There are many challenges associated with successfully operating a small business and tax planning is a specialised area that, if neglected, could have a significant effect on the viability of the business. As a small business owner in difficult times, the fact that the business is trending to actually pay tax is a positive, since it means that a profit has been generated for this tax year. Planning to take advantage of any legal methods of reducing the amount of tax to be paid should have already identified target areas and steps that need to be taken before the end of the financial year.
If this important year end tax planning hasn’t been done it may be too late to influence the result for this financial year. However, the business operator should arrange to meet with their accountant to work out strategies for the next financial year. This will ensure that any actions can occur naturally as a normal part of business operations throughout the year, and the results will be in the accounts ready for the preparation of the relevant tax returns.
The timing of income and deductions is a time-honoured strategy that deserves another run. Pre-payments, for example, reduce taxable income in the current year by bringing forward deductions, but it must be realised that this strategy, to be effective, must be continued into subsequent years. Rent, interest and insurance premiums are expenses that are often handled in this manner.
Delaying the issuing of invoices, not pursuing debtors and postponing the sale of assets until the new tax year are all basic end of tax year strategies that can reduce income. If, at the same time, the business undertakes last-minute repairs and maintenance to business or investment properties thus increasing their expenses, the reduction in taxable income can be considerable.
Superannuation is a major player in year end tax planning with several options available to business operators who may have a self-managed superannuation fund (SMSF). Maximising contributions while taking care not to exceed the contribution cap is essential and advice should be sought on this issue prior to the end of the financial year. In fact, superannuation strategies should be reviewed regularly throughout the year as actions may need to be taken well before any cut-off period to satisfy any legal requirements. As the superannuation laws change from one year to the next, any advice should never be acted on unless it is current!
It is essential that small business operators treat their relationship with their accountant as an on-going partnership rather than a once a year visit. Only by working closely together throughout the year can opportunities be identified and processes put in place to bring end of year tax strategies to account in the normal course of business.
