As the end of the financial year approaches most business owners are giving thought to the tax they may have to pay and how they could reduce this. The simple approach has been to put more money into super. While this may be good personally, it can put cash flow pressure on your business. The more astute business owners see tax as an expense that needs to be managed. They take the time to consider a range of options. These options include ways that reduce tax without reducing the business’s cash flow.
Most business owners hate paying tax. Cash flow is critical to a business surviving and thriving. Good tax planning recognises the tension between these and finds strategies that can hold them in balance.
Good tax planning firstly quantifies the likely tax that the business and the owners will pay. This is based on real up to date financial data with best estimates for the balance of the year. Once quantified the tax problem can be better managed. The strategies for a business differ to whether it considered a small business or not. A small business is one where the revenue for it and its related entities combined is under $2million.
A small business has a number of tax concessions available to it that have minimal impact on cash flow. These include:
• Immediate write off of depreciating assets up to $6,500 and $5,000 of motor vehicles costs. This was meant to stop from 1 January, but the bill has not been passed.
• Prepayment of expenses up to 12 months in advance.
• Better depreciation through the use of pools.
• Ability to use cash accounting where appropriate. This means if customers have not paid you, you do not have to pay tax on the income.
The types of strategies for small and larger businesses that leave cash flow intact include:
• Paying your super contributions prior to 30 June.
• Obsolete or out-dated stock write-off.
• Ensuring sufficient action has been taken on bad debts by 30 June that they qualify for a deduction.
• Use of the overnight travel allowances that do not require substantiation.
• Bringing forward expenses that you were going to make in July or August.
Changes in the budget will drop company tax rates to 28.5% from 1 July 2015 widening the gap between personal income tax rates. Income over $180,000 next year will be taxed at 49%, which is 20% higher than company rates. This creates a planning opportunity to build up personal credit loan balances in your company now so that you can maximise the benefits of the lower company tax rates.
With the marginal tax rates for income up to $180,000 this year being only 38.5% this is a good opportunity to clear loans you have from the company and set yourself up to take advantage of lower tax rates. Clearing up these “Division 7A” loans will save your company tax and remove your personal exposure to risk.
Tax planning before 30 June gives you maximum opportunity to reduce your tax and plenty of time to put aside the cash you may need to pay.
Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au
View LinkedIn profile – http://www.linkedin.com/pub/peter-ambrosiussen/29/171/a24
Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 31 May 2014