2024 Tax Planning Guide for Business Owners

As June 2024 draws near, small business owners find themselves navigating a landscape marked by economic challenges and opportunities. In the face of rising inflation and continuous interest rate hikes, many Australian businesses are feeling the strain on their cash flow and financial stability. The Reserve Bank’s efforts to curb inflation have resulted in higher operating costs, making it crucial for small business owners to adopt effective tax planning strategies to maintain their financial health.

In this final instalment of our year-end tax planning toolkits series, we turn our attention to the unique needs of small business owners. At Investax Group, we recognise the critical role that small businesses play in driving the economy, and we are committed to providing you with the tools and insights needed to optimise your tax position. This comprehensive guide aims to help you navigate the complexities of business taxation, offering practical strategies to reduce your tax burden and enhance your financial resilience.

Whether you’re managing a startup, a growing enterprise, or a well-established business, our goal is to equip you with actionable advice that aligns with your business objectives. From leveraging tax deductions and credits to strategic planning for cash flow management, this guide covers essential aspects of tax planning tailored to small business needs. If you need immediate assistance or personalised tax planning advice, our team of Investax Group business tax specialists is here to support you. Let’s delve into the key tax planning strategies for small business owners to ensure you are well-prepared for the end of the financial year.

Record Keeping 

As a small business owner, maintaining accurate and comprehensive records is not just good practice—it is a legal requirement. You are obligated to keep records of all transactions related to your tax, superannuation, and registration affairs throughout the lifecycle of your business, whether you are starting, running, selling, changing, or closing your business. This diligent record-keeping includes any documents that relate to your small business’s income and expenses, ensuring that you can substantiate all claims and deductions made on your tax returns.

Additionally, you must retain any documents containing details of elections, choices, estimates, determinations, or calculations you make concerning your small business’s tax and superannuation affairs. This includes maintaining clear records of the basis or method used to arrive at these estimates, determinations, or calculations. Proper documentation ensures that you can provide evidence of your compliance with tax laws and helps you avoid potential disputes with tax authorities. By keeping meticulous records, you not only fulfill your legal obligations but also gain valuable insights into your business’s financial performance, aiding in better decision-making and strategic planning for your small business.

Note – You must keep all your business records for five years.

Prepayments 

Prepayment can be a powerful strategy for small business owners looking to manage their tax obligations more effectively. By making advance payments on certain expenses before the end of the financial year, businesses can potentially bring forward deductions, reducing their taxable income for the current year. The ATO allows business owners to claim prepayments if they are for a period of 12 months or less and do not extend beyond the next financial year. Prepaying expenses such as rent, insurance, or even certain supplies can lead to significant tax advantages. Let’s delve into a few key prepayments that can help business owners optimize their tax position.

Prepayment of Superannuation Payment 

The Superannuation is tax-deductible for business owners when it is paid. While the superannuation for the April to June quarter is not due until July, you have the option to pay it in June, thus allowing you to claim the superannuation tax deduction in your 2024 financial year (FY) tax return rather than in 2025. This means you can process and pay your June quarter superannuation liability in June to make it tax-deductible in the 2024 FY. If you are a monthly superannuation payer, you can also process and pay the June month’s superannuation before June 30 to benefit from the deduction in the current financial year. This proactive approach can provide immediate tax relief and improve your cash flow management.

Prepayment of Rent 

One effective strategy for small business owners to manage their taxes is prepaying rent. By paying up to 12 months of rent in advance in June 2024, covering the period from June 2024 to June 2025, you can claim the entire rent amount for the 2025 financial year on your 2024 tax return. This means you’ll reduce your taxable income for the current year, which can lower your tax bill.

Prepaying rent can also help you plan your finances better, as you’ll have a major expense already taken care of. This approach not only provides immediate tax benefits but also gives you more financial stability and predictability for your business.

Prepayment of Loan Interest 

Businesses typically pay loan interest monthly. However, if your cash flow permits, you can prepay up to 12 months of interest in advance in June 2024. By doing this, you can claim the entire interest amount for the next 12 months in your 2024 financial year tax return, rather than spreading the deductions out over the following year.

