Tax Time Myths Busted

Tired of the same old tax tips? Here’s some ‘between the lines’ information to keep in mind if you’re a small business owner. 

Tax time is on the horizon again and along with it comes the barrage of tips and insights from accountants and financial experts.

The information seems to be the same every year but this doesn’t mean you have to follow it to the letter. In fact, some of the most common tips might not actually apply to your business.

Have a look at some alternate perspectives to generic tax times tips and you’ll see why it makes sense to get individualised advice as you grow your small business.

Tip: Spend up before EOFY…

…IF you can afford it

Most of the tax advice columns talk about spending money before June 30th. This is the case if you have surplus cash and there are things your business genuinely needs.

For example, you might desperately need to do some marketing, or your sales reps could require vehicles. If you make purchases before June 30th, the tax write-off will be applied to your tax return for the same year. Spend the money after July 1st and you’ll have to wait a year to claim the deductions.

It does make sense, but what often fails to be mentioned is that even if an expense is a tax deduction, you still have to spend the money. Spending $1 to save 30 cents won’t put you ahead financially. You may be better off investing surplus money and allowing it to grow.

The takeaway: Make sure you’re not splurging at tax time for the sake of it.

Tip: Defer payments from your clients and claim every deduction possible

…IF you aren’t worried about proving you’re making a healthy income

It is a bit of a catch-22 situation in June.

Many businesses are trying to make necessary purchases so they can reduce their tax bill. Meanwhile, lots of people are saying “It’s ok, it can wait until July!” because they don’t want to wind up with a surplus of money that is subject to tax.

Asking people to pay late makes sense if you want to minimise your tax bill by pushing revenue into the next financial year. Similarly, going through your expenses with a fine-toothed comb and claiming every possible cent as a deduction will reduce your taxable income.

However, if you know you need to borrow money in the near future, you may be better off with a cash surplus on June 30th. If you have pushed payments across to the next financial year and claimed a lot of expenses, it could potentially play against you.

It’s not completely black and white, but the higher your income and the better your profit margins, the easier it should be to borrow.

The takeaway: Talk to your accountant about your next moves. They will help you make a tax minimisation plan that matches your goals.

Tip: Prepay your expenses…

If you’re not expecting a big year next year

Still on this topic… you may read that you can prepay expenses like your office rent for the next financial year. This is a good way to move surplus money and avoid paying taxes on it.

However, if you are forecasting growth, you could just end up kicking a big tax bill down the road. You will have to find other expenses to fill the gap in the prepaid rent bill.

The takeaway: Doing some forecasting is helpful because it allows you to make more calculated spending decisions.

Tip: Put money into your superannuation to minimise tax

… if the money isn’t better directed elsewhere

There is a lot of talk about tax deductions and superannuation. Make voluntary contributions to your super and the money won’t be taxed at the same rate.

Doing this is a great way to save for the future. However, once you put that money away, you can’t get it back until you retire.

If you have surplus cash to pay yourself with, it may make more sense to put it against your mortgage or reduce high-interest debts. This isn’t personal financial advice so we can’t say for sure if this is the case, but it’s worth a chat with a professional to figure out if contributing surplus funds to super as your first priority definitely makes sense for you.

The takeaway: Speak to a professional about the best way to maximise your wealth.

Tip: Save money by filing your taxes online

…IF you aren’t too worried about accuracy

Actually, not many accountants will tell you to file your taxes yourself. This is because there are so many rules and regulations about what you can claim. You’re more likely to hear this kind of advice from someone at a backyard BBQ.

You can save a few hundred or a few thousand dollars with a DIY tax return. However, you could be missing out on a better outcome. And if you get your figures wrong, you could face an audit from the ATO.

The cost of getting help is a tax-deductible expense that does make sense. As an added bonus, accountants can delay the filing of your tax return so you have time to put money towards a bill if you know you have one coming.

The takeaway: You’d think accountants were paying us to write this… but we know getting professional help makes sense if you’re serious about staying in control of your money and growing your business.

Final tip: Preparation helps

There’s no opposing perspective on this one…

If your business is making money, you have to pay taxes. It’s never easy to figure out how much money to put aside but if you get a general rule of thumb and make sure to store it in a separate account every month, you’ll have a lot less stress when your tax bill comes in.

Often, your quarterly contributions are calculated based on your previous year’s earnings. If you’re in a growth period, you may find you wind up with a larger EOFY bill than expected. Again, work closely with your accountant to check you’re putting enough money aside to cover the cost of tax. It’s easy for small tax debts to add up over the years, leaving you under financial stress.

Best of luck this tax time! Don’t forget to connect with reliable and highly recommended financial providers on the BackBone platform.