By Ian Ash
Just after the start of this financial year I began working with a young couple who run a business in the health and wellbeing space.
They are both hard-working and keen to do the best for their clients, but they came into our second meeting extremely angry as they had just received a tax bill for close to $20,000.
Theirs is not a large business and in the previous financial year they had elected not to pay the husband a salary believing that it was better to keep the money in the business.
However, this turned out to be not such a great move, so let’s look a bit more closely into why and what they could have done differently to save on tax.
If the tax bill was $20,000, then since they are a small business, the company must have made $80,000 profit.
Let’s assume they knew fairly on the company would make a profit around this figure and instead of keeping all the profit in the business, they paid the husband a monthly salary that totalled $70,000 annually.
The following would then have applied:
Company tax = $80,000 – $70,000 = $10,000 at 25 per cent = $2500
Tax on husband’s income = $13,217
Total tax paid = $13,217 + $2500 = $15,717
Total tax saving = $20,000 – $15,717 = $4283
In addition, the couple are now better off personally by $56,783 due to the husband’s net salary.
Now I am not suggesting you should take as much out of the business as you can since it is always wise to keep some in reserve for those unexpected events, but the moral here is to keep track of the company’s profitability and ensure a proper balance between cash kept in the business, personal income and investment back into the business.
As we approach the end of the financial year, I always recommend that my clients take their forecast net operating profit figure and divide into four as follows:
one quarter for the ATO
one quarter for investment into the business
one quarter in reserve for those ‘rainy days’
one quarter for bonuses and/or recognition events for staff and management
Small businesses have access to an instant asset write-off of $20,000 which means that the cost of equipment purchases can be expensed rather than depreciated and hence reduce the company’s tax for this year. However, take care with this one since there may be fringe benefits tax implications here (especially with vehicles) so if in doubt consult your accountant first.
Finally, if you are a small cash accounting-based business that is providing services to an accrual accounting-based business, then it may be worth discussing what is known as ‘advance billing’.
This is where it is known and agreed that the services will be provided in due course and instead of invoicing for them after they have been completed, an invoice for the work is sent to the accrual- based business in advance.
This benefits the latter since invoices received will be tax deductible in that period and also benefits the cash-based business since the work is now locked in and actual payment made according to the agreed trading terms.
Ian Ash is the managing director of OrgMent Business Solutions ombs.com.au
