As we gear up for the end of the financial year and face a cost of living crisis along with increased costs to do business, it’s vital for small business owners to get ahead of the game by fine-tuning their financial strategies to maximise any available benefits or tax advantages and stay on top of the latest tax regulations.
With significant changes to individual income tax rates and thresholds set to come into effect on July 1, 2024, business owners should review their current financial plans and make any needed tweaks before the new financial year begins.
Let’s take a closer look at these changes and explore some essential tips to help small business owners stay ahead of the curve:
The Australian government recently enacted changes to individual income tax rates and thresholds, which will take effect on July 1, 2024.
These changes include:
In light of the changes to income tax rates, it is critical that business owners review their remuneration strategies and ensure they are paying themselves in a way that maximises their tax position. This may involve reassessing the amount and structure of your pay to align with the revised tax rates.
Exploring alternative methods of payment, such as dividends or distributions from a trust, can potentially offer greater tax efficiency and improve cash flow for small business owners. However, to do that, you need to ensure you have the correct business structure in place first.
Another area for company shareholders to be on top of is private company benefits, referred to as Division 7A dividends. Division 7A serves as a rule of integrity that aims to prevent private company profits from being distributed to shareholders or their associates without incurring taxes. This rule does not apply to legitimate payments such as salary, wages, director fees, fringe benefits, or ordinary dividends.
However, it has a wide scope and applies to all other forms of payments and benefits. In cases where it is applicable, the recipient of the loan, payment, or benefit will be considered as receiving an unfranked dividend, which will then be included in their assessable income.
Some common errors include incorrect accounting for the use of company assets by shareholders and their associates, loans being made without adhering to the required loan agreements, reborrowing from the private company to make repayments on Division 7A loans, and the application of an incorrect benchmark interest rate on a Division 7A loan.
It is crucial for shareholders and their associates to maintain accurate records and engage in forward planning when accessing private company funds or assets. Regular annual checks are necessary to ensure compliance and should be conducted to confirm adherence to the rules.
The end of the financial year is the ideal time to review your current business structure and understand if it’s still fit for purpose.
If you are an ABN sole trader and your income has dramatically increased and is likely to stay that way, it might be time to move to a company structure. You should also consider whether operating as a company or family trust might work regarding taxes.
Each structure has implications for tax obligations and liabilities, and it is crucial to determine the most suitable option for your needs based on your business’s specific circumstances.
Small business owners can capitalise on the opportunity to reduce taxable income by making significant contributions to their superannuation. With the threshold for concessional superannuation contributions set at $27,500, business owners can allocate funds to their superannuation plan to optimise their tax position.
It’s important to note that superannuation contributions are taxed at a favourable rate of 15%, making it an attractive avenue for reducing taxable income and securing financial benefits over the long term.
While it’s all a guessing game at this stage, I think the ATO will intensify its focus on tax compliance within the short-term rental (such as Airbnb) and ride-sharing economy sectors. With the new reporting regime for the sharing economy, encompassing ride-sourcing and short-term accommodation platforms live from July 1, 2023, and electronic distribution platforms (EDP) from July 1, 2024, the ATO has enhanced access to transactional data for income matching and compliance purposes. It will also look out for landlords exaggerating claims for rental properties or neglecting to include all income.
It is also reportedly intensifying its focus on work-from-home expenses in the upcoming year. The ATO revised the fixed rate method for calculating work-from-home deductions last year, expanding the scope of what can be included and raising the rate. As these changes come into full effect this year, people are being cautioned about the importance of maintaining “comprehensive records” to support their work-from-home claims. They will need to be able to provide evidence of the hours worked remotely, in the form of a calendar, diary, or spreadsheet. Additionally, they must submit any additional expenses incurred, such as electricity or internet bills.
It is a timely reminder of the importance of accurate and thorough reporting for individuals and businesses operating within these sectors to ensure compliance with tax obligations.
Temporary full expensing rules ended on June 30, 2023. As part of the 2023 — 2024 budget, the Australian Government announced it will improve cash flow and reduce compliance for small businesses by temporarily increasing the instant asset write-off threshold to $20,000, from July 1, 2023 until June 30, 2024. The bill is currently before parliament.
SMEs need to be aware of the implications for their asset acquisitions. Is there any investment your business can make before the end of the tax year to reduce your taxable income?
To streamline the process and gain a comprehensive understanding of their tax obligations, SMEs should complete their tax assessments early and establish effective systems to manage their financial responsibilities well in advance of the end of the financial year and in preparation for the next year. If they have any questions, they should contact a tax specialist sooner rather than later.
By taking the steps outlined above, business owners can position themselves for financial success and compliance as they approach the end of the financial year.
Richard Lawrence is a director at Mackay Goodwin.
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