Prepaying interest can be a strategic move to reduce your taxable income for the current year, offering immediate tax savings. This approach is particularly beneficial if you anticipate higher income in 2024 and want to take advantage of the tax deduction now. It also provides a more predictable financial outlook by covering a significant expense in advance, which can help stabilize your business’s cash flow. By planning ahead and prepaying interest, you can optimize your tax position and enhance your business’s financial management. Let’s delve into other key prepayments that can help business owners maximize their tax benefits.

Note – If you expect a large profit in 2024, prepayment can help minimize your tax liability.

Superannuation Contribution for Business Owners 

If you’re self-employed as a sole trader, part of a partnership, or running your business through a trust structure, you’re not required to pay superannuation guarantee contributions for yourself. The superannuation guarantee applies only when you declare wages as an employee of the business entity. However, you can choose to make personal superannuation contributions to minimize your tax liability and save for your retirement.

Making personal super contributions is a strategic way to reduce your taxable income, as these contributions are tax-deductible. To claim this deduction, you must notify your super fund of your intent to claim a deduction and receive an acknowledgment from the fund. This process ensures that your contributions are properly documented and recognized for tax purposes. By planning your super contributions, you can enhance your financial security in retirement while also benefiting from immediate tax savings. and get an acknowledgement from the fund. 

Note – To claim a tax deduction for your personal super contributions, you must submit a notice of intent to your super fund and receive their acknowledgment.

Claiming Bad Debts 

As a business owner, you can claim a tax deduction for income that cannot be recovered from a customer or debtor, also known as a ‘bad debt.’ If you reported this income in your 2023 tax return as assessable income and later find out in the 2024 financial year that your client or customer will not pay, you can write it off as bad debt in this financial year.

To qualify for this deduction, the debt must still exist and not have been dealt with in any other way. This means you must not have waived, forgiven, or extinguished the debt through other means, nor should you have sold it.

This deduction is particularly relevant for businesses that lodge their tax returns on an accrual basis, as they report income when it’s earned, not when it’s received. If you lodge your tax return on a cash basis, you generally only report income when it is actually paid to you.

GST Consequences for Bad Debt

If you handle GST on an accrual basis, you can reduce your GST owed for a bad debt if:

• You made a taxable sale and have paid GST to the ATO for that sale.
• You have not received the payment, either in whole or in part, for the taxable sale.
• You write off the debt as bad or the debt has been overdue for 12 months or more.

By understanding and properly handling bad debts, you can optimise your tax position and ensure compliance with tax regulations.

Note – You can claim an unpaid debt if you reported it as income in the previous financial year.

Instant Asset Write-Off 

On 14 May 2024, the government announced as part of the 2024–25 Budget that it will extend the $20,000 instant asset write-off for small businesses by another 12 months, until 30 June 2025. This initiative aims to improve cash flow and reduce compliance costs for small businesses. The extension was initially announced in the 2023–24 Budget.

Here’s what this means for small businesses:

• Eligibility: Small businesses with an aggregated turnover of less than $10 million can immediately deduct the full cost of eligible assets costing less than $20,000.
• Timeframe: This applies to assets that are first used or installed ready for use between 1 July 2023 and 30 June 2025.
• Multiple Assets: The $20,000 threshold applies per asset, so you can instantly write off multiple assets, each costing less than $20,000.

For assets valued at $20,000 or more that cannot be immediately deducted, these can be added to the small business simplified depreciation pool. These assets will be depreciated at 15% in the first year and 30% each year thereafter.

Note – Be cautious when claiming this benefit, as these measures are not yet law.

Review Asset Register 

As a business owner, regularly reviewing your asset register is crucial. The asset register helps you keep track of all your business assets, including those that have been scrapped or disposed of. Writing off the tax written down value of these assets can significantly reduce your taxable income, offering a valuable tax benefit.

However, it’s important to be cautious with assets that have benefited from the instant asset write-off or temporary full expensing. These assets may already have a nil written down value for tax purposes, even if they still show a higher value in your accounting records. Ensuring accuracy in your asset register not only aids in compliance but also helps you make informed financial decisions regarding asset disposal.

Trade in or Sale – When evaluating the tax impact of assets that have been traded in, transferred, or sold, it is crucial to closely examine those that benefited from the instant asset write-off or temporary full expensing in the prior year. These specific tax treatments can significantly influence the tax implications of your asset disposals.

For assets that were fully expensed under these schemes, the tax written down value may be zero, even though they might still hold a significant value in your accounting records. This discrepancy can result in unexpected tax consequences when the asset is disposed of, as the difference between the sale price and the written down value needs to be accounted for in your tax return.

