Just before the end of the financial year profitable businesses often look for tax deductions that will reduce the income tax that they pay. Depending on whether the business profit is taxed at the company rate or taxed at the individual marginal rates, a better tax result could be achieved by delaying a payment until the 2019 financial year.
The common end-of-year tax planning steps that small business owners can take includes:
- buying assets that cost under $20,000,
- having equipment or assets repaired before June 30,
- maximising tax-deductible super contributions, and
- delay earning income until the new financial year.
When a small business is operated through a company it does not matter when a deduction is claimed as the tax rate of 27.5 per cent is the same in the 2018 and 2019 years. However where the business profit is paid at individual marginal tax rates, and the profit for the 2019 year is expected to be higher than 2018, bringing forward a tax deduction can result in a smaller tax benefit.
An example of this is a business operated through a husband and wife partnership that has a profit before making a tax deduction of $70,000 for the 2018 year. The purchase of a $15,000 business asset before June 30 saves tax at the rate of 21 per cent for the husband and wife.
If the estimated profit for the business for the 2019 year is $100,000, a better tax result will be achieved by delaying the purchase of the business asset until after June 30, 2018. This is because the individual marginal tax rate for incomes over $37,000, including Medicare levy, is 34.5 per cent, while the rate on income under $37,000 is only 21 per cent.
Q. My husband and I are looking at opening a business and would like to know if any of our purchases can be instantly deducted under the $20,000 tax write off for a small business. As this is a new business and has yet to make a sale, but will in the coming weeks, would we be eligible for the $20,000 tax deduction if we purchased two new laptops, which both cost $3000? Also will we get all of the $6000 we spent back when our first tax return is lodged?
A. You will only get a benefit from the $6000 if the income that your business earns for the 2018 year, after taking into account it was only operating for part of the year, resulted in you passing the non-commercial loss $20,000 income limit test.
If this test is not passed you would get no tax benefit for the 2018 year, but could claim the loss against other income you earn next year, as long as the $20,000 business income limit is reached.
The benefit of the $6000 is not a refund of the amount that you pay, but a reduction in the tax that you pay. This means that the 21 per cent tax rate creates a tax reduction of $1260, while the 34.5 per cent tax rate results in a tax reduction of $2070.
Max Newnham is a partner in TaxBiz Australia and founder of SMSF Survival Centre.