Let’s not miss out on tax planning opportunities in 2024 by missing the deadline!  Today we will be looking at using these strategies to help with planning for and reducing taxes:  using losses to help reduce tax, deferring income, using negative gearing and investments and reviewing your business structure.  We’ll also quickly look at when to pay dividends and what that means for your tax plus using superannuation as way to reduce your tax bill.  Plus if you read until the end, I have a couple of bonuses for you which you might find useful.

The first thing we really need to cover off on here is the end of year deadline.  The end of the financial year here in Australia is 30 June.  This means that if you are planning on doing anything to help with your tax bill, it needs to be done before this date otherwise it won’t count for this year, it will need to be included for next year.  The time for tax planning is right now, so we all have time to get our ducks in a row to make sure we’re in the best possible position tax-wise come year-end.

To kick this off we are looking at losses.  Any seasoned business owner will tell you there are two types of losses, those you make from your business activities otherwise known as “revenue losses” and those you make on the sale of assets otherwise known as “capital losses”. 

You make revenue losses when your business expenses are greater than your business income and you can carry these losses forward indefinitely provided you satisfy a couple of criteria outlined in the tax law.  Broadly speaking however, if your business structure has remained unchanged since you made the loss, you should be able to use them easily.  Revenue losses are always used before capital losses and you use them in the order in which you made them.  So for example, if you made a revenue loss in 2020, 2021, 2022 and 2023, you would use the losses you made in 2020 first. 

How do losses actually help you, aren’t they a sign a business isn’t failing?  Look, losses are never something you outwardly set out to achieve but you may have incurred costs in a year which are out of sync with the timing of income associated with that cost.  Mining companies are a great example of this, they incur massive costs looking to see if a particular site is viable to mine before they actually dig the hole, remove the ore and start to sell it and make money.  This can happen for years before they actually start to see any income.

How does this benefit you today?  Well you can use losses you have made in previous years to reduce the profit you are making in the current year thereby reducing your tax bill.  Think of it as the reward for your blood sweat and tears during years of hard business conditions.  Can you use losses to reduce your profit to nil.  Absolutely you can.  And what’s more, whatever losses are left over after reducing your profit, can continue to be carried forward.

So that’s revenue losses, but what if you only have capital losses.  Well, sadly, capital losses can’t be used to reduce profit.  However, they can be carried forward indefinitely and used to reduce a capital gain at some point in the future.

A capital loss is made when an asset of some variety, think shares or an investment property, has been sold for less than it was bought for.  Because the loss can’t be used to reduce profit, it is carried forward until such a time that a capital gain is made. 

What if you don’t ever make a capital gain?  Then the loss just sits there.

The trick to capital gains and losses is to sell loss making assets first.  A loss can only be carried forward, it can’t be carried backwards so it can only be used to offset future gains.  Therefore, if you sell the loss making asset first, it can used to reduce the gain on the profit-making asset sold in the future.

The next item on our checklist of year-end tax planning is deferral of income.  What benefit does this have?  If you are a small business you will be taxed on what is called a “cash basis”. This means you are only taxed on income you have physically received in a year, and amounts you have physically spent in a year.  So, a way to help manage your tax bill, is to do a little forward planning around the timing of your income and expenses.

Most businesses will generally speaking have some sort of terms of trade meaning that they are not paid the instant the invoice is sent out.  They may actually receive the income anything up to 30 days after the date of the invoice.  So come June, if as a result of your tax planning, you know you are going to have a tax problem, it might be worth issuing invoices with a due date past the end of the financial year i.e. sometime in July.  Why?  Because most businesses pay their bills either on or just before the due date which will mean you will recognise the income in July and not June and thus keep your revenue down in the current financial year and therefore too your tax bill.

Is it legal, yes, you aren’t avoiding declaring the income, just pushing out when it is received.

A similar thing, but in reverse, should be done for expenses at the end of the year.  As I said before, you an include amounts you actually spend in a financial year as a deduction, so those bills you receive in June that aren’t due until July, go ahead and pay them.  In this way you bring the timing of the deduction forward and are to reduce your tax bill.

Next we come to investment properties.  First thing we need to do is understand the difference between a negatively geared investment and a positively geared one.  A positively geared investment is one in which you are making a profit each year that is, the income generated from the investment is higher than it’s expenses.  It follows therefore that a negatively geared investment is one in which the expenses are higher than the income. 

