As we approach the end of the 2024 financial year, now is the perfect time for business owners to analyse the financial situation of their business in order to gain an understanding of the potential tax position for the 2024 financial year.
Business owners should consider engaging with their Accountant to undertake some tailored tax planning advice, where individualised strategies can be determined based on their circumstances and implemented prior to 30 June 2024. This can in fact reduce their tax liability and maximise deductions.
As tax and business advisers, we have found that many business owners do not realise the importance of tax planning and only think about it when their income tax is due for payment by which time the financial year has ended, and it is too late to reduce the impact of unexpected tax liabilities.
We believe that effective tax planning is essential and worth the time investment. It not only offers ways to reduce the tax liability for the current financial year, but also allows for the ability to budget for upcoming tax liabilities and ensure enough cash will be set aside for when the income tax is due for payment.
Another advantage of tax planning is the ability to adjust the June 2024 quarter PAYG instalment if the estimated tax liability is lower than the previous year or expectations. This adjustment would assist the cash flow of businesses by ensuring PAYG instalments are not overpaid and allowing funds to be better utilised in the running of the business.
Tax Record Keeping
To assist with your business tax planning, it is beneficial to first consider your record keeping.
As a business owner, you need to keep records of all financial transactions under Australian tax law. Ensuring your records are well organised and accounts are kept up to date and reconciled is essential for the accuracy of your taxation planning.
Great record keeping will also enable you to easily locate information and documents for your Accountant when your end of year financial statements and income tax returns are processed. This will allow you to focus on running your business rather than spending time searching for documentation.
Well organised records are also advantageous should you ever consider selling the business, as potential buyers will rely on accurate and up to date information to make informed decisions. Additionally, banks often require businesses to keep their records current to facilitate regular reviews of their KPIs and to assess the sustainability of ongoing borrowings.
Outlined below are some tax planning strategies to consider implementing before the end of the 2024 financial year.
Prepaid Expenses
Individual taxpayers not operating a business and small-to-medium business entities (entities with a turnover up to $50 million) are able to claim a tax deduction for prepayments made for an advanced period of up to 12 months after the end of the financial year.
Therefore, if a business is planning to incur significant expenses shortly after 30 June 2024, it would be beneficial to bring forward the payment of these expenses to receive the benefit of the tax deduction in the 2024 financial year, rather than wait for the deduction in the following financial year.
Expenses which would be eligible for an immediate tax deduction when prepaid include: rent, insurance, loan interest, software and other subscriptions, etc.
Now would also be a great time to review your expenditure for the 2024 financial year to ensure that all relevant expenses have been recorded. For example, a review will highlight if any expenses have been missed which were paid from a personal bank account or credit card, which is often the case.
Review of Trade Debtors
To reduce your tax liability and maximise deductions for the 2024 financial year, it is crucial for business owners to review their outstanding debtors prior to 30 June 2024 and determine whether any of their customer debts are unlikely to be recovered. If uncoverable debts are identified, these can be written off as a bad debt and claimed as a tax deduction. Additionally, for businesses reporting GST on an accruals basis, the GST adjustment associated with the bad debt can be included in the June 2024 quarterly BAS thereby reducing the GST liability for the quarter.
By strategically managing both the collection of debtors and bad debts, you can effectively reduce your current year tax liability, improve your cash flow and enhance your overall financial strategy.
Small business instant asset write-off
Eligible small business entities can claim a full deduction for all assets purchased during the 2024 financial year which cost less than $20,000. The $20,000 threshold applies on a per asset basis, so small businesses can instantly write-off multiple assets. For assets to be eligible for the instant write-off they must be first used or installed ready for use before 30 June 2024.
The Government had previously announced the extension of the $20,000 instant asset write-off for the 2023-24 financial year in the May 2023 Federal Budget, however the Treasury Laws Amendment Bill is currently before Parliament and is not yet law.
As part of the 2024-25 Federal Budget, the Government announced it will extend the $20,000 instant asset write-off by a further 12 months until 30 June 2025.
Careful consideration should be given to your business’s cash flow to ensure that assets purchased prior to 30 June 2024 in order to take advantage of the instant asset write-off deduction in the current financial year will not affect the level of working capital for the business and sufficient cash is retained for the ongoing operations of the business. Assets purchased should improve the business by helping to generate more profit, improve efficiency, etc. rather than just purchased for the sole reason of claiming the instant asset write-off and reducing your tax liability.
Superannuation Contributions
Superannuation payments for employees are only tax deductible when paid. Therefore, ensuring that the employees’ June 2024 quarter superannuation is paid and received by their superannuation funds before 30 June 2024, rather than the 28 July 2024 due date, allows you to claim the tax deduction in the current financial year.
Business owners can also look at making additional concessional contributions up to the yearly concessional contributions cap, which is $27,500 for the 2024 financial year. This approach not only allows for wealth to be accumulated, but also provides the advantage of reducing their tax obligations.
When making additional superannuation contributions, remember to check your superannuation funds end of financial year cut off dates to ensure the contributions are processed and received by your fund prior to 30 June 2024.
If you have unused concessional cap amounts from any of the previous five financial years, then you may be able to carry these forward and utilise them to increase your concessional contributions cap in the 2024 financial year. This will allow for a greater tax-deductible superannuation contribution to be made in the 2024 year. In order to be eligible, your superannuation account must have a balance of less than $500,000 at 30/06/2023.
Keep in mind that where your combined income and concessional contributions exceed $250,000, you will incur an additional tax of 15 per cent on the excess amount over the threshold on the taxable super contributions. This is known as Division 293 tax.
Division 7A Loans
Where a Division 7A loan arrangement exists from funds borrowed from a company in previous financial years, business owners must ensure that the required minimum repayment (principal and interest) is made prior to 30 June 2024. An alternative to making a cash repayment is to declare a franked dividend for the same amount to the shareholders of the company, however this could increase the individual tax liability.
For loans taken out in the current financial year there are a several options to consider prior to the end of the financial year.
- Pay the loan back to the company in full before 30 June 2024.
- Salary and wages can be reported on your June 2024 quarter BAS, however superannuation on the wages declared must also be paid prior to 28 July 2024.
- Declare a franked divided before 30 June 2024 and prepare the required dividend resolution and dividend statements.
- Have a Division 7A loan agreement entered into before the lodgement due date of the company return, if not, the funds will be treated as an unfranked dividend.
Summary
Don’t feel that you need to spend up for the sake of claiming tax deductions to reduce your tax liability, which could be detrimental for your cash flow. Remember that for every $1 spent you are only saving a portion equivalent to your tax rate. If you operate through a company, you save 25 cents per $1 spent. If you operate through a trust and receive trust distributions, or if you run your business as a sole trader, the savings are at your individual marginal tax rate.
For More Information
For more information on how your business can benefit from Tax Planning advice, please contact your Archer Gowland Redshaw adviser on (07) 3002 2699 | info@agredshaw.com.au.
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