1. Use the right business structure
When you start a new business, you need to carefully choose the right business structure for your goals and for the type of business you want to run. Each business structure has different requirements around set-up costs, asset protection and tax.
Therefore, the first step in determining how to reduce taxes is to choose the business structure that best meets your overall needs and priorities. There are four primary business structures in Australia and their tax implications are as follows:
Sole trader
You pay taxes on your business income and any other earnings at the applicable marginal tax rate for individuals. Note that your tax rate could be up to 45% (plus Medicare levy) for top income earners.
Partnership
A partnership business structure is essentially a group of individuals. Each member of the partnership pays individual taxes based on their share of profits, alongside any other earnings in the financial year. The partnership itself doesn't pay taxes.
Company
The company tax rate is 30%, or 25% for base rate entities. Unlike other business structures, there's no tax-free threshold for companies - every dollar earned is taxable
Trust
Each beneficiary must declare their share of trust income on their individual tax returns. The trustee can distribute trust income in the most tax-effective way, typically to beneficiaries with the lowest marginal tax rates. The trust itself doesn't pay taxes.
2. Claim all tax deductions
If you’re wondering how to reduce taxable income, Australia offers several business tax deductions that can help reduce your tax liability. For example, you may be able to claim deductions for:
business travel expenses
the purchase of essential equipment
depreciation of assets.
You may also be able to claim for the business share of items that are also used for personal purposes, such as laptops, mobile phones and motor vehicles.
For example, if your phone usage is 50% business and 50% personal, you can only claim a business deduction for half of its costs.
Claim a tax offset
If you’re a sole trader, partner or trust beneficiary of a small business with an annual turnover of less than $5 million, you may be able to claim a $1,000 tax offset to lower your tax liability.
3. Write off bad debts
If a debtor or customer fails to pay you, and that money would have been part of your income, you may be able to claim a deduction for the unrecoverable income (bad debt).
4. Distribute income to family members
If your business is a trust, its beneficiaries pay tax on the income they receive from it. The trustee can decide how to distribute trust income. If the beneficiaries are family members, it may make sense to distribute income to those on the lowest marginal tax rate - if the trust distributions are those beneficiaries’ only source of income, their tax liability for those earnings might be minimal.
5. Increase super contributions
Another way to reduce your taxable income is to make personal before-tax contributions to your super (contribution caps apply).
6. Delay income collection
If you’re trying to lower your income-based tax obligations, consider postponing your invoicing to after the end of the financial year. Any money you collect after 30 June will count toward the next fiscal year.
7. Pay all employee super by the deadline
If you have employees, you can claim a deduction for Superannuation Guarantee contributions, mandatory contributions under industrial awards and salary sacrifice contributions, but only if you make all employee contributions by 30 June.
Consider paying your contributions at least a full week before the filing deadline to allow time for processing delays and other administrative hiccups.
8. Account for asset depreciation
Some business assets may be tax-deductible if they lose value over time. For example, you may be able to claim depreciation deductions for machinery and work vehicles.
9. Make personal concessional super contributions
If you’re self-employed, you may be able to make contributions to your super out of your pre-tax income, reducing your overall tax liability and helping you plan for your financial security in retirement.
10. Consider capital gains tax (CGT)
If you sell any shares or assets that you’ve held for less than a year, you’ll pay higher capital gains tax as part of your income tax. If you hold them for more than a year, you’ll get a 50% CGT discount, which means you only pay tax on half the net capital gain on that asset. (Note that CGT doesn't apply to depreciating assets, such as business equipment).
11. Offset income with negative gearing
As an individual, if you own a rental property with costs that exceed your profits, you can deduct your losses from your taxable income. And if you know that you’ll take a loss on your rental property in the financial year, you may be able to apply for a PAYG withholding variation, which decreases your withholding throughout the year.
12. Make charitable donations
Another strategy for minimising tax is making charitable donations. If you make charitable donations of money or property and have a receipt for your donation, you may be able to claim those expenses as deductions.
13. Purchase private health insurance
If you earn more than $90,000 per year as a single or $180,000 as a family and don’t have health insurance, the ATO will apply a Medicare levy surcharge of 1-1.5%, depending on your total income. You won’t be subject to this charge if you carry private health insurance (the cost of which could be much less than the Medicare levy surcharge).
14. Keep accurate tax records
Most of the tax-reduction strategies we’ve covered in this guide require tax receipts or other records. If you have paper records, consider making digital copies and storing them in the cloud so you can organise and retrieve them easily. Note: the ATO requires you to keep records for 5 years in most cases from the date you lodge your tax return.
15. Use accounting software
As a business owner, keeping track of all your expenses and every possible tax deduction can be difficult, but when you use accounting software all your key financial information is stored in one place. You can also use your software to manage tax and basic reports, track GST and lodge BAS.
Simplify your tax with MYOB
By choosing the right accounting software, business owners can simplify tax time by having their income and expenses at their fingertips. Even so, for many the help of a professional makes all the difference to their tax payable.
With MYOB Business, you can invite your accountant, bookkeeper, business partner or advisor to your software at no extra cost, so you can make sure you claim for all your eligible business expenses and don’t pay more tax than you need to.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation, including filing your BAS return or annual tax statements, then you should consult with your accountant or other registered tax adviser.