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Small Business Tax Planning Strategies For 2023


The end of the 2023 financial year is only a few weeks away, but there are still some last minute strategies that SME business owners should consider, and act upon by 30 June, to reduce this year’s tax liability.


SMALL BUSINESSES

The following two strategies apply only to small businesses that satisfy the aggregated turnover requirements:

1. Deduction for prepaid expenses

A small business with an aggregated turnover of less than $50 million can claim an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less and that period ends before the end of the next income year. The most common expenses that you should consider prepaying by 30 June 2023 include lease payments, interest, rent, business travel, insurances and business subscriptions.


Note that your business must be obligated to make the prepayment under the relevant contractual agreement to get the immediate tax deduction this financial year - you cannot simply choose to prepay the expense.


2. Other tax concessions

A small business, with an aggregated turnover of less than $10 million, is also entitled to the following additional tax concessions for the 2022/23 year:

  • Simplified trading stock rules, giving small businesses the option to avoid an end of year stocktake if the value of their stock has changed by less than $5,000 from the previous year; and

  • The option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.


Temporary full expensing of the depreciating asset expenditure ends on 30 June 2023


The previous Government’s COVID-19 stimulus measures included a generous regime that allows a full write-off of the cost of new depreciating assets, and improvements to existing depreciating assets, incurred by a business with aggregated turnover of less than $5 billion and installed and ready for use from 7.30pm on 6 October 2020 up until 30 June 2023. The immediate deduction is also available to businesses with aggregated turnover of less than $50 million for purchases of second-hand assets, and businesses with aggregated turnover of less than $10 million with a low value asset pool get an immediate deduction for the closing pool balance.


Importantly to obtain an immediate tax deduction in a particular year, the asset must be used or installed ready for use by the end of that year, and in all cases must be used or installed ready for use no later than 30 June 2023. This could be an issue for imported equipment and also in the domestic context where Australian suppliers are COVID-19 impacted or transport companies are having difficulty keeping up with the demand for deliveries. After 1 July 2023 small businesses (i.e. those with less than $50 million turnover) can rely on the old instant asset write-off provisions which have a per item limit of $20,000 for the 2024 tax year only, with the limit reverting to $1,000 from 1 July 2024.



120% deduction for skills and training expenditure, technology investment, & energy efficiency


Businesses with an aggregated turnover of less than $50 million are entitled to an additional 20% deduction for eligible expenditure on training employees, adopting digital technology, and investments that support energy-efficient practices and implementing energy-saving technologies.


20% bonus deduction Date range

Skills & training Until 30 June 2024

Digital adoption Until 30 June 2023

Energy efficiency 1 July 2023 to 30 June 2024


The above three measures are not yet law.


Scrap obsolete equipment


If obsolete plant and equipment is sitting on your depreciation schedule, it should be scrapped and written off by 30 June 2023 to generate an additional tax deduction.


If your business is classified as a small business and assets were allocated to a small business pool, as noted above, if you choose to apply temporary full expensing, then the balance of your small business pool will be written off at the end of the income year, otherwise you would continue to claim one deduction for the pool of assets - you cannot separately write-off individual assets in the pool.


Loss carry back concession for companies ends on 30 June 2023


Another concession introduced in the October 2020 Federal Budget and extended for a further 12 months in the May 2021 Budget, this concession allows a company (i.e. not available to partnerships, trusts or individuals) to “carry back” tax losses incurred in any of the 2020, 2021, 2022 and 2023 years to an earlier year as far back as 2019. A refund could be claimed on lodgement of tax returns from the 2021 year onwards, representing the tax saving that would have arisen if the tax loss had been available to claim in the earlier year. This concession will not be available for future years.


Claiming concessional superannuation contributions


The maximum concessional superannuation contribution limit is $27,500 for all individuals. Note that employer super guarantee contributions and salary sacrifice contributions are included in the cap.


Where a concessional contribution is made which exceeds these amounts, the excess is taxed at your marginal rate, less a 15% tax offset for the tax already paid by the super fund on the excess contribution.


If you are making a personal superannuation contribution, ensure you obtain the relevant documentation from your superannuation fund to substantiate claiming the deduction before lodging your 2023 tax return.


In order to obtain a deduction in the 2023 financial year, the contribution must be received by your superannuation fund by 30 June 2023 - refer points (ii) and (iii) below.


Other important superannuation issues in the lead up to 30 June 2023


(i) Carry-forward concessional super contributions


From 1 July 2019, taxpayers can make 'carry-forward' concessional super contributions if they have a total superannuation balance across all funds of less than $500,000 at the end of the previous year. The unused concessional contributions caps can be used on a rolling basis for five years upon which they will expire.


For example, if a self-employed taxpayer has a carry forward balance of $50,000 at 30 June 2022, the taxpayer could make concessional contributions of up to $77,500 by 30 June 2023 without breaching the contributions cap if their super balance was less than $500,000 at 30 June 2022.


