In the weeks leading up to June 30, small business owners often face an overload of advice around how to best maximise their tax return refund — from claiming as many tax deductions as possible to making voluntary superannuation contributions.
One of the common traps I see small businesses fall into during their end-of-financial-year preparations is the temptation to rush out and make additional purchases with the primary goal of reducing their tax bill or obtaining a refund when they lodge their tax return.
Making large purchases — like a company car, new office tech or more advanced equipment — can certainly be a worthwhile investment if the purchase will likely boost revenue or improve productivity. However, the prevailing belief that spending more equates to saving more on taxes can lead small business owners down a slippery slope.
Not all expenses are created equal, and blindly chasing deductions without a clear understanding of their effect on the bottom line can prove to be a costly mistake — particularly when the purchase results in repayments over time. This is especially true in the current economic climate. It’s also important to note that the small business tax rate in Australia is currently 25%, meaning that you can only claim 25 cents for every dollar spent on additional tax deductions.
While it may be tempting to claim deductions in the eleventh hour before EOFY, it’s wise to resist the allure of impulse purchases. Here are some tips to avoid this common mistake:
Tax time can be stressful and overwhelming, but accountants and bookkeepers are there to guide you every step of the way. By providing a deeper understanding of your business’ financial position, they can help identify areas where you may be overspending, or missing out on potential deductions. This can help with answering questions like, how is my cash flow? Can I actually afford this expense? Is my business making a profit and will this purchase affect my tax position this tax time? How much will this purchase actually affect my tax position? Where will this put the business in 12 months’ time? In short, advisors are there to help you make informed decisions about your finances that make sense in the long run.
At the heart of efficient financial management is detailed and accurate record keeping — this is where accounting software platforms can help. Having access to real-time data, including expenses and forecasted cash flow, will give you a more holistic understanding of your financial position. This means you can manage cash flow more effectively (and identify potential cash shortages), anticipate upcoming expenses, and plan accordingly to avoid liquidity issues or overdrafts.
One of the best ways to understand your numbers is by leveraging digital tools. Accounting software platforms can help you understand your financial position, make smart decisions about spending, and focus on what your business really needs. They provide real-time insights into cash flow and expenses, giving complete clarity on where money is flowing in and out. Repetitive tasks such as invoicing, bank reconciliations and expense tracking are also automated, reducing the risk of data entry errors. Plus, cloud accounting platforms also enable integrations with apps to streamline workflows and processes, as well as real-time collaboration with your advisor.
Having real-time collaboration with your advisor is absolutely fundamental to a business, without it the time frame for obtaining financial data needed for key decision-making could be weeks due to the lengthy process of obtaining the required data from you such as bank statements and receipts, organising and extrapolating the details to import into accounting software and then producing financial reports.
Spending money in order to reduce your tax bill certainly has its merits, but be sure to go through the appropriate checks and balances before heading out to splurge on a big-ticket item. By paying attention to financial data, engaging an advisor, and leveraging smart technology, you can make a more informed decision on whether it will be a savvy financial decision in the lead-up to EOFY and improve your business’ bottom line.
Natalie Lennon is the founder and director of Two Sides Accounting, Two Sides Academy and a member of Xero’s Partner Advisory Council (XPAC).
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