Many business clients like to review their tax position before the end of the income year and evaluate any strategies that may be available to legitimately reduce their tax. Traditionally, year-end tax planning for profitable small businesses is based around accelerating deductions and deferring income.
Small Business Entities (‘SBEs’) – i.e., those with an aggregated turnover of less than $10 million – often have greater tax planning opportunities compared to other businesses, due to certain concessions generally only applying to them. SBEs usually also have the flexibility to pick concessions that suit their circumstances. For 2023/23, many of the SBE concessions are also available to medium-sized businesses (‘MSBs’), i.e., businesses with an aggregated turnover of less than $50 million.
The following are common strategies that may be considered for all business taxpayers.
Maximising deductions for non-SBE business taxpayers
Deductions can be maximised for non-SBE business taxpayers by prepaying expenses, accelerating expenditure and/or accruing expenses that have been incurred.
Any part of an expense prepayment relating to the period up to 30 June is generally deductible.
In addition, non-SBE taxpayers may generally claim prepayments in full for expenditure that is:
- under $1,000;
- made under a ‘contract of service’ (e.g., salary and wages); or
- required to be incurred under law.
Note: Medium-sized businesses (‘MSBs’) may fully deduct prepayments made before 1 July 2023 (refer below).
Accelerating expenditure (including depreciation deductions)
Accelerating expenditure involves bringing forward expenditure on regular, on-going deductible items.
In fact, this is a useful strategy for any business taxpayer (i.e., including SBEs) because businesses can generally claim deductions for expenses they ‘incurred’ during 2022/23, even if the expenses have not actually been paid by 30 June 2023.
Examples of accelerated expenditure that may be incurred and claimed as a tax deduction in 2022/23 by a business taxpayer include the following:
- Consumables/spare parts.
- Fringe benefits. Any benefits to be provided, such as property benefits, could be purchased and provided prior to 1 July 2023.
- Superannuation contributions made to a complying fund, to the extent the contributions are actually made (i.e., they cannot be accrued but must be paid by 30 June 2023).
In addition to accelerating expenditure on business items such as those listed above, for 2022/23, non-SBE businesses may claim the following accelerated depreciation deductions for depreciating assets first used (or installed ready for business use) by 30 June 2023:
- Non-SBEs with an aggregated turnover of (generally) less than $5 billion can fully expense the cost of eligible assets as well as eligible improvements, regardless of cost.Note: Non-SBEs may choose to opt out of full expensing on an asset-by-asset basis.
- If full expensing does not apply, or an opt-out choice is made, non-SBEs can generally claim the following depreciation deductions
(if applicable) for their business assets:– Assets costing less than $1,000 may be allocated to a Low Value Pool and depreciated at a rate of 18.75% (in 2023) and 37.5% thereafter.– In most other cases, the asset’s cost is depreciated over its effective life (as determined by the taxpayer or the ATO).
Maximising deductions for SBE taxpayers Accrued expenditure
Business taxpayers (including SBEs) are entitled to a deduction for expenses incurred as at 30 June 2023, even if they have not yet been paid.
Examples of expenses that may be accrued and claimed as a tax deduction in 2022/23 include:
- salary or wages and bonuses accrued for the number of days that employees have worked but have not been paid as at 30 June 2023;
- accrued interest outstanding on a business loan that has not been paid;
- commission payments owing to employees or other external parties;
- the fringe benefits tax (‘FBT’) instalment for the June 2023 quarter, if it is due but not payable until July 2023; and
- directors’ fees payable as at 30 June 2023, where the company is definitively committed to the payment.
Maximising deductions for SBE taxpayers
Deductions can be maximised for SBE taxpayers by accelerating expenditure and/or prepaying deductible business expenses (and also by accruing expenditure – refer above).
Maximising deductions for SBE taxpayers Accelerating depreciation expenditure
In addition to accelerating expenditure on various business items (refer above), for 2022/23, SBE taxpayers that use the simplified SBE depreciation rules may claim the following deductions in relation to depreciating assets:
- A full deduction for the cost of eligible assets first used or installed ready for business use by 30 June 2023 (as well as eligible improvements), regardless of cost.Note: SBE taxpayers that use the simplified SBE depreciation rules cannot directly opt out of fully expensing depreciating assets. Instead, they will need to firstly opt out of the simplified SBE depreciation rules entirely, and then opt out of full expensing on an asset-by-asset basis.
- The SBE closing pool balance (before current year deductions), if any, will be fully claimed in the 2023 income year. Note: SBE taxpayers using the simplified SBE depreciation rules cannot opt out of full expensing with regards to their SBE general pool (i.e., even if they opt out of the simplified SBE depreciation rules).
If appropriate, SBE taxpayers should consider purchasing and using (or installing ready for use) these items by 30 June 2023.
Prepayment strategies (SBEs and MSBs)
SBEs and medium-sized businesses (‘MSBs’) that make prepayments before 1 July 2023 can choose to claim a full deduction in the year of payment
(i.e., in 2022/23), if they cover a period of no more than 12 months (ending before 1 July 2024).
Otherwise, the prepayment rules are the same as for non-SBE taxpayers.
The kinds of expenses that may be prepaid include:
- Rent on business premises or equipment;
- Lease payments on business items such as cars and office equipment;
- Interest – check with your financier whether it is possible to prepay up to 12 months interest in advance;
- Business trips;
- Training courses that run from 1 July 2023;
- Business subscriptions.
This is some of the information we will need you to bring to help us prepare your income tax return:
- Stock-take details as at 30 June 2023;
- Debtors listing (including a list of bad debts written off) as at 30 June 2023.Note: To claim a tax deduction, the debt must be written off on or before 30 June.
- Creditors listing as at 30 June 2023.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.