Time is short to reduce tax
Q: My wife and I run a small business and we’re wondering whether there is anything we should be considering for ourselves and the business before the end of the financial year? Luke and Natasha - Subiaco A: Time is running short. If you would like to minimise the amount of tax you pay this financial year, you have a limited window in which to organise your finances.
With that in mind, here are the top four suggestions to help you reduce the taxman’s cut of your income for 2015/2016.
1. Understand your income – and what you can claim as an expense.
Your income can potentially include a lot more than just your fortnightly pay packet.
Bank interest on savings accounts will count as income, as will share dividends (any profits you have made through buying and selling shares will be taxed as a capital gain, so you need to allow for that too!).
While negatively geared properties are in the news at the moment, positively geared properties will also need to be recorded as income.
The flip side of this income is that interest and professional fees relating to this income can be prepaid before July 1 so you can claim it as a tax deduction too.
This applies to both businesses and individuals earning income.
2. Delay income if you are a cashbased small business.
Depending on the accounting system your business uses, you can reduce your taxable income by delaying the receipt of income until the new financial year.
Accrual accounting counts income when it is earned, while cash accounting counts income when it is received, so if you are a cash-based business, make invoice due dates after July 1 and you won’t have as much income to declare. 3. Pay your bills before July 1. This is the opposite of delaying income.
By paying bills in this financial year, even if the due date isn’t until after the end of June, you will increase your deductible business expenses for the 2015-16 financial year and reduce your taxable income.
While individuals don’t have the same range of allowable deductions as businesses, the same principle applies.
4. Make deductible purchases before July 1.
This is more of an extension of paying your bills than a separate point, but it is important to understand that if you are considering any major purchases in the coming months, it is worth getting organised now so you can either deduct the full purchase now or get the first portion or depreciation in for more expensive items.