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It's tax planning season - and personally, my favourite time of year (I'm weird like that)
So, what do you need to think about when it comes to tax savings in the lead up to 30 June? Below are our top tips for tax planning and these will ensure you are 30 June ready!
What is tax planning?
Tax planning is something us accountants start thinking about when we enter the final quarter of the financial year - those April to June months.
We're approaching the end of the financial year, but we still have enough time up our sleeve to implement some super smart strategies to minimise any tax resulting from all those glorious profits your kickass business is making.
TOP TAX PLANNING TIPS
Tip # 1 - How to spend money to save on tax
The big question here is - is a tax deduction in your best interest? Remember, to save $1, you must spend $4 - so is that worth it?
This comes down to what you're looking to buy. Do you need that fancy new car, or are you just buying it to save on tax? If there's a piece of plant/equipment that you've been eyeing off and you have the cash or finance ready to go, and the business will benefit from it, then sure, you need to consider whether to buy this (and have it installed and ready for use) before 30 June to maximise your tax deductions.
Got some cash to splash?! Here are some ideas on what you can spend your money before 30 June!
Instant Asset Write Off - to infinity and beyond
The good news here is, if you're looking at some new equipment, there is no limit on how much we can write off (immediately depreciate) for small business entities (SBE's).
Not an SBE?? - No worries! You also have the option to use temporary full expensing - which means you can still write off the full cost of that asset.
Disclosure - Capital works excluded.
Warning – Banks are silly - some of the big banks are no longer adding back depreciation when considering serviceability for finance applications - causing a massive headache with all these large depreciation figures for small businesses.
Marty McFly Time – Prepayments
Are there any expenses that you incur regularly that you could prepay? Think things like rent, consultants, accounting fees.
By prepaying these items, you can bring that tax deduction forward into the 2022 financial year - keeping in mind this means the next year you won't have it, so this is really just kicking the tax can down the road! But you could get a handy discount on some services by offering to pay upfront!
Looking after Ol Mate – Putting $$ into Super
Businesses
If you’re looking for an extra tax deduction in 2022 (who isn’t??) then consider paying your employees outstanding super before 30 June. Xero have told us to ensure funds hit to accounts by 30 June 2022 (and are therefore deductible) you'll need to process it by 20th June.
Individuals
You can contribute up to $27,500 into super during the 2022 financial year. Remember this includes employer contributions, so for those of you that are receiving salary/wages your employer will already be using up some of that cap!
Key takeaway here is that the fund must receive and process the funds before 30 June!
Disclosure - have a chat to your financial advisory about the tax-deductibility of your contributions as well as your own personal circumstance son whether this is the right strategy for you
TOP TIP # 2 - Get your shit in order (please)
Are you looking to get finance soonish? Well then, the chances are you need to maximise your taxable income - so all those tax deductions mentioned above might work against you here!
Do you want to get finance but also don't want to pay tax? Don't we all! Unfortunately, these things often do not go hand in hand. You'll need to look great on paper to the banks, which means income needs to go up, and as a result, taxes do too!
But that doesn't mean we can't implement some cool tax saving strategies in the following year - this is all about timing.
TOP TIP # 3 - The Switcheroo
Cash vs Accruals - what does that even mean?!
Cash is when you report (and pay tax) on your income when it is received into the bank. Accruals is when you report (and pay tax on) income when you invoice, not when you are paid.
Your accountant will review your circumstances (either before or after year end) to determine whether swapping you from cash/accruals or vice versa put you in a better tax position. Once again, we need to remember that putting income off this year, pushes it into the following year!
Push Income and/or Pull Expenses?
If you report on an accrual's basis (when you invoice) you can consider doing one (or both) of the following:
Pull expenses in - bring in any bills you have on hand prior to 30 June, you don't have to have paid them, they'll still be deductible.
Push income out - if you have some invoicing to do, consider whether you want to hold off sending those invoices out until July, pushing that income into the following financial year.
TOP TIP # 4 - Think of the future – time to restructure?
Different entity types pay different rates of tax. For example - trading companies that operate as Small Business Entities enjoy a lower tax rate of just 25%.
If your businesses net profit tends to fluctuate significantly between different financial years - than a different structure may provide some tax relief from the swings and roundabouts.
Trusts on the other hand can't retain profits like companies can - but they can distribute profits out to individuals/companies in a tax effective way (disclosure: this assumes your income is not Personal Services Income)
Example of how entities are taxed is below:
*Assuming the Trust can distribute to 2 minors and 3 adults
How can we help?
Are you still with me? Haven't gone completely cross-eyed just yet?
Then you sir/madam - are a legend!
Illumin8 has just kicked off our tax planning season - so if this all seems a big daunting to tackle yourself, reach out to us and we'll get planning for you!
Stay classy you cool cats and kittens 🤙
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