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.
Key threshold amounts for tax offsets
If you are an individual taxpayer, including a sole trader or a partner in a partnership, or your business is carried on through a trust and you are a beneficiary or through a company and you are a shareholder, you may be entitled to the Low Income tax offset (LITO) or the Low and Middle Income tax offset (LMITO), depending on your taxable income. The key income thresholds are set out below.
- $37,001 – LMITO ($675) increases by 0.5 cents for every dollar above $37,000
- $37,501 – LITO (maximum $700) phases out by 0.5 cents for every dollar above $37,500
- $45,001 – 19% tax rate increases to 32.5%
- $48,001 – maximum LMITO ($1,500) payable
- $66,668 – LITO ceases to be payable
- $90,001 – maximum LMITO ($1,500) phases out by 0.3 cents for every dollar above $90,000
- $120,001 – 32.5%% tax rate increases to 37%
- $126,000 – LMITO ceases to be payable
- $180,001 – 37% tax rate increases to 45%.
$90,001 (singles) and $180,001 (families) are relevant thresholds for qualifying for the private health insurance tax offset (or insurance premium reduction) or liability for the Medicare levy surcharge – but add $1,500 for each dependent child after the first one.
LMITO is due to end this income year and will therefore not be available from the 2022–23 income year. You do not need to do anything to claim the LITO or the LMITO. The ATO will automatically apply the relevant offset if you are eligible for assessment when you lodge your 2022 income tax return.
Defer assessable income
If your taxable income for the income year is approaching any of the above key thresholds, you may want to consider deferring assessable income so your taxable income for the year remains below the relevant threshold.
For example, if you account for your income on a cash basis, you could delay issuing an invoice so you won’t be paid until after 30 June – that way, the income is taxed next income year. However, that may not work if you account for your income on an accrual basis. Of course, cash flow issues might mean you would prefer to be paid more promptly.
If you are in the process of selling property and the profit will be taxable as a capital gain, you could defer the sale until the next income year – but remember that the liability to pay CGT arises when you exchange contracts and not on settlement.
Another way to keep taxable income below a relevant threshold is to increase deductions. For example, you could bring forward the purchase of one or more depreciating assets (new assets are deductible outright under temporary full expensing). An immediate deduction is also available for start-up costs and certain prepaid expenses.
Charitable donations are a good way to increase your deductions. If you are unsure whether a donation will be deductible, you can check the deductibility status of charities here . In certain circumstances, you can claim a deduction if you donate trading stock. Don’t forget to ask for a receipt.
As the end of the income year approaches, talk to our KMT tax adviser about ways to minimise your tax bill.
The ATO is encouraging businesses to use e-Invoicing. This is the new, standardised way to send and receive electronic invoices directly through your accounting software. E-Invoices are sent directly between buyers’ and suppliers’ software through a secure network.
Once the sender creates the invoice in their software, this information is sent directly and securely to the receiver’s software, ready to be approved and paid.
The ATO states that e-Invoicing saves time, money and gives you better control of your invoicing by:
- Reducing the repetitive manual entry of invoices, as e-Invoices automatically appear in your software;
- Removing the need to chase lost or incorrectly addressed invoices, as e-Invoices are delivered using your trading partner’s ABN, with key invoice details validated before they are sent
- Eliminating costly and time-consuming errors in invoices that often happen with manual entry;
- Providing greater visibility of the delivery status of your invoices, with real-time information available Directly in your accounting software;
- Reducing the risk of fake, unsolicited or compromised invoices and other false billing scams, including business impersonation scams; and
- Allowing you to trade seamlessly with e-Invoicing enabled businesses in Australia and around the world.
Talk to your accounting software provider today to see how you can get started with eInvoicing.
If you don’t pay your tax
The ATO understands that taxpayers, in particular small business operators and sole traders, sometimes have cash flow issues meaning they can’t pay their whole tax bill on time. If you are having a problem, the ATO encourages you to engage with them early so they can help you deal with your debt while it’s still manageable.
If you don’t pay the amounts you owe the ATO on time, they will charge interest on your unpaid amounts and use any future refunds or credits to repay the amounts you owe.
The ATO may take stronger action if you are unwilling to work with them to address your debt or repeatedly default on agreed payment plans.
Is cash flow an ongoing issue?
You’ll learn effective cash flow management practices and find the right information to improve your business and financial knowledge, make critical decisions and plan ahead to stay viable. These skills help you meet your financial commitments, including tax and super obligations.
Our cashflow management coaching helps identify practical actions they can take to better manage their cash flow and meet their business goals.
Talk to our KMT tax adviser today as we can help you break down cash flow complexities and uplift your cash flow know-how.
Debts on hold
An aged debt is an uneconomical non-pursued debt that the ATO has placed on hold (it does not show as an outstanding balance on your ATO account) and has not undertaken any recent action to collect.
If you have an aged debt, you may receive a letter from the ATO reminding you of the debt.
From June 2022, the ATO will recommence offsetting any tax refunds or credits to pay off any debts on hold. In some cases, the ATO may use credits from other government agencies to pay off the aged debt.
The ATO has published on its website detailed information about the responsibilities of a company director for ensuring that the company’s tax and superannuation guarantee (SG) obligations are reported and paid on time.
If you are a current or former company director, the ATO can recover from your unpaid amounts of:
- Pay as you go withholding (PAYGW);
- GST; and
- SG charge.
If these obligations are not met, you become personally liable for the unpaid amounts, unless you take steps to ensure the company meets its obligations, appoints an administrator or goes into liquidation (only within certain time limits).
Any amounts that you are personally liable for are called director penalties. The ATO can recover the penalty amounts from you after issuing a director penalty notice (DPN).
Becoming a new company director
Before you become a company director, check if the company has any unpaid or unreported PAYGW, GST and SG charge liabilities. Once you are appointed as a company director, you are responsible for ensuring the company meets its PAYGW, net GST and SG charge obligations in full by the due date.
You are no longer a director
If you resign as a director of the company, you remain liable for director penalties for liabilities of the company that were due before the date of your resignation. In certain circumstances, you may also be liable for liabilities that fall due after your resignation.
Director penalty notices
Before recovering your company’s unpaid amounts, the ATO must give you a DPN. The notice outlines the unpaid amounts and remission options available to you.
The ATO can recover the amounts of the director penalty by:
- Issuing garnishee notices;
- Offsetting any of your tax credits against the director penalty;
- Initiating legal recovery proceedings against you to recover the director penalty.
Director penalties are a parallel liability
Once DPNs have been issued, the ATO may commence or recommence recovery action from each director personally, because these penalties are a parallel liability.
To recover the debt, the Commissioner can pursue either the company or the directors.
This means that any payment or credit applied to the company’s account, or to a director’s account, to reduce the penalty will reduce the director penalty amount for the other directors and the company’s corresponding liability for the same reporting period.
Talk to our KMT tax adviser if you are a company director and the company owes PAYGW amounts, GST or SG charge.
Download our tax planning guide to learn strategies and tips on how to minimise your personal and business tax from our Free Resources
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.