The end of the financial year is almost upon us and we are here to help. The purpose of Tax Planning is to establish clear objectives now and for the future with an appropriate pathway to achieve them.
The importance of tax planning is not limited by size, type, industry or ability. From the perspective of a sole trader or small business, tax planning can allow for greater certainty around anticipated tax obligations. At the other end of the scale are medium to large businesses. Operating in a larger scale setting can mean that there are internal resources available to manage some key accounting functions which can lead to more value being achieved at higher levels with strategic tax planning. For example, there are a number of legislative changes announced which allow larger businesses the ability to benefit from bringing forward capital expenditure to achieve greater re-investment.
A key part of our service entails helping you progress and develop clear strategies to help your business achieve your goals. This way you can maintain a strong focus on running your business without having to devote time to other matters we can assist in managing.
The following example provides an outline of the benefits tax planning can achieve when we work with our clients.
Joan is a sole trader who started a mowing business full-time in October 2020. She followed the correct steps in terms of applying for an Australian Business Number (ABN). In February 2021, she registered for GST as there was significant growth in her client base and she projected the business turnover to be above $75,000 for the following 12 months. She has been able to offer lower prices to her clients as a result of her lower overheads. She is a little unsure on what she will need to be paying in tax this financial year as she is not currently making any pay as you go (PAYG) instalments. She is also looking to make a superannuation contribution into her superannuation fund in the most tax effective way possible and is unsure how running a business impacts her ability to contribute. Her current equipment is a little dated as she had purchased them second hand when starting her business. She is unsure whether she will have enough funds to reinvest into her business by buying new equipment. Her current business records show the following information:
- Total Revenue to 30 April 2021 $110,000
- Total deductible expenses to 30 April 2021 $30,000
- Projected taxable profit for May and June 2021 $20,000
At this stage, we know Joan is a sole trader. This means any profit Joan makes from her business activity must be declared on her personal income tax return for the 2021 financial year.
Joan is concerned that she will have a large tax bill and isn’t sure how much money to put aside to make sure she has what is needed when it comes time to pay her tax. She is confident that she has the correct private health cover to avoid paying the Medicare levy surcharge.
There are several points to acknowledge from Joan’s current situation, not limited to the following:
- Joan is currently experiencing significant growth in her business
- Joan can potentially help grow her business by purchasing new equipment and claim a tax deduction under the temporary full-expensing rules.
- Joan can also potentially benefit from making a personal deductible superannuation contribution into her superannuation fund and claiming a tax deduction for these contributions.
From the information gathered from Joan we can establish that she has made a year to date profit of $80,000 and has forecasted the final two months of the financial year to earn a profit of $20,000, being an annual forecast profit of $100,000.
Working with Joan, we have run through some options regarding how to maximise her after tax position for the 2021 year and achieve some of the plans she has around contributing to super and buying some equipment for her business. In actioning these steps pre 30 June, Joan has the ability to reduce her personal tax bill by $12,400 which is summarised below.
|Scenario 1 – without changes||Scenario 2 – with changes|
|Estimated Revenue||$110,000||Estimated Revenue||$110,000|
|Less Estimate Deductible||($30,000)||Less Estimate Deductible||($30,000)|
|Add Estimated Profit for May and June 2021||$20,000||Add Estimated Profit for May and June 2021||$20,000|
|Estimated Net Profit||$100,000||Estimated Net Profit||$100,000|
|Deduction for purchase of new equipment||$0||Deduction for purchase of new equipment||($25,000)|
|Deduction for personal superannuation contributions||$0||Deduction for personal superannuation contributions||($10,000)|
|Adjusted Taxable Income||$100,000||Adjusted Taxable Income||$65,000|
|Basic tax estimate*||$24,187||Basic tax estimate*||$11,787|
*Including Medicare levy of 2.0%
To benefit from these tax savings, Joan does need to take action before 30 June 2021. However, lodgement and payment of her tax obligation, when lodging via a tax agent, is due in May 2022. With this in mind, Joan can now have greater certainty around expected future cash outflows over the next 12 months.
In addition to considering things such as the instant asset write off and concessional superannuation contributions, other tax planning strategies applicable for sole traders and small businesses include:
- A deduction for start up expenses if you are looking at restructuring or starting a new business
- Accessing the small business income tax offset
- Prepaying expenses, subject to eligibility rules
- Revaluing stock and writing off obsolete stock
- Accurate expense tracking for business use items such as portion of motor vehicle use
- Writing off bad debts before year end
We hope this information has encouraged you to think about what pre 30 June planning you can be thinking about in your business.
If you require any assistance in relation to Tax Planning before the end of the financial year or your taxation affairs in general, please contact our office on 03 52216399 or at firstname.lastname@example.org.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.
Davidsons is not licensed to provide any financial product advice nor make any recommendations in respect of any financial product. If you require such advice, you will need to consult a financial adviser who is licensed to provide financial product advice before you make a decision on a financial product.