Car Acquisition- For car acquisitions, remember there is a limit on the amount of the cost you can depreciate for tax purposes. Any excess above this limit is not depreciable. The car cost limit for the financial year ending 30 June 2024 is $68,108 ($69,674 for 2025FY), and this threshold applies regardless of the car’s fuel efficiency.

GST – If you buy a car and the price is more than the car limit, the maximum GST credit you can claim (except in certain circumstances) is one-eleventh of the car limit. For the 2024–25 income year, the maximum GST credit you can claim is $6,334 (that is, 1/11 × $69,674).

Note – Writing off assets reduces income tax, but disposing of them can create unexpected tax implications.

Delaying Assessable Income

If you have the flexibility, consider delaying your income—whether it’s business income or capital gains—as this can reduce your tax liability for the current financial year. For businesses operating on an accrual basis, you must report income for any invoices raised, even if they are issued in the last week of June. To manage your tax burden more effectively, consider delaying the issuance of invoices until after the financial year ends, if feasible. This strategy can help lower your taxable income for the current year and potentially reduce the amount of tax you owe.

If you are considering disposing of any assets, it may be beneficial to delay the disposal. As a small business owner, you have likely used the instant write-off method in recent years, resulting in a written down value of zero dollars in your accounting records. Disposing of or trading in these assets for an amount greater than zero will trigger assessable income, increasing your tax liability. By postponing the disposal, you can better manage your taxable income and potential tax implications.

If you are considering selling any business real estate, investments, or property, it may be advantageous to delay the sale until after June 30. By postponing the sale, you can defer the capital gains and any associated tax liabilities to the next financial year. This strategy allows you to manage your taxable income more effectively and potentially reduce your tax burden for the current financial year.

Note – Consider delaying income and asset disposals to reduce your tax liability 

Stock Take 

Valuing trading stock correctly is crucial for accurate tax reporting and optimising your business’s tax position. For tax purposes, business owners can value trading stock at cost, market selling value, or replacement value. It’s important to review your method for valuing trading stock annually rather than automatically using the same method as last year. Assess whether your current method is still suitable, or if a different method might be more appropriate, especially considering factors like obsolescence or special circumstances affecting stock value.

Conducting a stocktake on 30 June is a recommended business practice. This allows you to evaluate older or slow-selling product lines, which can justify any necessary write-downs in stock value. Properly valuing your trading stock can reduce your taxable income and improve your financial position.

Keep thorough records to substantiate your stock valuation calculations. Accurate record-keeping not only ensures compliance with tax regulations but also supports your financial decisions and tax planning strategies. By carefully managing your trading stock valuation, you can optimise your tax outcomes and enhance your business’s financial health.

Note – Trading stock can be valued at cost, market selling value, or replacement value. 

Repairs and Maintenance 

If your business uses large machinery or premises, consider undertaking repairs and maintenance before 30 June to maximize your tax benefits. This strategy can be particularly beneficial across various industries, including dairy, fishing, construction, manufacturing, and agriculture, where heavy machinery and equipment are critical to operations.

For example:

• Dairy Industry: Regular maintenance of processing and packaging machines ensures smooth operation and prevents costly breakdowns. Completing these repairs before the end of the financial year allows you to claim the expenses as deductions in your current tax return, reducing your taxable income.
• Fishing Industry: Fishing vessels often require extensive repairs and maintenance to remain seaworthy and efficient. Scheduling these necessary works before 30 June can provide immediate tax relief by allowing you to deduct the costs in the current financial year.

• Construction Industry: Heavy machinery such as excavators, cranes, and bulldozers are vital for construction projects. Performing necessary maintenance and repairs on these machines before the financial year ends can result in significant tax deductions.

• Manufacturing Industry: Factories rely on various types of machinery for production. Ensuring that machines such as assembly lines, conveyors, and robotic systems are well-maintained and repaired before 30 June can help you take advantage of tax deductions.

• Agriculture Industry: Tractors, harvesters, and irrigation systems are essential for farming operations. Conducting repairs and maintenance on this equipment before the financial year ends can help optimize your tax position.

By planning and executing repairs and maintenance within this timeframe, you not only enhance the operational efficiency of your business but also optimise your tax position. 