(ii) Super contributions made by cheque or electronic funds transfer (EFT)


Care needs to be taken where last minute contributions are made by cheque or electronic fund transfer to ensure that the deduction can be claimed in the current financial year.


Where the super contribution is made by cheque and the fund receives it by 30 June 2023, the deduction is allowed in the current financial year so long as the trustee banks the cheque within 3 business days and the cheque is not subsequently dishonoured.


Where the contribution is by EFT, it is taken to be made when the amount is “credited” to the bank account of the fund and not when the transfer is made.


Unless the contribution is made between linked accounts of the contributor and the fund (held at the same bank), the deduction may be deferred to the next financial year where the funds are not credited to the super fund account by 30 June 2023.


(iii) Super contributions made to the government’s small business superannuation clearing house (SBSCH)


To ensure a deduction can be claimed for employee super guarantee contributions in the 2023 year, the ATO says that due to processing time delays, payments need to be accepted by the SBSCH by 23 June 2023.



Defer income & capital gains tax


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 2023.


Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the “issuing of invoices” until after 30 June 2023.


Realising a capital gain after 30 June 2023 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes. In some cases, the capital gain can be further reduced to Nil under the small business capital gains tax concessions.


Family trust distributions


For the 2023 year, minors (i.e. children under the age of 18 at 30 June) can receive investment income (including trust distributions) of up to $416 without paying tax. Any income earned above this amount is taxed at penalty rates.


Income received by a family trust should be allocated amongst the various beneficiaries by 30 June each year and documented by way of resolution. It is preferable that the resolution is made by 30 June 2023 to avoid any later dispute with the ATO as to whether the income was properly allocated by this date.


The exact requirements for allocating trust income are set out in the trust deed, and as each trust deed is different, it is vital that trustees are aware of the terms applying to that particular trust.


Failure to follow the terms of the trust deed and to allocate the relevant income by 30 June 2023 may result in the trustee paying tax on income of the trust at the top marginal tax rate of 47% (including 2% Medicare levy).


Note also that special rules apply to the “streaming” of capital gains and franked dividends received by family trusts to particular beneficiaries, and if you wish to stream it is critical that there are sufficient “streaming” provisions in the family trust deed which allow the trustee to do so.


Also note that the ATO has finalised its guidance on the treatment of trust distributions made in certain situations (such as to adult children or retired parents who may not receive the benefits of the funds allocated to them) and the potential application of an anti-avoidance rule in Section 100A of the tax legislation which can have the effect of assessing the trustee at the top marginal tax rate of 47% instead of assessing the beneficiaries who were purportedly allocated the distributions. The most important step that trustees and advisors should take is to consider the effect of this on the allocation of trust income for the 2023 tax year and take appropriate steps to ensure that the approach taken will stand up to ATO scrutiny.


Write-off slow moving or obsolete stock


All businesses have the option of valuing trading stock on 30 June 2023 at the lower of actual cost, replacement cost, or market selling value. A different valuation method may be applied for each item of trading stock.


For example, where the market selling price of stock items at year-end is below the actual cost price, your business can generate a tax deduction by simply valuing the stock at market selling value for tax purposes.


Also, in situations where stock has become obsolete at year-end (e.g. fashion clothing), your business may elect to adopt a lower value than actual cost, replacement cost, or market selling value, provided the value adopted is reasonable.


Claim deductions for expenses not paid at year end


All businesses are entitled to an immediate deduction for certain expenses that have been “incurred” but not paid by 30 June 2023 including:


Salary and wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2023, but have not been paid until the new financial year.

Directors fees. A company can claim a tax deduction for directors fees it is “definitely committed” to at 30 June 20233 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2024 year when the amount is actually received.


Staff bonuses and commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2023 where it is “definitely committed” to the expense.


Repairs and maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2023 but not paid until the next income year.



Write-off bad debts


If your business accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2023 so long as the debt is declared bad by 30 June 2023.


Your business will need to show that it has made a genuine attempt to recover the debt by 30 June to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a company directors minute).


Your business can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.


Personal services income rules


If you conduct a business through a trust or company structure that relies on your personal effort and skill to generate the income, there are different rules that apply to the diversion of some or all of that personal services income.


For example, if your company earns personal services income, the ATO can treat the income as having been earned by the individual rather than the entity that earns the income, unless certain tests can be satisfied. The personal service income regime also denies particular types of deductions which would otherwise be available to a business.


Disclaimer

This information is provided solely for general information purposes and is not intended as professional advice. Readers should not act on the information contained therein without proper advice from a suitably qualified professional.


We expressly disclaim all liability for any loss or damage to any person or organisation for the consequences of anything done or omitted to be done by any such person relying on the contents of this information.

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