Here’s how to set your business up for success in 2021 and beyond with a solid tax strategy:
You can almost hear the exhale as businesses of all sizes breathe a collective sigh of relief that the year of Covid is in their rear-view mirror. And there’s a lot to get excited about in 2021.
For starters, this end of financial year (EOFY) is shaping up to be a lot less taxing. We asked tax expert and author of 101 Ways to Save Money on Your Tax – Legally!, Adrian Raftery, to break it down for us.
Here’s what you need to know so you can make the most of the opportunities on offer for your business.
What’s new?
There are a few changes to the tax system to get across this financial
year.
“Most Covid-19 stimulus payments, such as JobKeeper, are
coming to an end,” Raftery says. “Although the JobMaker hiring credit is still available for each
eligible additional employee aged between 16 and 35 that businesses hire, up
to 6 October 2021.”
The good news is the company tax rate has dropped to 26% for small businesses this tax year and falls even further next year to 25%. Tax rates are also lower this year for sole traders. Plus, from 1 April this year, small businesses will be eligible for fringe benefits tax (FBT) exemptions for car parking benefits and work-related portable electronic devices.
While it’s a good idea to fully explore all the available options to keep a lid on your tax bill, Raftery recommends you take these three steps in the lead-up to 30 June to get your tax on track.
1. Clean up your books
Tax time is an opportunity to reconcile any bad debts.
Now is the time to look at writing off any of these bad debts that have been sitting on the books this financial year. Check the ATO’s rules around bad debts as your accounting method will dictate the steps you take.
“Put decisions about write-offs in writing in board minutes,” Raftery says. “To prove a debt is bad, you also need to show you have made a genuine attempt to recover it.”
Don’t forget you can write off stock you can’t sell before 30 June to get a tax deduction for this financial year.
And be smart about how you value the stock. “Value trading stock at the lower cost out of actual cost, replacement cost or market value,” Raftery says. “You can choose the valuation method for each item of trading stock.”
2. Consider your deductions
It’s often a balancing act as the end of the financial year comes round, between accessing the many EOFY sales on offer – to upgrade your equipment and meet your operational needs – and minimising the drain on cash to your business that any purchase will be. This is where you need to be laser focused on what makes sense as a tax deduction now, what is better put on hold, and the impact these decisions will have on your profit and loss in the eyes of the tax office.
Some great tax concessions have been introduced over the past few years for small businesses, such as the instant asset write-off for new business assets. It means you can immediately claim a tax deduction for new computers, printers and technology, office furniture or other allowable business expenses. But don’t forget, you’ll only get a percentage of the asset’s value back, and you need to weigh up how any purchases might affect cashflow.
“If your business is registered for GST, you can claim the 10% GST credit
first up and get an immediate write-off for the balance in this year’s tax
return,” Raftery says.
After 1 July 2022, the instant asset
write-off reverts to $1000 for small businesses with turnover of less than $10
million. “But we expect this will change between now and the end of the
2022-23 tax year.”
It’s also worth understanding whether any large business purchase might mean the business makes a taxable loss this year, despite making a profit on paper. “This means you could potentially claim a loss carry back and get the tax back that was paid by the company in the 2018-19 and 2019-20 tax years,” Raftery says.
3. Think about delaying invoicing
Accountants often talk about how deferring taxable income to the next financial year can help cut your tax in the current financial year – with the exception being when the marginal tax rate is increasing.
“If you operate your business on a cash accounting basis, simply delay receipt of the income,” Raftery says. “If you operate on a non-cash basis, you may want to defer invoicing until the next financial year.”
Tax is complex and the rules around it constantly change. So it’s worth using the services of an accountant to help you stay within the lines, and at the same time, claim all the allowable deductions you can.
Implementing a tax strategy can make forecasting easier, and future-proof your
business.
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