Note – Complete repairs and maintenance on heavy machinery before 30 June to maximize tax deductions

Considering Tax-Friendly Business Structures

When structuring your business, it’s crucial to consider tax-friendly options such as trusts and companies. These structures offer significant tax advantages and can provide enhanced asset protection. For example, a company can benefit from a lower corporate tax rate, which may reduce the overall tax burden compared to individual tax rates. Trusts, on the other hand, can distribute income to beneficiaries in a tax-efficient manner, potentially lowering the total tax paid by taking advantage of the lower tax brackets of individual beneficiaries.

In addition to tax benefits, trusts and companies provide a layer of asset protection. Assets held in a trust are generally protected from creditors, as the legal ownership of the assets lies with the trustee, not the individual. Similarly, a company structure can shield personal assets from business liabilities, as the company is a separate legal entity. This separation can safeguard your personal wealth from potential business risks, providing peace of mind and financial security. 

At Investax, we focus on proactive tax planning for business owners, with business structure being a key component of our strategy. The right structure plays a crucial role in tax planning, asset protection, and exit strategy. A well-chosen structure can significantly impact the future growth and success of your business. By carefully choosing the right structure, small business owners can optimize their tax position and protect their assets, ensuring a robust foundation for future growth and stability. If you would like to know more about why you should operate your business through a company, please feel free to check out our article that specifically covers various advantages of a company structure. If you would like to know more about trust structures, feel free to read our article, “6 Essential Reasons to Choose a Discretionary Trust for Your Business.”

Note – The right business structure ensures effective tax planning, asset protection, and succession planning.

Bonus Tips 

Trust Resolution before 30 June 2024- The Australian Taxation Office (ATO) has specific guidelines regarding trust resolutions for profit distribution that must be adhered to before 30 June each year. Trustees of discretionary trusts are required to make and document their resolution on how the income of the trust will be distributed to beneficiaries by this date. Failing to do so may result in the trust’s income being taxed at the highest marginal rate. The resolution must be clear and unambiguous, detailing the distribution of income to each beneficiary. This requirement ensures that the trust complies with tax obligations and provides transparency in the management of trust income. 

Division 7A Loan – Division 7A of the Australian Taxation Office (ATO) guidelines addresses the treatment of loans made by private companies to their shareholders or associates to prevent profits being distributed in the form of tax-free loans. It is crucial for companies to review these loans by 30 June to ensure compliance and avoid adverse tax consequences. This date serves as an important checkpoint to assess the balances of shareholders’ or directors’ loans, identifying any potential Division 7A loans. If these loans are not repaid or converted to compliant Division 7A loan agreements within the specified period, they may be deemed as unfranked dividends, resulting in significant tax liabilities for the recipients. Regular monitoring and proper documentation of these loans help maintain tax compliance and ensure that the company’s financial practices adhere to ATO regulations.

Franking Account Balance – The franking account balance is a critical aspect of tax planning for business owners, as it directly indicates the capacity of a company to issue franked dividends. This balance essentially represents the amount of tax-paid profits available for distribution to shareholders with accompanying franking credits, which can offset their own tax liabilities. By reviewing the franking account balance at the end of the financial year, business owners can make informed decisions about issuing dividends. If the balance is sufficient, withdrawals by shareholders can be structured as franked dividends, thus providing tax benefits to shareholders.

In conclusion, effective tax planning is not just a year-end activity but a crucial component of your overall business strategy. The right approach can significantly impact your cash flow, financial stability, and long-term growth prospects. As you navigate the economic challenges and opportunities of 2024, implementing the tax strategies outlined in this guide can help you optimize your tax position and enhance your business’s financial resilience.

At Investax Group, we understand that each business is unique, with its own set of challenges and goals. Our team of specialist tax accountants is committed to providing tailored advice that aligns with your specific needs. Whether you are looking to maximise deductions, improve cash flow, or strategically plan for future growth, we are here to support you every step of the way.

If you believe your growing business could benefit from expert guidance, don’t hesitate to reach out to Investax Group. Contact us today to schedule a consultation and ensure your business is well-prepared for the end of the financial year and positioned for continued success. Let us help you navigate the complexities of business taxation with confidence and precision.

Reference

ATO  – Prepaid Expenses 

ATO – notice of intent

ATO – Bad Debt 

ATO – Car Threshold