Normally I would advocate for a positively geared investment because for the long-term, it is better to have a revenue stream which you don’t have to spend much money on so think coming towards retirement or replacing your main source of income.  However, from a purely tax point of view, a negatively geared asset is very much the way to go.  Why I hear you asking?  Because you can use the loss made on the negatively geared asset to offset your income and reduce your tax bill.

So when it comes to tax planning, have an investment in your portfolio which is negatively geared is going to be a real bonus.  It becomes a lot more effective the more income you earn so as a business owner who maybe wanting to draw funds from the business, it is a way of making sure we can do so without triggering a higher tax bill or unwanted PAYG instalments.

Which leads us quite neatly into reviewing your business structure.  Many businesses in Australia are set-up as a sole-trader a trust or a partnership.  Whilst each has their benefits, the one negative they all have in common is around the distribution of profit and the effect it has in the hands of those receiving it.  I have done a video previously around the pros and cons of business structures in Australia and I will leave a link to it in the description box below.  However, the guts of it is, sole traders, beneficiaries and partners are all taxed on profit at their marginal tax rates. The only real way to control this a completely, is to use a company structure.

With a company structure the owners of the business can be paid a salary akin to any other type of employee.  This controls the amount of tax which they need to pay and means we can possibly do away with those pesky quarterly PAYG payments.  With a company the profit remains within the company and taxed at the company’s tax rate of 25% for most small businesses. Should the owners want to take more money out, it can be done via a bonus payment or a dividend depending on their circumstances.

A bonus payment can be made at any point in time during the year depending on the needs of the business.  However, if as a result of doing some tax planning, it is determined that a bonus should be paid to the owners or key members of staff, it’s declaration and timing can become a way of reducing the business’ tax bill.  A bonus maybe declared in June, but not paid until July when say, a large invoice is received and the cash is available.  Contrary to everything I told you before about the deductibility of expense, a bonus can be taken as a tax deduction when it is declared.  So provided the minute declaring the bonus is signed-off on in June, a tax deduction can be taken for the total bonus to be paid in July.

Dividends may also be a way of distributing cash at the end of the year.  Unlike bonuses the payment of dividends is not tax deductible however there are other considerations to be made around things like the franking credits to be attached to the dividend.  The key message here is to make sure there are enough franking credits accrued during the year, to be able to pay a fully franked dividend to shareholders.  What is a franking credit?  Very basically, it is the amount of tax physically paid by the company during the financial year.  If either no tax has been paid or very little, it is unlikely that a fully franked dividend can be paid to shareholders and another alternative would need to be found (such as a partially franked dividend or an unfranked dividend).

Last on my list before we go to the bonuses is the use of superannuation to reduce your tax bill.  As at the date of recording, Australian taxpayers are able to contribute up to $27,500 each year into their superannuation fund.  This includes employer contributions, salary sacrifice contributions and those you make out of your after-tax salary. 

How does this help with your tax bill?  If your business contributes say $15,000 in superannuation for you on your behalf, you can top-up that contribution from your after-tax salary and claim a tax deduction for that amount. So in this example, you may want to contribute another $12,500 from your after-tax salary and provided all the paperwork is filled in correctly, you would be able to take a tax deduction for it.

A word to the wise, this is an extremely effective tax strategy and one of my favourites for reducing your tax bill however, you need to be careful.  If you accidentally contribute too much, there are tax penalties which apply making the whole strategy completely worthless.  Talk to your accountant and or your financial planner before you go ahead and do anything to make sure you don’t go down the wrong path.

Bonus number 1.  As a business owner there are a number of things you need to do before the end of the year to ensure your business remains compliant.  For companies this is making and signing a solvency minute and for trusts a profit distribution minute.  I will leave a template for both of these items in the description box.

How do you know what numbers to put into the minute.  You guessed it, tax planning.  Without it you won’t have a clue what you are doing and may well end up with a tax sting in the tail.

Don’t be tempted to back-date these minutes – the ATO have cottoned onto this one and I have seen over my career, when they are really hunting for revenue, the ATO question the validity of minutes and when they were signed.  With digital signing becoming more prevalent these days it is becoming all the harder to get away with backdating documents as the software automatically populates with today’s date, so make sure it is done before June 30.

Bonus number 2.  I have a checklist of items which need to be done before the end of the financial year which I will leave in the description box below to use to make sure your business is ready for the 30 June.

Otherwise, I hope you found this article useful, thankyou so much for reading and I will catch you in the next one.  Take care.

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