Time for Tax Planning—How to Reduce Your Tax Bill
The cooler months of autumn signal tax planning season, with accountants and clients both looking for ways to reduce their annual donation to the Australian Taxation Office (ATO).
That’s especially the case for small business owners and entities with an aggregated turnover of less than $25 million—who can employ a range of smart strategies to minimise their annual tax bill.
Smart business owners are trying hard to avoid channelling more of their hard-earned money to the ATO. That’s why a proactive approach to tax planning is key to reduce your tax bill and ensure you’re in optimal shape heading into the new financial year.
So, what exactly does that involve? To get you started, below are a few strategies we have implemented for our clients in the past and enjoyed success with.
1. Fill Up Your Bucket—How a Trust Can Help You Pay Less Tax
The ATO has made small but significant changes to company tax rates over the past few years. While the full company tax rate of 30% is still applicable to major corporations, that rate has gradually been declining for small businesses recently.
If you’ve been operating a small business entity for all or part of 2023, the tax rate for base rate entities under the threshold is now 25%. That’s contingent on 80% or less of your company’s assessable income consisting of passive income—or in other words things like rent, royalties, interest dividends, and net capital gains.
But there’s more you can do than just write off depreciable assets, particularly if you’re using the tax advantages of a trust. One strategy is to allocate profits to a bucket company.
In simple terms, that’s a company set up as a beneficiary for a trust into which you can pour money to reduce tax. As long as you’re engaged in some form of business operations, you can tip the profits into your bucket company and ensure your tax is capped at that corporate rate of 25%.
That’s a much lower rate than the 45% charged on individuals who earn more than $180,000 of taxable income. Strategic moves to use a bucket company can ultimately save small business owners thousands in the long run.
2. Take Advantage of 100% Write-Offs Before June 30
While the ATO’s latest temporary full expensing regulations essentially do away with the previous $150,000 threshold for instant asset write-offs, the bigger takeaway this tax season is that any eligible business can still write off 100% of capital purchases or improvements to reduce their taxable income in the 2023 financial year.
For small business owners, that’s obviously contingent on the purchase or improvement of an asset being made before June 30, 2023. Eligible assets can include items such as machinery, equipment, and vehicles, as well as improvements to existing assets such as renovations or upgrades.
With the rules around write-offs set to be amended once again at the end of the financial year—with no word yet on how much businesses will be able to write off in future—now is the time to take advantage of the tax benefits.
There’s plenty of savings on offer for those who do—with savings of anywhere between $12,000 to $18,500 available on an eligible business purchase of $50,000, depending on the tax rate. But with the tax break set to end at the conclusion of the financial year, the time to act is now. Making strategic capital purchases or improvements before the deadline is an effective way to reduce your tax liability and improve your overall financial position.
Meanwhile, small business entities can also take advantage of temporary full expensing on a range of eligible second-hand depreciating assets.
Sound a bit confusing? Not to worry—that’s where the team at Prime comes in.
Instead of scrutinising every rule and regulation on the ATO website, simply get in touch and we can walk you through the smartest write-off strategies to reduce your tax bill.
3. Paying Super, Deferring Income—Even More Ways to Reduce Your Tax Bill
Paying less tax involves a range of smart tax planning, but that doesn’t mean you can’t return to a few proven strategies to help reduce your tax bill even further.
You can maximise deductible super contributions by paying up to the $27,500 cap for individuals. Just remember not to exceed that amount, otherwise you’ll actually end up paying more tax.
You’ll also need to ensure all employee superannuation payments are received by the nominated super fund or Small Business Superannuation Clearing House (SBSCH) by June 30.
A note of caution: make those payments in advance, because any delays can result in them being processed in the new financial year—thereby eliminating the immediate tax benefit.
Purchasing tools of trade and other fringe-benefit-tax-exempt items before the end of the financial year is another prudent tax-saving strategy—as is taking care of any repairs and maintenance—while deferring income until the next financial year also helps delay tax payable for an additional 12 months.
While these are all standard tax-saving strategies, there’s certainly an element of complexity to shrinking your annual tax bill. That’s why speaking to a professional is one of the smartest investments you can make—and why PrimeAdvisory has you covered. We’ve been helping small businesses pay less tax for years and we can help you do the same.
If you’re after even more expert advice about how to reduce your tax bill, drop me a line at [email protected].
And stay tuned for our upcoming eBook: The Ultimate Guide To Business Tax Planning. It contains plenty more in-depth insights into how small business owners can reduce their annual tax bill.