Tax: The good, the bad and the ugly for small business owners

13 Aug Tax: The good, the bad and the ugly for small business owners

Tax is one of those unavoidable parts of running a business. When things are going well, paying tax can actually be a sign that your business is profitable. But without planning, tax can also create cash-flow pressure, unexpected bills and, in the worst cases, serious problems with the Australian Taxation Office.

For small business owners, the goal should not simply be to pay less tax. It should be to run a profitable business while legally and appropriately managing your tax position. That is where regular advice from your accountant can make an enormous difference.

The Good: Tax Planning Creates Opportunities

The good side of tax is that the Australian tax system recognises that businesses incur legitimate costs in earning income. Generally, many expenses incurred in operating a business can be deductible, subject to the relevant tax rules and appropriate records being maintained.

Depending on your circumstances, these expenses might include wages, rent, professional services, insurance, marketing, equipment and other costs associated with running the business.

Eligible small businesses may also have access to a range of tax concessions, although eligibility and the rules applying to each concession need to be carefully considered.

This is where tax planning becomes valuable.

Rather than waiting until after the financial year has finished, meeting with your accountant during the year allows you to estimate your likely profit, understand your potential tax obligations and consider legitimate strategies before important decisions are made.

Good tax planning can also help answer a much bigger question: What should we do with the profits?

Should you retain cash in the business? Reduce debt? Invest in equipment? Make additional superannuation contributions where appropriate? Employ another person? Expand? Or simply build a stronger cash reserve?

Tax should be part of these decisions — but rarely the only reason for making them.

The Bad: The Tax Bill You Didn’t Expect

The bad side of tax is often poor planning.

A business can appear profitable while simultaneously struggling for cash. GST, PAYG obligations, income tax, employee obligations and other liabilities can accumulate while money sitting in the bank creates a false sense of security.

The danger is spending money that effectively needs to be reserved for future obligations.

Another common mistake is waiting until tax time to organise records. Accurate record keeping is an important part of meeting business tax, superannuation and other obligations, and businesses need appropriate evidence to substantiate deductions they claim.

A good accountant should therefore be more than someone you visit once a year to lodge a tax return. Regular conversations can help identify potential issues before they become expensive surprises.

The Ugly: Chasing Tax Deductions at Any Cost

Then there is the ugly side.

Buying something purely because it is “tax deductible” does not automatically make it a good financial decision.

Spending $10,000 unnecessarily simply to obtain a tax deduction still means you have spent $10,000.

Even more concerning is crossing the line between sensible tax planning and arrangements that are inappropriate, poorly documented or inconsistent with tax law.

Business owners should be particularly careful about mixing personal and business expenses, claiming expenses without adequate evidence, treating business money as personal money without understanding the consequences, or entering complex arrangements purely for a perceived tax advantage.

The ATO continues to focus on areas of small business tax compliance, making good records and appropriate professional advice particularly important.

Tax Minimisation Should Be About Efficiency, Not Avoidance

There is nothing wrong with wanting your business to be tax efficient.

In fact, understanding the concessions, deductions, structures and planning opportunities legitimately available to you is simply good business management.

But the smartest tax strategy is rarely about finding a clever trick at the end of June.

It is about planning throughout the year.

Talk regularly with your accountant. Keep accurate records. Understand your numbers. Put money aside for upcoming liabilities and discuss major financial decisions before making them.

Most importantly, remember this: the objective of business is not to minimise tax at all costs. It is to maximise sustainable, after-tax wealth.

Your accountant can help you understand the difference — and that advice may be one of the most valuable investments your business makes.

If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.

This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.

(Feedsy Exclusive)