Part 3: tax tips for your small business

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In the third of our three-part series, we look at actions small businesses can consider to reduce their tax for 2017.

This article is all about income. As with accelerating deductions, deferral of income can result in a slightly lower personal top marginal tax rate next year and provide a cash flow benefit. Of course, deferring a taxable profit only works if the relevant entity is paying tax.

Owner remuneration
Income of family members from a business depends on the ownership structure (e.g. sole trader, partnership, trust or company). Wages, dividends or profit share may, in certain circumstances, have different tax outcomes to the recipients. It is therefore worthwhile to ensure you are aware of what your personal tax position is likely to be and plan appropriately.

Where wages or other forms of income are being paid to other family members, it’s worthwhile considering if a minor under 18 years can commence a full-time occupation prior to 30 June as this can provide them with the lower adult tax rates.

Owners should also consider repayment of any “Division 7A” loans (these are borrowings from a company) prior to year-end. Repayment this year can avoid a dividend (and resultant personal tax) that is usually required under the relevant rules.  And if you have a discretionary trust involved, distribution resolutions should be completed prior to year-end.

Income deferral
Income deferral could be as simple as delaying the issue of invoices, however it is often necessary to review customer contract terms to determine when income becomes assessable. The general rule is that income becomes assessable when it is “derived”, typically meaning non-refundable or a present debt exists.

Despite being derived, income may also be non-assessable if it is not “properly referrable” to an income year. In practice this usually means that where services have been paid for but are yet to be performed they can be considered non-assessable “unearned income”.

Such amounts should be accounted for in a separate balance sheet account, which can be made as an adjustment after year end but they need to be identified. This can include a proportion of a receipt where a service is only partially performed. So, if you receive 20% of a contract up front but will not start work on it until July, that amount will be excluded from this year’s taxable income.

Are you ready for tax time?

Income from the sale of goods is generally not assessable until the goods are delivered.

Be careful however when dealing with an associate. Schemes designed to provide an immediate deduction to one party but defers income to another may result in the deduction being denied.

Certain businesses may want to consider if they can use a cash accounting method for determining income, this may be possible for micro-businesses providing services relating to professional skill and personal work that does not rely on capital items such as plant and machinery.

Other areas to consider
Many businesses have multiple entities with transactions occurring between them. End of year is a time when you should ensure the appropriate invoices and other paperwork has been prepared. It is good practice to get a handle on what taxable profits are being made in each entity to ensure you don’t end up with, for example, profits in one entity and losses in another.

In terms of non-business investments, any term deposits may want to be commenced in early July if on an annual maturity cycle. Any investments sitting in a loss may want to be sold before year-end if other capital gains exist. Avoid repurchasing the same asset as anti-avoidance provisions may apply. Similarly, the sale of investments with an underlying capital gain may want to be deferred until July so the tax payable is effectively delayed for a year. The same principals can apply to depreciable assets if you are not using a small business pool method.

Finally, if you are expecting a refund, get your affairs in order and lodge your returns early. Your accountant will also love you for it!

What are your thoughts? Let us know by commenting below.

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Read these three related articles:
1. How to manage cash flow
2. Essential 2017 year end tax tips
3. What wage should I take from my business?

Part 2: tax tips for your small business

Michael Bode
Michael Bode is Director of Taxation at Prosperity Advisers Group with 20 years’ experience across income tax, GST, tax audit, FBT and payroll issues stamp duty issues and cross-border transactions. Prosperity Advisers Group is a business advisory and wealth management practice. Clients partner with Prosperity for strategies and techniques to minimise taxes, maximise profit, drive growth and build or protect their personal wealth.

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