How to reduce your business tax bill before 30/06/2022?
For many small business owners, the end of each financial quarter signals added stress and a hefty tax bill.
Fortunately, there are plenty of simple and legitimate ways you can cut down on your small business tax bill while meeting all your tax obligations.
Here’s a list of what you can start doing now and what you can begin to plan for before the end of financial year.
Tax depreciation incentives
Numerous tax depreciation incentives have been introduced or extended in the prior year. The various measures have different eligibility requirements and application dates. It is also necessary to consider the interactions between the different measures. In effect most businesses should be able to write off the full amount of the cost of eligible depreciable assets in the 2022 income year.
The application of these rules generally depends on:
The turnover of the taxpayer
The type of asset
The cost of the asset and
The date of acquisition / date the asset is installed ready for use.
Loss carryback
The loss carry back rules provide companies with aggregated turnover of less than $5 billion the option to carry back a tax loss for the 2019-20, 2020-21, 2021-22, 2022-23 income years.
The amount of the loss carry back for the 2019-20, 2020-21, 2021-22 or 2022-23 income year is limited to the less or of the amount of tax paid in earlier income years, being the 2018-19, 2019-20, 2020-21 or 2021-22 income years (as relevant) and the amount of the franking account balance at the end of the income year the loss carry back is being applied.
Expansion of small business tax concessions
An SBE can access a range of tax concessions. From 1 July 2021 businesses that are not SBEs because their turnover is $10 million or more but less than $50 million are also eligible for:
Government grants
The state and territories, as well as the Federal Government, have provided various grants to small businesses affected by COVID-19 and a number of natural disasters.
Section 59-97 of the ITAA 1997 provides that state and territory grants are non-assessable non-exempt income if the grant was announced on or after 13 September 2020 and received in the 2020–21 or 2021–22 income years. Therefore an analysis will be required to determine the nature and income tax status of any such grants received during the year.
Proposed changes announced in the Federal Budget 2022-23
Small Business – Skills and training boost
Tax deductibility of COVID-19 test expenses
Small Business – Technology investment boost
These proposed changes have not been legislated and are subject to change given the change in the Government.
Lower company tax rate
It is critical to determine whether or not a company is a base rate entity for the purposes of determining the amount of its income tax liability for the year ended 30 June 2022.
A company which is a base rate entity will pay tax at a rate of 25% on its taxable income for the year ended 30 June 2022 whereas a company which is not a base rate entity will pay tax on its taxable income at the 30% tax rate.
A company will be regarded as being a base rate entity if no more than 80% of the company’s assessable income comprises ‘base rate entity passive income’ (BREPI) and its ‘aggregated turnover’ is less than $50 million for the year ended 30 June 2022. For these purposes aggregated turnover is only calculated on the relevant annual turnover of the company and its affiliates and connected entities for the current year being 30 June 2022.
Small business tax offset
An individual is entitled to the small business income tax offset for the year ended 30 June 2022 being 16% of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.
This non-refundable offset is available to sole traders who would meet the requirements of being a small business entity, and to individuals who are not a small business entity, but who are assessed on a share of the net income of a small business entity in which they are a partner in a partnership that is a small business entity or a beneficiary of a trust that is a small business entity.
An entity is a small business entity for these purposes if it carries on business and its aggregated turnover for the 2022 year is less than $5 million. An individual is only able to claim one small business tax offset for an income year irrespective of the number of sources of small business income derived by that individual and the maximum amount of the offset is capped to $1,000 per year.
Keep a business vehicle logbook.
Maintain a logbook of your business vehicle use for at least 12 weeks during the year so you can accurately claim back vehicle expenses at tax time. Legitimate business use of a vehicle is tax deductible, so you should also keep all receipts and invoices related to vehicle expenses such as petrol and maintenance.
Defer income and bring forward expenses.
You can cut down on your tax bill by deferring taxable income to the next financial year. For example, if you delay invoicing until 1 July, the invoice amount won’t count towards your taxable income for the previous financial year.
