Eight end of year tax tips for Australian small businesses

The Australian financial year runs from 1 July to 30 June.  For many small businesses, the end of the financial year – tax time – is frantic and stressful as they scramble to get their books in order and work out what deductions can be claimed.

To help take some of the pressure off, here are our top tips to help you get your affairs in order by the end of the financial year as well as some simple advice to make the most of this time of year for your business.

Download our End of Financial Year Guide for more tips for you and your business.

Eight end of financial year tax tips for small businesses

        1. Claim tax deductions

It is commonly recommended that SME owners make sure they are claiming all the appropriate tax deductions possible.  This can include items such as rent, utilities or repairs, or professional, legal and accounting advice.  It may also be suitable for your business to bring forward expenses to the current financial year such as pre-paying rent or repair expenses. However, you do need to be able to justify the expense and in order to claim the deduction it needs to have been paid.

ATO Assistant Commissioner Kath Anderson has warned taxpayers about trying to claim standardised deductions simply because they believe they are entitled to them.  “People think that they have an entitlement even though they have not spent the money. You have to have still spent the money,” Anderson told Fairfax. “It has to be related to earning your income, and you have to be able to show us how you calculated the claim.”

        2. Take advantage of the instant asset write-off

The instant asset write-off scheme has been extended once again to 30 June 2020 for assets purchased up to $30,000.  The scheme affects small to medium businesses with a turnover of up to $50 million a year, allowing business owners to immediately deduct assets costing up to $30,000 which can then be claimed in their tax return in that income year.

So if your business has purchased an asset this financial year (such as vehicles, tools, and office equipment) this, for up to $25,000 prior to 2 April and for up $30,000 since 2 April 2019, then be sure to take advantage of the instant asset write-off.

However, it is equally important to keep an eye on cash flow.  While the Instant Asset Write-Off Scheme reduces the tax your business has to pay, it is not a rebate.  Your cash flow will still have to be able to support any purchases.

        3. Understand the Capital Gains Tax (CGT) concessions for small businesses 

Individuals operating a small business may be eligible for capital gains tax (CGT) concessions on the sale of business assets.  Be mindful of the eligibility conditions that you must meet to qualify for any of the concessions.   The small business CGT concessions are available to business taxpayers with an aggregated turnover of less than $2 million or net business assets less than $6 million.

There are four concessions which may allow a small business owner to disregard or defer some or all of a capital gain from an active asset used in the business:

• 15-year exemption – If your business has continuously owned an active asset for 15 years and you’re aged 55 or over and are retiring or permanently incapacitated, you won’t have an assessable capital gain when you sell the asset.
• 50% active asset reduction – You can reduce the capital gain on an active asset by 50% (in addition to the 50% CGT discount if you’ve owned it for 12 months or more).
• Retirement exemption – Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you’re under 55, the exempt amount must be paid into a complying super fund or a retirement savings account.
• Rollover – If you sell an active asset, you can defer all or part of a capital gain for two years, or longer if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.

Review your potential concessions for this year to receive the benefits of tax relief.

        4. Use the income tax offset

If your small business is unincorporated, it’s likely you’re eligible for the small business income tax offset, which can be up to $1,000 off your tax bill if your business’s turnover is less than $5 million. The offset is calculated as a proportion of tax payable on your business income.  Currently, the offset is 8% and it will increase to 16% by 2022.

        5. Understand the company tax rate changes

The debate about changes to Australia’s company tax rate has been ongoing.  In the recent Federal Budget, we saw the promise of a further reduction of the company tax rate to 25% from 2021-22.  Given the election result, we will be keeping a close eye on what changes are passed in the coming months.

Currently, incorporated small businesses enjoy a 2.5% cut in the tax rate (to 27.5%), already in place for all businesses with a turnover of less than $10 million. That cut is set to be extended to businesses with a turnover of up to $25 million from 1 July 2019.

Given the possibility of further changes, it may be worthwhile considering deferring income until the next financial year if your business falls into this category.  By deferring income, the income will fall into the new tax year and be taxed at the lower rate.

        6. Write off bad debts

While it never seems like good news to have to write off ‘bad debts’ (outstanding debts which you are unable to recover), there is a positive in that it is possible to receive a tax deduction on the amount of debt you have to write off.

The debt must be included as assessable income in the current or previous financial year.  So it may be worthwhile reviewing your current debtors list and if there are any debtors on it who you believe won’t or can’t pay, then write off those debts by 30 June to claim the deduction this financial year.  Your business does need to keep a record that the debt has been written off.

        7. Make your superannuation payments on time

In order for small business owners to claim the tax deduction on super contributions made on behalf of employees, the super has to be paid before 30 June. Super contributions need to be paid to employees’ super fund 28 days before the end of each quarter.  For any quarter you miss that deadline, the super is not tax deductible.

        8. Give your business a health check

The end of the financial year is a good time to take stock of how your business is performing and possible areas for improvement.  This may be the only time of year that you have a complete set of accounts to look at how much money the business is making and where it’s coming from, how much money the business is spending and where it’s going, where the risks are in the business.

EOFY is an ideal time to make strategic decisions which could improve business performance and make your business more profitable. You might also want to review your business structure and insurances.