It is that time of year when business clients require tax planning. Tax planning prior to April can be rather useless for businesses as most have a level of unpredictability about their performance. By the end of March we have a reasonable idea of how the business has travelled and can make some predictions on how much tax could be payable and if there is anything we can suggest to minimise this.
May and June have been jam packed with tax planning meetings with my clients. I thought I would share my approach to tax planning which may help as the financial year draws to a close.
Make sure the accounts are up to date and correct
It may sound obvious but without updated financial accounts it is impossible to do any tax planning. My first step is to not only check that the accounts have been updated, but to do some mini reconciliations of the accounts to ensure that they are reasonably correct. Below is a list of the things I find most likely to be misrepresented in the accounts, particularly in the Profit & Loss Statement (P&L) which we use to calculate your tax.
· Wages and Salaries – your wages & salaries should agree to your payroll reports. When you run payroll a journal is automatically created recognising your payroll expenses (wages and superannuation) and your liability to pay these wages (either under a Wages Payable, Payroll Clearing or Superannuation Clearing account). When the wages are actually paid from the bank account they should be recorded against the liability account.
We often see clients record the actual payment of the wages to the wages expense account. This is double counting of the wages in your profit & loss and will significantly alter the end profit result. In addition some clients record their drawings as wages, again over stating the expenses.
Check that your wages do agree to your payroll report and if there are some additional transactions in their move them to the correct account.
· Superannuation – In the same way that wages can be recorded as an extra expense when paid, superannuation is often double expensed. Make the same check as you would for wages to ensure the superannuation expense agrees with the payroll reports.
In addition, check to see if any of the superannuation you paid is not tax deductible. If you are unsure about the late payment of super read my article here. If you have paid late superannuation, unless it was declared AND paid during the superannuation amnesty, your superannuation will not be tax deductible.
· Income tax payments – while income tax payments are an expense, they are recorded from after tax profits. Your profit is calculated, the tax is calculated and what is left is your after tax profit. I often see the P&L being run to include income tax payments which gives a false sense of the business profit position. Exclude those income tax payments from your calculation, or better still record them to an Income Tax Payable account on your balance sheet.
· Dividends and Drawings – Like income tax, a dividend is an after-tax item. You do not get a tax deduction for paying a dividend. Drawings can also be lumped in as an expense to the business but really should be shown on the balance sheet rather than in the P&L.
· Loan Repayments – Loan repayments are not tax deductible, they reduce a liability. The interest on these loans is likely to be tax deductible. Make sure loan repayments, including those for Equipment Loans or Chattel Mortgages for motor vehicles, are not included in your P&L.
· Coding of Stimulus money – The two main forms of stimulus money last year are Jobkeeper (which is taxable income) and Cashflow Boost (which is not taxable income). Both of these items should be shown as income in your P&L. Many clients have confused these payments or not recorded them correctly. You may need some help from your accountant or bookkeeper if you are not sure.
COVID Grants in particular can be a reasonable amount of money and should properly be factored into your tax estimates.
Temporary Full Expensing of Assets
Most clients are very aware of the fact that assets can be written off in full this financial year, but I urge you to check your tax return for the prior year as many businesses had already written off their assets in 2021.
Part of the COVID-19 Stimulus Measures were to increase the Instant Asset Write Off to $150,000. While there have been various changes to the levels of Instant Asset Write Off and the eligibility to access these write offs, if you are a small business you will have had the $150,000 write off available to your business at 30 June 2020.
If you have elected to use the small business depreciation rules you could write off the balance of your Small Business General Asset Pool as at 30 June 2020 if the balance was less than $150,000. Many businesses were eligible for this last year and wrote off their assets in full. If that applied to you, unless you have purchased new assets this year, you will not have any depreciation.
If you pool was not written off in full last year, it will be this year. In fact, the ATO rules do not give us an option. We must write off the pool balance this year. For some businesses this will be a significant amount of depreciation.