Claim deductions for expenses not paid by EOFY.
You can still claim deductions for some expenses even if they haven’t yet been paid by the end of the financial year. These expenses include:
• Staff salary and wages – claim the number of days that employees have worked up to 30 June but have not been paid until the new financial year
• Staff bonuses – claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June if you are committed to paying the expense.
• Repairs and maintenance – claim repairs carried out and billed by 30 June but not paid until next year.
Write off bad debts.
You can claim a tax deduction on bad debts if you can show that the debt has been written off by 30 June, and if the debt was originally shown as income. Put your decision in writing (such as in meeting minutes), which you can use as evidence that the debt was written off before EOFY.
Gift and Donations:
In order to claim the gift and donation, you must ensure that you did not receive any tangible benefit from making the donation and has receipts to evidence the making of such donations.
Section 26-55 of the ITAA 1997 limits the amount of the donation deduction as the making of a deductible gift cannot create or increase a tax loss. Where the deductible donation amount exceeds this limit, you may elect to carry forward the donation deduction and claim this over a maximum of five years for certain gifts where the conditions of Subdivision 30DB of the ITAA 1997 are met.
Deductions to political parties are limited to $1,500.
Contact John from Elite Tax Advisory today about your business needs.
Phone: 0456 799 959
Email: info@elitetaxadvisory.com.au
Fortunately, there are plenty of simple and legitimate ways you can cut down on your small business tax bill while meeting all your tax obligations.
Here’s a list of what you can start doing now and what you can begin to plan for before the end of financial year.
Tax depreciation incentives
Numerous tax depreciation incentives have been introduced or extended in the prior year. The various measures have different eligibility requirements and application dates. It is also necessary to consider the interactions between the different measures. In effect most businesses should be able to write off the full amount of the cost of eligible depreciable assets in the 2022 income year.
The application of these rules generally depends on:
The turnover of the taxpayer
The type of asset
The cost of the asset and
The date of acquisition / date the asset is installed ready for use.
Loss carryback
The loss carry back rules provide companies with aggregated turnover of less than $5 billion the option to carry back a tax loss for the 2019-20, 2020-21, 2021-22, 2022-23 income years.
The amount of the loss carry back for the 2019-20, 2020-21, 2021-22 or 2022-23 income year is limited to the less or of the amount of tax paid in earlier income years, being the 2018-19, 2019-20, 2020-21 or 2021-22 income years (as relevant) and the amount of the franking account balance at the end of the income year the loss carry back is being applied.
Expansion of small business tax concessions
An SBE can access a range of tax concessions. From 1 July 2021 businesses that are not SBEs because their turnover is $10 million or more but less than $50 million are also eligible for:
- An immediate deduction for eligible start-up costs incurred from 1 July 2020 and
- An immediate deduction under the 12-month prepayment rule for prepaid expenses incurred from 1 July 2021.
Government grants
The state and territories, as well as the Federal Government, have provided various grants to small businesses affected by COVID-19 and a number of natural disasters.
Section 59-97 of the ITAA 1997 provides that state and territory grants are non-assessable non-exempt income if the grant was announced on or after 13 September 2020 and received in the 2020–21 or 2021–22 income years. Therefore an analysis will be required to determine the nature and income tax status of any such grants received during the year.
Proposed changes announced in the Federal Budget 2022-23
Small Business – Skills and training boost
- From 29 March 2022 to 30 June 2024, small businesses (with aggregated annual turnover of less than $50m) will be able to deduct an additional 20% of expenditure incurred on external training courses provided to their employees. The external training courses will need to be provided to employees in Australia or online and delivered by entities registered in Australia.
- The boost for eligible expenditure incurred by 30 June 2022 will be claimed in tax returns for the following income year. The boost for eligible expenditure incurred between 1 July 2022 and 30 June 2024, will be included in the income year in which the expenditure is incurred.
Tax deductibility of COVID-19 test expenses
- The cost of taking a COVID-19 test to attend a place of work will be tax deductible for individuals from 1 July 2021.
