As the end of the financial year looms closer, business owners and managers should be gearing up for the extra tasks involved in getting their accounts in order, ready to present to their accountants. However, they should also have been working with their accountants to develop a tax plan, well before this part of the year.
Tax planning is a process with the potential to reduce a tax liability legally, but only if it is approached in a proactive, purposeful manner with a clear objective, and well before financial year end. Leaving it until after 30 June gives accountants little to work with, as they are reviewing transactions that have already happened. This historical information cannot be changed, so any opportunities that there may have been to save tax have already been lost.
There are many ways to reduce tax liabilities, some complex and suitable only in certain circumstances, and others that are used regularly and which apply to most businesses. The most common are methods to defer income in the current financial year while at the same time bringing forward deductions. This should reduce the income on which the tax liability is calculated.
If you are a business owner who has not yet discussed tax planning with your accountant, here are five of the most widely used methods to start you thinking about the possibilities.
- Bad Debts are the bane of every business, but by reviewing your debtors early, you should be able to identify those unlikely to be recovered. Write them off before 30 June, thus reducing your income tax. If you are registered for GST on a non-cash basis, this should also generate a GST refund.
- Defer the derivation of income if the business can viably do so. This can be done by holding back some invoices if possible until after 30 June. This reduces the income for the current financial year and drops it into the next financial year.
- Check the timing of expenses, as they are only deductible when they have been incurred. Some accruals and provisions are not deductible, as they do not relate to an existing liability, so by checking them in advance it may be possible to bring them into the current financial year.
- Bonuses paid to staff are only deductible when the business is committed to paying them, so make sure that at 30 June there is evidence of this commitment.
- Prepare in advance for a stock take on 30 June and during this process, identify obsolete or old stock that can be scrapped or written down to its market value. This is likely to be less than the accounting value currently on the books.
These are just a sample of the possibilities that an accounting firm like Carbon Group can open for your business. Contributing to superannuation, investing in tax effective products and diminishing the adverse effects of fringe benefits tax are others. Accountants who are up to date with current tax laws will have other initiatives that may suit your type of business. They will assist you to review your current business structures to identify any changes that will reduce your tax liability and increase your wealth.
There are many more methods available to you if you start your tax planning strategy now, well before financial year end. With a viable tax plan in place that suits your business needs, you will be ready to face 30 June, not with trepidation but with confidence.