Effective tax planning in 2023

End-of-year tax time is the wrong time to start thinking about (or enacting) effective tax planning. When is the right time? As early as possible in your SME business journey and ensure it’s an ongoing process too. 

Tax planning can help your business to avoid surprises. By implementing a tax planning strategy your SME could reduce its taxable income as well as increase growth opportunities through effective wealth management. Done correctly, tax planning can help improve the business’ bottom line and stability.

The key considerations in effective tax planning:

Exit, succession planning 

Holding  investment assets, private assets or Division 7A loans in a business you plan to sell could impact your eligibility for the small business CGT concessions.

Flexibility in your trust distribution patterns year-to-year may allow you to save tax on business profits but could also impact on how your small business CGT concessions are applied. Strategic planning of distributions over time may enable significant tax concessions to be available to you.

Instant asset write-off

Due to end on 30th June 2023, Australia’s temporary full expensing measure will allow you to claim an immediate deduction for the cost of new assets in the first year they are installed ready for use or used.

Loss carry-back

An activity enabling business to offset or carry-back a loss in the current financial year against a profit in a recent year. This measure can mean the business obtains a refund of the tax paid in the earlier (loss) year, a reduced tax liability or tax debt owed. It’s important to note that this will also reduce a business’ franking account balance which could impact upon the ability to pay fully franked dividends.

Reviewing trust distributions

Most SME owners are familiar with the potential benefits of a discretionary trust – asset protection, tax advantages, a succession planning framework. Another advantage can be making distributions to beneficiaries on lower marginal tax rates.

The ATO has recently become more strict about situations where distributions are made by a trust to an adult child, but that child doesn’t receive the full benefit. 

Under Section 100A provision of tax law, these types of distributions will be of increasing focus to the ATO for the 2023 financial year and beyond. This could mean a different approach to trust distributions within your family and business. Read our article on Family Trust Changes for further details.

Superannuation contributions

Typically the ability to contribute a large amount to your superannuation fund and claim a tax deduction has been restricted by the concessional contributions cap (currently $27,500 annually). 

However, for individuals with a super balance below $500,000 and who have not exhausted their caps during 2019-2022 years, they may be eligible in the 2023 financial year to make additional contributions for which they can claim a tax deduction. 

Should very little or no superannuation contributions have been made since 2019 you may be able to contribute an amount in excess of $100,000 in the 2023 year and claim a deduction for the whole amount, resulting in significant tax savings (especially for those on a higher marginal tax rate).

Tax deductible debt

Maximising tax-deductible debt has always been a key tax planning strategy and it’s increasingly important given recent interest rates rise and more expected. When interest rates rise and therefore the total interest paid increases, potential tax savings from a deduction for interest also increases.

Tax rates and franking dividends

For most SME businesses the company tax rate is now 25%, however when a business pays a dividend it will not necessarily be franking the dividend at the same rate as the company tax rate. Seeking professional advice in order to understand the potential ‘top up’ tax as a dividend flows through your structure to the shareholders is crucial. 

Additionally, the marginal tax rate system plays a big part in tax effectiveness of gains and income across your business. If you or family members are on a high marginal tax rate then it may be overdue to discuss both trusts and a sensible structuring approach.

Other aspects of effective tax planning this financial year may include the managed timing of investment income and capital events, writing of bad debts, as well as home office and Covid-19 test expenses.

Here’s our team’s tips when it comes to tax planning.

Reinvest – consider that investing the funds saved from tax planning may be a clever way to boost your business’ bottom line and encourage responsible wealth management. Discuss this option with your business accountant. 

Research – stay current on any and all changes made by the ATO that may impact your business. You can do this by regularly communicating with your business accounting and researching the legalities around tax planning. 

Start now – the earlier you begin planning your tax the better for your business over the long-term. 

Stay aware – Be careful of tax avoidance schemes, including those promising tax benefits that aren’t legally available. The ATO has resources to help.

Strategise – contact your trusted financial team to get up-to-date and relevant information for you and your business.

Beyond Advisors can assist with effective tax planning and advice for SMEs. Get in touch with our helpful team today.

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