For business owners, as we approach the End of the Financial Year, it is important to gain a true understanding of your potential tax position and establish a variety of business strategies for EOFY 23 and leading into FY24.
One of the most effective ways for all entity types to achieve this and implement the appropriate actions is through Tax Planning. As tax and business advisers, we have found that most business owners don't realise how much they are paying in tax and that there are a number of legal ways to structure your tax affairs effectively.
By participating in tax planning sessions, as a business owner you will be able to gain clarity on your projected taxable income, allowing you to make more informed business decisions.
Additionally, as you look to minimise your tax obligations and maximise claims, you may find that the business benefits from improve cash-flow, move the business towards a stronger financial position, and/or generate potential growth opportunities.
Tax Planning Strategies to Consider ahead of End of Financial Year
To assist in preparing for potential tax planning sessions, it may be beneficial to first consider some solutions to implement ahead of time.
We've listed a few basic tips below, including the following:
Keep Accurate Records
It goes without saying, ensure these are current and reconciled.
Prepaying 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.
Certain prepaid expenses may include insurance costs, software subscriptions, or loan interest, etc.
For these taxpayers, making prepayments accelerates the timing of the tax deduction that would otherwise be ordinarily claimable in the following Financial Year. Similarly, by prepaying expenses for the New Financial year ahead of time, you may be able to reduce your overall Net Tax position.
Reviewing debtors
Taxpayers with outstanding debtors should review them to determine whether any are 'bad debts' and can be written off prior to 30 June 203 in order to claim a 'bad debt deduction'.
Bring forward any asset purchases & utilise Temporary Full Expensing support measures
Extended until 30 June 2023, the Temporary Full Expensing measure allow eligible businesses to deduct the full cost of eligible depreciating assets.
A business qualifies for Temporary Full Expensing if it has an annual aggregated turnover less than $5 million.
For the 2023 Income Year, an eligible entity can claim a deduction for the business portion of the cast of:
- eligible new assets acquired from 7:30PM AEDT on 6 October 2020 and first-use or ready-for-use by 30 June 2023;
- eligible second-assets where both the asset was acquired from 7:30PM on 6 October 2020 and first-used or installed ready-for-use by 30 June 2023, and the entity's aggregated turnover is less than $50 million.
Similar to the prepayment strategy, if you have any planned asset purchases, ensure these are done before 30 June 2023 to realise the tax deduction in the current year.
With the above Temporary Full Expensing measure concluding at End of Financial Year, as part this year’s Federal Budget announcements, businesses will have the opportunity to temporarily write-off asset purchases immediately from 1 July 2023 until 30 June 2024.
The temporary changes to the small business Instant Asset Write-Off will allow those with an aggregated annual turnover of less than $10 million to deduct the full cost of eligible assets costing less than $20,000 that are first-used or installed ready for use between the one year period. The $20,000 threshold will apply on a per-asset basis, so small businesses can instantly write-off multiple assets.
Those considering a significant asset purchase prior to the EOFY period, the extension of the Instant Asset program (and uplift from $1,000 to $20,000) could allow for better cash-flow management, with purchase decisions now no longer needed to be made prior to New Financial Year.
Utilise the Company 'Loss Carry Back' Tax Offset
You might make a loss in an income year as a result of claiming an immediate deduction under temporary full expensing. Instead of carrying the tax loss forward and using it to offset your future income, you may be eligible for a refundable tax offset under the 'loss carry back' measures.
The temporary offset allows eligible companies, with an aggregated turnover of less than $5 billion, to carry-back losses incurred in the 2020 to 2023 Financial Years, to be used against profits taxed in a previous year - 2019 or later.
These companies will receive a refundable tax offset in the year they made a loss, if they elect to use this mechanism when they lodge their tax return. Where the choice to carry back tax losses results in a tax refund, this will increase business cash-flow.
The losses carried back must not be more than earlier taxed profits and must not result in a franking account deficit. Any tax losses that are not offset in full against previous taxed profits, or not elected to be used, will be carried forward as normal.
As highlighted, the 'loss carry back' measure in only available until 30 June 2023.
Make deductible Superannuation contributions
Ensuring Superannuation contributions for employees are paid and cleared by 30 June 2023 can maximise your superannuation deductions come End of Financial Year.
Similarly, tax planning can be used to calculate extra Concession Contributions which can be made against the Concessional Contribution Cap at $27,500.
Div7a Loans
Business owners who have borrowed funds from their company in previous years must ensure that the appropriate principle and interest repayments are made by 30 June 2024.
Current year loans must be either paid back in full, or have a loan agreement entered into before the due date of lodgment for the Company return, if not, that fund will be treated as an unfranked dividend under Division 7A.
Manage Cash-Flow and plan for Tax Payment Due Dates
Most business owners experience cash-flow 'highs' and 'lows' as they purchase supplies and equipment, pay employees, and collect payments. Large tax bills can hijack cash-flow, putting pressure on businesses and household finances.
Scheduling tax payments ahead of time and budgeting for them well in advance will reduce future stress and position you for steady success.
Overall, the May and early June period is a terrific time to consider these requirements. In doing so early will allow for a full review of your cash-flow figures based on the previous quarters and will help in establishing future projections across the forthcoming months.
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