The last few months of the financial year see most people turning their business eye towards their tax planning. However, it is never too early to consider tax planning, even now over nine months from financial year end.
The following items came about from a recent discussion with a client concerned about what the year could bring financially and therefore tax-wise also. Although much of this discussion was Primary Production related, the same applies to all businesses.
Something often overlooked is how to structure receiving income, which needs to be considered before an income event happens. Many may consider this counting chickens before they hatch, but without planning you can never really manage the flow of income. Consider the timing of contracts for commodity sales. Is there the opportunity to sell at agreed values with payment terms spread out? This could mean pushing into the next financial year and deferring tax payable. Where possible, storing commodities and selling in another financial year can also defer tax. These options need to be carefully considered as cashflow will be impacted, possibly resulting in strain on working capital.
Holding off selling to defer payments creates price fluctuation risk, but could equally result in achieving higher commodity prices.
Deferring the receipt of income, having already delivered requires confidence in the buyer that they will still be able to pay in future.
Entering agreement on price now with future delivery, particularly without a contract in place does put you at risk as to whether the purchaser will take the commodity in time, especially if prices have dropped or they have fulfilled their orders.
When it comes to expense-related planning the $20,000 immediate write off is very popular with those businesses in the Small Business Entity regime. The May 2018 Federal Budget announced this will again be extended, this time until 30 June 2019, extending the opportunity to purchase any number of items costing less than $20,000 (GST exclusive) before the end of the financial year. A rule of thumb I apply with regards to this initiative is to only acquire those items you would have considered required items regardless. Do not buy things for the sack of the deduction.
For those who are Primary Producers there is also the opportunity to consider the timing of your Farm Management Deposits (FMD). These are generally considered whilst doing May/June planning, however there can be a real benefit having access to these earlier in the year. The reason for this is the twelve-month initial period an FMD must stay deposited. Therefore, if the FMD was deposited in January this year, it would come available the following January. If the next season is poor, the timing of the cashflow from the FMD may alleviate cashflow shortfalls that may otherwise have been suffered. For example, in the January to May period as new season cropping expenses are due or when many equipment finance payments come due, it would be beneficial to have that additional cashflow.
At the end of the day many tax planning opportunities arise through the timing of activities – deferring income and therefore tax, bringing forward expenses and therefore tax savings. These strategies result in the timing of tax changing, not being eliminated entirely.
To get a once-and-for-all reduction in tax there are a limited number of methods. A couple to consider are making Concessional Contributions to a superannuation fund and reviewing the current business structure to ensure income is being taxed at the lowest possible marginal tax rate.
So, don’t just wait to start having the tax planning talk late in the financial year, consider it well before the income is even in the bank. Particularly where income is substantial being prepared will allow better control over tax at year end.
Don’t be afraid to talk to your accountant about tax planning throughout the year. We’re here to help at any time.