Tax planning, an essential component of running a small business. For small and medium enterprises (SMEs) in Australia, effective tax management is not just about compliance, it’s a strategic tool that can significantly contribute to financial success.
At its core, tax planning involves assessing business operations and financial strategies to legally minimise tax liabilities while maximising potential returns. This proactive approach ensures that SMEs can take full advantage of available tax benefits, deductions, and incentives under Australian tax law.
For small business owners, the complexity of the tax system may seem overwhelming. However, with the right information and guidance, tax planning can be integrated seamlessly into your business strategy.
Not wanting to get into the nitty gritty of taxes? Fair enough! We can take care of that for you. Give the team a call.
Understanding the Basics of SME Taxation
Key Tax Obligations for SMEs
Income Tax
All businesses pay tax on their taxable profits. The tax rate varies depending on the business structure—sole traders and partnerships are taxed at individual rates, while companies face a fixed tax rate.
- Standard company tax rate is 30%.
- Small businesses (classified as base rate entities with a turnover of less than $50 million), the tax rate is 25%.
Goods and Services Tax (GST)
Businesses with an annual turnover exceeding $75,000 must register for GST. This 10% tax applies to most goods and services sold in Australia.
Pay As You Go (PAYG)
Businesses need to withhold income tax from employee wages and make regular payments to the ATO.
Fringe Benefits Tax (FBT)
FBT is a tax that employers must pay on specific benefits they offer to their employees or their employees’ families. These benefits can include providing company cars, meals and event tickets etc. The current FBT rate is 47% and applies to the taxable value of the fringe benefits provided.
Tax Advantages for SMEs
Tax Deductions
SMEs can claim deductions for most business-related expenses, provided they are necessarily incurred in gaining or producing assessable income.
Capital Gains Tax Concessions
Small businesses can access several concessions on capital gains, provided they meet certain eligibility criteria.
Loss Carry-back
Businesses can offset current year profits against losses incurred in previous years, subject to certain conditions and limits.
Tax Planning Strategies for Small Businesses
Timing Expenses and Income
Expense Prepayment
Consider prepaying some expenses like rent, insurance, or subscriptions. This strategy moves the tax deduction into the current fiscal year, potentially reducing taxable income.
Deferring Income
If possible, defer income to the next fiscal year. This can be beneficial if you expect to be in a lower tax bracket or if it helps manage cash flow more effectively.
Asset Purchases and Depreciation
Immediate Write-offs
Small businesses can benefit from immediate asset write-offs for eligible purchases. This allows for full deduction in the year the asset is purchased and used.
OR
Depreciation Schedules
Proper management of depreciation schedules can defer taxes by spreading the expense recognition over several years.
Please note for small businesses it is either depreciation or asset write off.
Superannuation Contributions
Concessional Contributions
Making concessional contributions to your superannuation can be tax deductible. These contributions are taxed at a lower rate (15%) within the super fund, offering tax advantages over standard income tax rates.
Employee Superannuation
Ensure timely payment of superannuation for employees. Superannuation contributions are tax deductible only once received by the fund, not when paid. Be aware that there can be a time lag between making the payment and it being received by the fund.
Debt Management
Business Loans
Interest payments on business loans are tax-deductible. Proper structuring of debt can improve cash flow and reduce taxable income.
Bad Debt Deduction
If certain debts are unrecoverable, considering them as bad debt can allow for a tax deduction, provided specific conditions are met.
Common Tax Deductions for Small Businesses
Optimising your tax returns involves leveraging various deductions that are commonly available to small businesses. These deductions can significantly reduce your taxable income:
Home Office Expenses
If you operate your business partly from home, you may be eligible to claim a portion of home-related expenses. This includes utilities, internet charges, and office furniture. The specific calculation method can vary, so it’s important to ensure you meet the criteria set by the Australian Taxation Office (ATO).
Vehicle and Travel Expenses
Travelling for your business? Costs related to business travel, including vehicle expenses, airfares, and accommodations, are deductible.
For vehicle expenses, you can choose between the logbook method or the cents per kilometre method, depending on which is more beneficial for your situation.
Employee Salaries and Super Contributions
Salaries, wages, bonuses, and super contributions made for employees are generally deductible. This includes your own salary as a business owner if your business structure allows for it (e.g., if operating as a company or a trust).
Insurance Premiums
Premiums paid for business insurance provide another opportunity for deductions. This can include public liability, professional indemnity, and workers’ compensation insurance.
Professional Services
Fees for professional services such as accounting, legal advice, and consulting are deductible when these services are used for business purposes.
Utilising Government Incentives and Concessions
Instant Asset Write-Off
As mentioned above, instant asset write-off allows small businesses to claim immediate deductions for new or second-hand plant and equipment assets.
Research and Development (R&D) Tax Incentive
For businesses involved in innovation and development, the R&D tax incentive provides significant tax offsets for costs associated with eligible R&D activities. This incentive is designed to encourage companies to engage in potentially risky but innovative projects.
Small Business Concessions
Small businesses with a turnover of less than $50 million may access a range of tax concessions including lower company tax rates, simplified trading stock rules, and the option to account for GST on a cash basis. These concessions are intended to simplify the tax reporting process and reduce the tax burden on small businesses.
Capital Gains Tax (CGT) Concessions
Small businesses can also benefit from several CGT concessions, which can exempt or reduce the capital gains from the sale of business assets. Qualifying for these concessions often requires meeting specific conditions, such as the active asset test and the $6 million net asset value test.
Loss Carry-Back
The loss carry-back rule allows businesses to offset tax paid in previous profitable years against losses made in later years. This can result in a refundable tax offset and is particularly useful in managing cash flow during periods of downturn.
Avoiding Common Tax Errors
Inaccurate Record Keeping
Poor documentation of transactions, expenses, and income can lead to missed deductions or tax penalties. Implement routine bookkeeping practices and regularly review financial records to ensure accuracy.
Missing Deadlines
Failing to meet tax filing or payment deadlines can result in fines and interest charges. Set reminders for all critical tax dates and consider using tax software that flags upcoming obligations.
Overlooking Deductions
Many small businesses fail to claim all allowable deductions due to a lack of awareness. Regularly consult with a tax professional to stay informed about what deductions and credits are available for your business.
DIY Tax Preparation
While it’s tempting to save money by handling taxes internally, complex business situations often require professional expertise. Engaging a tax accountant can prevent costly mistakes and provide strategic advice that far outweighs the cost of their services.
Ready to Elevate Your Business? Let’s Talk!
If you’re facing uncertainties in managing your tax obligations or if you’re seeking comprehensive financial planning advice, JD Scott + Co is here to assist. Our team of experts specialises in all facets of accounting and bookkeeping for SMEs, whether you need help with tax, payroll, strategic business planning, or routine financial management, we have got you covered. Contact JD Scott + Co book a consultation today.