Understanding how much depreciation will be applicable to you this year will be fundamental to your tax planning. If you are not sure, ask your accountant.
Paying tax on a Cash or and Accrual Basis
This is another instance where you may need to ask your accountant. This is also NOT necessarily linked to the way you prepare your Business Activity Statement.
As a small business you can elect to pay your tax on a Cash or an Accrual basis. If you pay tax on a Cash basis you only pay tax on the money you have received, and claim deductions on the money you have paid during the year. If you pay tax on an Accruals basis you include the invoices raised for the year (even if they have not been paid) and any Accounts Payable that have not been paid.
If you are using Xero or QBO you can run your P&L reports on a Cash or an Accruals basis so check with your accountant to make sure you are looking at the correct report. The results can be quite different particularly if you have large swings in your Accounts Receivable balances.
So what is your position?
Now that you have an idea of your Profit and Loss figure, including depreciation, you need to look at any items that are not taxable or tax deductible.
The main non-taxable item is the Cashflow Boost. While there may be some other small business grants that are non-taxable, assume they are. Most will be taxable income.
The main non- deductible items are fines, entertainment and superannuation that has not been paid or not paid on time.
Where there any carried forward tax losses from last year? Check your tax return to find out. If you do have carried forward tax losses, add them into your calculations.
What is the result? Is there a profit that will need to be taxed, or a loss?
If there is a loss
Depending on your structure you may be able to get some benefit out of a tax loss. If you trade out of a company (and this is only relevant for companies) you may be able to access the new Tax Loss Carry Back provisions giving you a refundable tax offset for taxes paid in 2018-19 or 2019-20. There are a number of conditions to this but the ATO is expecting this to work in conjunction with the Temporary Full Expensing of assets to help cashflow for small businesses. Your accountant should be able to help you access this rebate at tax time if it is applicable.
If you are trading out of a different structure you probably don’t need to do too much more.
If there is a profit
Let’s face it, we are in business to make money and making money means that we pay tax. Making a profit is an awesome thing, however you may want to consider ways to minimise the amount of tax you need to pay this year.
Things to consider:
· Is there anything you need to purchase prior to the end of the year? If you have been considering getting that new laptop and have the cashflow to do it, maybe it is time to make that purchase. We see a lot of money changing hands between businesses at this time of year so that tax deductions are maximised.
· If you have invoices to raise that can be delayed until 1 July, consider delaying them. Particularly if you pay tax on an accruals basis (although you might find the invoice is paid quickly if someone else is trying to get a tax deduction for it).
· Look at prepaying some expenses. The small business prepayment rules apply if your turnover is less than $10 million. This means that you can prepay expenses that will be used in the next 12 months and claim the deduction now. Examples could include rent or interest payments.
· Consider making additional superannuation contributions for the business owners. There are limits on how much you can contribute to superannuation and specific ways to do this, but seek advice if you are considering this. You need to make sure any contributions have been received prior to 30 June to be deductible.
If you have a Discretionary Trust
If you use a Discretionary Trust for your business you need to make the decision around how income is to be distributed prior to 30 June. Even if the trust appears to be in a loss position you should be making that decision now. You may need some help from your accountant to make this decision, and record it so there is no doubt that the decision was made in this financial year.
One final word on Division 7A
If you have been drawing money out of the business other than as wages, see if you need to repay any of this (or can repay any of this). If you don’t cover your drawings, your accountant will need to look at how to cover these which will impact the way your taxes are prepared.
If you have existing Division 7A loans make sure the minimum payments have been made. Again this is something you may need to discuss with your accountant.
You should seek advice
This is quite complicated stuff and any tax planning really should be done with the assistance of a professional but hopefully this gives you an idea of some of the steps I run through for tax planning. Remember, every business is unique. There is no one size fits all and the structure of your business, the nature of the business you are operating and the circumstances of the individuals involved will all play a part.