Tax Planning - Sole Traders

Tax planning is the process of estimating your current year's taxable income and tax payable and taking steps to minimise this

Tax planning involves 4 steps:

• step 1- estimate your taxable income for the year (01/07 - 30/06)
• step 2- calculate tax payable taking into account tax rates, offsets etc
• step 3- strategies to minimise your tax
• step 4- ensure you have sufficient $ set aside to pay your tax bill by the due date

see below for a detailed explanation
 

Step 1- Estimate your business profit the year (01/07 - 30/06)

Best time to do tax planning is after you lodge your March BAS / reconcile your business transactions up to 31/03.

Add to this an estimate of business profit (income less deductions) for April to June. You can estimate this figure OR divide the July - March results by 3

example

July - March $100,000 sales less $40,000 expenses = $60,000 business profit
April - June profit estimate = $60,000 / 3 = $20,000
Total business profit for the year is estimated at $60,000 + $20,000 = $80,000

Once your sales reach $75,000 * or if you employ staff we recommend you use a qualified bookkeeper & computerised bookkeeping program such as

-Xero (recommended)
-MYOB
-Quickbooks

* you will need to register for GST once your sales reach the GST turnover threshhold link

Step 2- Calculate tax payable

Income

-gross wages
-bank interest
-net rental property income
-capital gains (eg sale of crypto)
-business profit e.g. $80,000 (refer above example)

less deductions

-work related expenses
-donations
-tax agent fees
-income protection insurance
-concessional superannuation contributions (limits apply)

Equals taxable income

Tax is payable on your taxable income at marginal tax rates less tax offsets etc. We recommend using a qualified tax agent to do this calculation

Tax Estimate
-If your taxable income is below $30,000 keep aside 10% of business profit
-If your taxable income is between $30,000 and $70,000 keep aside 20% of business profit
-If your taxable income is between $70,000 and $150,000 keep aside 30% of business profit
-If your taxable income is more than $150,000 keep aside 40% of business profit

You should also take into consideration your spouses taxable income as this could affect your decisions

Note that generally you cannot split income with your spouse. Refer to the ATO PSI rules
 

Step 3- Strategies to minimise your tax

You can legally minimise tax by

• reducing business income
• increasing business deductions 

Before deciding how to reduce your business income / increase your deductions you first need to determine whether your business is on the 'accrual' or 'cash' basis for income tax

Note- you may be on a different method for GST - most businesses are on a cash basis for GST

If unsure ask your accountant / tax agent

Accrual basis - you are taxed on income when invoiced / you claim a deduction when invoiced i.e. invoice date

Cash basis - you are taxed on income when received / you claim a deduction when paid

Business Income

1-Deferring Income
Deferring Income until the following year

Business Expenses

Links
Small Business Entities - What's New
Small Business Guides

1- Prepaying Expenses
You can claim an immediate deduction for prepaid expenses where the payment covers a period of 12 months or less that ends in the next income year

2-Write-off Bad Debts
Write-off bad debts before 30 June to claim a bad debt deduction

3-Temporary full expensing of depreciable assets
Small business entities with a turnover of less than $10m that use 'simplified depreciation' MUST fully write off any assets purchased (new or second hand) up to 30/06 provided the asset is installed and ready for use

Ends 30/06/2023

Refer to the attachment at the bottom of the page 'ATO small business - Interaction of tax depreciation incentives'

Special rules apply to cars

4-Employee Superannuation
Pay your employee super by 30 June (normally due by 28 July)
Employee superannuation is on a cash basis - you claim a deduction only when received by the fund

Individual taxpayer deductions

1-Superannuation

Although sole traders cannot be employees of their own business they can still contribute superannuation and claim a tax deduction

• must be paid to the fund before 30 June (in fact it needs to be banked by the fund by 30 June so pay it by the 20th of June)
• must send a notice of intent (NOI) to the fund claim a tax deduction
• concessional & non-concessional limits apply
• you may be able to use carry forward unused limits from prior years - conditions apply

Consider making non-concessional contributions of up to $1,000 to receive the governments $500 co-contribution. Conditions apply

2- Maximising Home Office Deductions

Claim home office expenses using 3 methods:
-Fixed Rate
-Actual Costs
-Shortcut Method (ends 30/06/2022)
ATO link

3-Other

If you are a high income earner and your spouse is a low income earner then income is better in the low income earners name eg bank interest

If you are a high income earner and your spouse is a low income earner then deductions are better in the high income earners name eg donations

IMPORTANT

Before manipulating your taxable income (up or down) you will need to consider how it affects other areas such as

• Business cash flow
• Selling your business
• Insurance premiums and benefit payments
• Applying for loans
• Government benefits eg Family Tax Benefit Part A & B
• Medicare Levy Surcharge
• Child support
• etc

 

Tip

Most changes you make need to change

1-business profit - refer to the profit and loss statement, or
2-tax return
(not the balance sheet)

If you pay down a debt eg car loan it will only affect the Balance Sheet - not the profit and loss - so you may choose to spend the funds elsewhere
 

Step 4- Ensure you have sufficient $ set aside to pay your tax bill by the due date

Don't put your head in the sand - once you are behind it can be very difficult to catch up

If you do fall behind and you are unable to pay your tax when due we recommend you enter into a payment plan with the ATO

But note all future debts must be lodged and paid on time or the payment plan will default. The more you default the harder it will be to negotiate a new payment plan

ATO-small-business-Interaction-of-tax-depreciation-incentives.pdf (175kB)