According to Benjamin Franklin, there are only two things certain in life; death and taxes. While it’s impossible to avoid death, if you’re wondering how to reduce the amount of tax you pay, there are a number of things you can do to reduce your business tax bill.
Contribute to Super
If you’re self-employed, superannuation might not be too high on your priority list; this is your reminder to speak to your financial adviser! Regardless of whether you’re actively saving for your retirement with super, it’s a great way to reduce your income tax.
The concessional contributions cap is $25,000, which means you can contribute $25,000 into your super fund from your before-tax dollars and claim a tax deduction. This effectively reduces your income for taxation purposes by $25,000. You’ll still need to pay tax on the amount you contribute to super, but it’s taxed at a flat rate of 15% inside super compared to your marginal tax rate of up to 37%.
If you’re looking to impress your financial adviser, it’s possible to contribute up to $100,000 to your super fund each year. These non-concessional contributions aren’t tax-deductible though, so speak to your trusted financial professionals when deciding how much to stash away for your retirement.
Claim Asset Depreciation
Being a business owner, you’re probably quite familiar with depreciation schedules for your assets of values above $300. The Temporary Full Expensing rule mixes this up a bit because you now have the option of instantly writing the asset off rather than depreciating it over its useful life.
Whether you depreciate your assets over their useful life or claim the full deduction immediately depends on your tax planning in future years. If you need to reduce your assessable income for tax purposes significantly in the current financial year, Temporary Full Expensing might be right for your business. If you’d like to evenly reduce your assessable income over a number of years, depreciating the asset over its useful life could be the answer.
It’s important to remember that instantly writing off an asset means that you cannot claim any further deductions in years to come. To claim depreciation in the future, you’d need to purchase another asset.
Claiming depreciation is just one possible area of tax deductions relating to assets. If you purchase an asset using a loan, you will generally be eligible to claim a tax deduction for the interest expense. Whether you write the asset off instantly or depreciate it over its useful life, as long as you’re paying interest on your finance agreement, you’ll be able to claim a tax deduction. If you’re after finance that qualifies for a tax deduction, it will need to be a chattel mortgage — an operating lease or finance lease does not allow you to claim interest as the lender legally owns the asset.
Small Business Concessions — Prepayment
A tax deduction can be claimed in the current financial year for prepayment of expenses in the next financial year. For example, rather than paying the business rent expense in arrears or month by month, you could pay an entire year of rent for the next financial year and then claim a tax deduction for the amount in the current financial year.
The small business prepayment concession applies to any expenses that satisfy one of the following criteria:
- Is an ‘excluded expense’.
- ‘The 12-month rule’ — immediate deduction for prepaid expenses of up to 12 months in the future.
- Relates to ‘pre-RBT obligation.’
Expenses such as rent, subscriptions and prepayment of interest, insurances, marketing expenses, and vehicle expenses may qualify if they satisfy the 12-month rule. Costs such as employee wages and items under $1,000 fall under excluded expenses and can be immediately deducted regardless of the 12-month rule.
As discussed above, you can claim a tax deduction for the purchase of business equipment — either by claiming the full amount instantly or the depreciation expense each year over the asset’s useful life. Equipment costs reduce your assessable income for income tax purposes, but there are other taxes to consider.
If your business is registered for Goods and Services Tax, you are able to get a refund from the ATO of the 10% GST you paid on equipment at the time of purchase. For example, if you bought a laptop for $2,200, you paid $2,000 for the computer plus $200 — or 10% — for GST. If the laptop is to be used exclusively for business use, you can claim 100% of the GST back, which means you’ll get a $200 refund when you submit your Business Activity Statement. You can claim GST on equipment used for both business and personal use, but you can only claim the portion that will be used for business purposes. For example, if you use the laptop for 50% business use, you can only claim 50% of the GST.
Fringe Benefits Tax
A fringe benefit is a type of non-monetary privilege or perks given to an employee. Things like the use of a company car for personal use, free tickets for entertainment, or a discounted loan to employees are all fringe benefits. Tax is calculated on the taxable value of the benefit.
If you are purchasing portable electronics for your staff to use or reimbursing them for the cost of the equipment, you may be eligible for an FBT exemption. The work-related portable electronic device exemption means employers can provide devices such as laptops, mobile phones and tablets to their employees without being subject to FBT. By providing employees with electronic devices, you could avoid FBT, claim GST, write the asset off instantly and claim the interest expense for any finance agreements used to purchase the device — lots of tax benefits for one asset!
Repair and Maintain Assets
The end of the financial year could be a good time to repair any assets. You can immediately deduct the amount paid to repair and improve your assets under the Temporary Full Expensing rule, which could significantly reduce your assessable income and your tax bill while keeping your assets in tip-top shape.
You now know the five tips on how to reduce your tax liability, but there are many other strategies that can be used. We're not accountants or tax specialists so be sure to speak to your adviser or trusted financial professional to determine the right methods of tax minimisation for your business. However, we are experts regarding business finance, so get in touch with us to discuss your finance options if you're looking to purchase assets to reduce your tax bill.