Under-declared depreciation, for instance, is rife. Depreciation is claimable against not just equipment and electronics, but also fit-outs, flooring and air-conditioning.
Financial advice fees are generally tax deductible too, which many people don’t realise.
Then there are past losses to carry over from previous financial years.
Underclaiming also extends to grants and incentives. Especially in the COVID-19 era, governments at all levels have substantial assistance measures and job creation incentives available. Your competitors are likely claiming them, so if you don’t too, your business is already on the back foot.
It’s pointless to claim deductions and incentives only to have those funds squandered in late fees and interest.
Profitable businesses minimise their tax liabilities – and protect their credit rating – by lodging returns and making payments on time.
If you’re having trouble doing so, don’t bury your head in the sand. Contact the ATO and request an extension or payment plan for taxes owed.
Positive cash flow
Cash flow isn’t just critical for business operations; it plays a role in minimising tax too.
For example, businesses may be able to use their GST liabilities for other purposes short-term, because it generally isn’t due until the end of the quarter. But those funds need to be accessible once the next GST instalment falls due.
Similarly, pre-paying expenses when cash is on hand means one less thing to find money for during leaner times and instant tax deduction.
Also, use instant asset write-off if you are eligible to help your cash flow. Doing so brings forward your depreciation to the current financial year. Plus, you eliminate the risk of forgetting to claim it in subsequent years.
In real estate, it’s all about location, location, location. For taxes though, it’s timing, timing, timing. That’s because when money changes hands determines which financial year a transaction is considered.
Legitimate purchases can be brought forward, not only to claim the tax deduction sooner but also to reduce the reportable business profits at June 30.
If your business had a stellar year (good on you!), consider delaying any remaining invoices until the following financial year. Conversely, if the following year looks stronger, then invoicing early may be wiser (assuming it is not a cash recording GST calculated business).
Don’t, however, overspend at end-of-financial-year sales. Buying goods just to claim a tax deduction is not good business.
Minimising tax is an ongoing process, not a once-a-year project as a new financial year ticks over.
It’s important to touch base with your advisers throughout the year, to ensure the business stays on track and embraces opportunities as they arise. Be proactive, rather than reactive.
Knowing your numbers is key not just to minimising your taxes but ensuring your business is profitable both now and into the future.
Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet: Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce: Your Survive and Thrive Financial Guide.
Note this is general advice only and you should seek advice specific to your circumstances.