Below are some practical strategies that SME business owners should consider in the lead up to 30 June 2022 to reduce this year’s tax liability.
The following two strategies apply only to small businesses that satisfy the aggregated turnover requirements:
1. Deduction for prepaid expenses
A small business with an aggregated turnover of less than $50 million can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less and that period ends before the end of the next income year. The most common expenses that you should consider prepaying by 30 June 2022 include lease payments, interest, rent, business travel, insurance and business subscriptions.
Note that your business must be obligated to make the prepayment under the relevant contractual agreement to get the immediate tax deduction this financial year – you cannot simply choose to prepay the expense.
2. Other tax concessions
A small business, with an aggregated turnover of less than $10 million, is also entitled to the following additional tax concessions for the 2021/22 year:
- Simplified trading stock rules, giving small businesses the option to avoid an end of year stocktake if the value of their stock has changed by less than $5,000 from the previous year; and
- The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
Temporary full expensing of the depreciating asset expenditure
Under the previous Government’s COVID-19 stimulus measures in its Budgets in 2020 and 2021 and now fully legislated, the instant asset write-off concessions was replaced with a more generous regime that allows a full write-off of the cost of new depreciating assets, and improvements to existing depreciating assets, incurred by a business with an aggregated turnover of less than $5 billion and installed and ready for use from 7.30pm on 6 October 2020 up until 30 June 2023.
The immediate deduction is also available to businesses with an aggregated turnover of less than $50 million for purchases of second-hand assets, and businesses with an aggregated turnover of less than $10 million with a low-value asset pool get an immediate deduction for the closing pool balance.
Importantly to obtain an immediate tax deduction in a particular year, the asset must be used or installed ready for use by the end of that year, and in all cases must be used or installed ready for use no later than 30 June 2023. This could be an issue for imported equipment and also in the domestic context where Australian suppliers are COVID-19 impacted or transport companies are having difficulty keeping up with the demand for deliveries.
Scrap obsolete equipment
If obsolete plant and equipment are sitting on your depreciation schedule, they should be scrapped and written off by 30 June 2022 to generate an additional tax deduction.
If your business is classified as a small business and assets were allocated to a small business pool, as noted above, if you choose to apply temporary full expensing, then the balance of your small business pool will be written off at the end of the income year, otherwise, you would continue to claim one deduction for the pool of assets – you cannot separately write-off individual assets in the pool.
Loss carry back concession for companies
Another concession introduced in the October 2020 Federal Budget and extended for a further 12 months in the May 2021 Budget, this concession allows a company (i.e. not available to partnerships, trusts or individuals) to “carry back” tax losses incurred in any of the 2020, 2021, 2022 and 2023 years to an earlier year as far back as 2019. A refund could be claimed on lodgement of tax returns from the 2021 year onwards, representing the tax saving that would have arisen if the tax loss had been available to claim in the earlier year.
Defer income & capital gains tax
Businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay “receipt” of the income until after 30 June 2022.
Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the “issuing of invoices” until after 30 June 2022.
Realising a capital gain after 30 June 2022 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes. In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.
Tax rate reduction from 1 July 2021 for certain companies
Balanced against the timing benefits of deferring income and bringing forward deductions, it is worth noting that a company that is a ‘base rate entity’ (BRE) had its tax rate reduced from 26% to 25% from 1 July 2021. A BRE is a company with aggregated turnover for the year less than $50 million and ‘base rate entity passive income’ (BREPI) representing 80% or less of its total assessable income for the year.
BREPI is passive income such as dividends, interest, rent, royalties and net capital gains (although note that this excludes business income flowing up from a trading company to a holding company by way of a dividend).
Write-off slow moving or obsolete stock
All businesses have the option of valuing trading stock on 30 June 2022 at the lower of the actual cost, replacement cost, or market selling value. A different valuation method may be applied for each item of trading stock.
For example, where the market selling price of stock items at year-end is below the actual cost price, your business can generate a tax deduction by simply valuing the stock at market selling value for tax purposes.
Also, in situations where stock has become obsolete at year-end (e.g. fashion clothing), your business may elect to adopt a lower value than actual cost, replacement cost, or market selling value, provided the value adopted is reasonable.
Claim deductions for expenses not paid at year end
All businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not paid by 30 June 2022 including:
Salary and wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2022, but have not been paid until the new financial year.
Director’s fees. A company can claim a tax deduction for director’s fees it is “definitely committed” to on 30 June 2022 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2023 year when the amount is actually received.
Staff bonuses and commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid on 30 June 2022 where it is “definitely committed” to the expense.
Repairs and maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2022 but not paid until the next income year.
Write-off bad debts
If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2022 so long as the debt is declared bad by 30 June 2022.
Your business will need to show that it has made a genuine attempt to recover the debt by 30 June to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a company director’s minute).
Your business can also claim back the GST paid on debts that have been written off as bad. Or where the debts have not been written off as bad, it has been outstanding for 12 months or more.
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This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.