- In making these costs tax deductible, the Government will also ensure Fringe Benefits Tax (FBT) will not be incurred by businesses where COVID-19 tests are provided to employees for this purpose.
Small Business – Technology investment boost
- From 29 March 2022 to 30 June 2023, small businesses (with aggregated annual turnover of less than $50m) will be able to deduct an additional 20% of the cost incurred on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems or subscriptions to cloud-based services.
- There will be a $100,000 expenditure cap per income year. The boost for eligible expenditure incurred by 30 June 2022 will be claimed in tax returns for the following income year.
These proposed changes have not been legislated and are subject to change given the change in the Government.
Lower company tax rate
It is critical to determine whether or not a company is a base rate entity for the purposes of determining the amount of its income tax liability for the year ended 30 June 2022.
A company which is a base rate entity will pay tax at a rate of 25% on its taxable income for the year ended 30 June 2022 whereas a company which is not a base rate entity will pay tax on its taxable income at the 30% tax rate.
A company will be regarded as being a base rate entity if no more than 80% of the company’s assessable income comprises ‘base rate entity passive income’ (BREPI) and its ‘aggregated turnover’ is less than $50 million for the year ended 30 June 2022. For these purposes aggregated turnover is only calculated on the relevant annual turnover of the company and its affiliates and connected entities for the current year being 30 June 2022.
Small business tax offset
An individual is entitled to the small business income tax offset for the year ended 30 June 2022 being 16% of the income tax payable on the portion of an individual’s taxable income that is their ‘total net small business income’.
This non-refundable offset is available to sole traders who would meet the requirements of being a small business entity, and to individuals who are not a small business entity, but who are assessed on a share of the net income of a small business entity in which they are a partner in a partnership that is a small business entity or a beneficiary of a trust that is a small business entity.
An entity is a small business entity for these purposes if it carries on business and its aggregated turnover for the 2022 year is less than $5 million. An individual is only able to claim one small business tax offset for an income year irrespective of the number of sources of small business income derived by that individual and the maximum amount of the offset is capped to $1,000 per year.
Keep a business vehicle logbook.
Maintain a logbook of your business vehicle use for at least 12 weeks during the year so you can accurately claim back vehicle expenses at tax time. Legitimate business use of a vehicle is tax deductible, so you should also keep all receipts and invoices related to vehicle expenses such as petrol and maintenance.
Defer income and bring forward expenses.
You can cut down on your tax bill by deferring taxable income to the next financial year. For example, if you delay invoicing until 1 July, the invoice amount won’t count towards your taxable income for the previous financial year.
Claim deductions for expenses not paid by EOFY.
You can still claim deductions for some expenses even if they haven’t yet been paid by the end of the financial year. These expenses include:
• Staff salary and wages – claim the number of days that employees have worked up to 30 June but have not been paid until the new financial year
• Staff bonuses – claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June if you are committed to paying the expense.
• Repairs and maintenance – claim repairs carried out and billed by 30 June but not paid until next year.
Write off bad debts.
You can claim a tax deduction on bad debts if you can show that the debt has been written off by 30 June, and if the debt was originally shown as income. Put your decision in writing (such as in meeting minutes), which you can use as evidence that the debt was written off before EOFY.
Gift and Donations:
In order to claim the gift and donation, you must ensure that you did not receive any tangible benefit from making the donation and has receipts to evidence the making of such donations.
Section 26-55 of the ITAA 1997 limits the amount of the donation deduction as the making of a deductible gift cannot create or increase a tax loss. Where the deductible donation amount exceeds this limit, you may elect to carry forward the donation deduction and claim this over a maximum of five years for certain gifts where the conditions of Subdivision 30DB of the ITAA 1997 are met.
Deductions to political parties are limited to $1,500.
Contact John from Elite Tax Advisory today about your business needs.
Phone: 0456 799 959
Email: info@elitetaxadvisory.com.au