Year end tax planning strategies for small businesses

Written on 01 June, 2006 by Joe Kaleb
Categories Accounting & FinanceSmall BusinessTags small businesstax

Year end tax planning for small business owners is essentially the use of legitimate strategies to accelerate deductions and to defer the recognition of income. Where the business owner has chosen to adopt the “Simplified Tax System” (STS), there are a different set of rules applying to some of these strategies.

The most common tax planning strategies that business owners should consider prior to 30 June 2006 include:

Simplified Tax System

The Simplified Tax System (STS) commenced from 1 July 2001 and was introduced to minimise the compliance burden on small businesses by applying cash accounting rules for income and deductions as well as simpler rules in recording trading stock and depreciation.

Currently a small business with a three year average turnover of $1M or less GST exclusive and depreciating assets (other than land & buildings) with a written down value of less than $3M can elect to use the STS.

The removal of the compulsory “cash” accounting rules from 1 July 2005 is a positive change for small businesses as they now required to record “income” on either a cash or non-cash basis depending on which is the most appropriate to their particular circumstances.

New entrants into the STS on 1 July 2005 can also claim a deduction for certain expenses that have been “incurred” but not paid by 30 June 2006 (see below) even though they are required to account for income on a cash basis. This provides business owners with a further incentive to enter the STS this financial year.

Small businesses already in the STS for the 2005 year can choose to opt out of the cash accounting rules from the 2006 year (this does not involve leaving the STS). If an STS small business chooses to opt out they can never re-apply the cash accounting rules. There are 2 possible outcomes from opting out:

(a) the business will continue to record income on a cash basis (because it is the most appropriate method) and will now be able to claim deductions on an incurred basis; or

(b) the business will commence to record income on an accruals basis (because it is the most appropriate method) and will now be able to claim deductions on an incurred basis.

Deferring Income

  • STS and non STS small 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 2006.
  • STS and non STS small businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred by delaying the “issuing of invoices” until after 30 June 2006.

Maximising Depreciation Claims

  • Non STS small businesses can claim an immediate deduction for assets costing less than $100 GST inclusive (e.g. minor tools). An STS small business can claim an immediate deduction for assets costing less than $1,000 GST exclusive.
  • Non STS small businesses can scrap or sell depreciable assets for less than their written down value to realise a tax deduction loss. This does not apply to STS small businesses as they are subject to pooling arrangements for assets costing $1,000 or more GST exclusive.
  • Where an STS small business purchases assets costing $1,000 or more GST exclusive, they are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2006 regardless of when the assets were acquired during the income year.
  • Non STS small businesses can allocate assets costing less than $1,000 GST exclusive to a “low value pool” and claim depreciation of 18.75% for 2006.
Under Age 35 Age 35 to 49 Age 50 and Over
$ $ $
14,603 40,560 100,587
  • here the small business owner operates as a sole trader or in partnership the deduction is limited to the first $5,000 of contributions plus 75% of the contributions in excess of $5,000 and the person's aged based limit. Therefore to obtain the above aged based deductions, the person needs to make the following contributions by 30 June 2006:
Under Age 35 Age 35 to 49 Age 50 and Over
$ $ $
17,804 52,413 132,449

Other Key Issues

  • Where a private company provides loans to shareholders, a careful review of the loan arrangement must be undertaken as certain rules may deem the loan to be an unfranked dividend. It may be necessary to ensure appropriate loan agreements are in place and repayments are made.
  • Where individuals incur losses from business activities, the non-commercial loss rules should be considered as such losses may not be eligible for offset against other assessable income during the year.

About the Author

Joe Kaleb is the CEO of www.australianbiz.com.au, a website that provides up-to-date tax information, management tools and other services to assist business owners to better manage their business and income tax obligations.