How to reduce your tax bill

The two simplest ways to do this are to reduce assessable income or increase deductible expenditure. Either way, the business’ taxable income (and thus the amount of tax payable) is reduced.

One way to reduce assessable income for the current income year is to delay sending an invoice to a customer until after 30 June, if your business reports income on a cash basis. Of course, cash flow issues may dictate otherwise.

If you are in the process of selling property and the profit will be taxable as a capital gain, you could defer the sale until the next income year – but remember that the liability to pay capital gains tax (CGT) arises when you exchange contracts and not on settlement.

You can increase deductible expenditure by bringing it forward from the next income year to the current income year. This is particularly useful where an immediate deduction is available — for example, for certain depreciating assets if you are a small business, start-up costs and certain prepaid expenses.

Charitable donations are a good way to increase your deductions. If you are not sure if a donation will be deductible, you can check the deductibility status of charities at: https://www.abn.business.gov.au/Tools/DgrListing.

In certain circumstances, a deduction is available where trading stock is donated. Don’t forget to ask for a receipt.

What are the benefits?

If you are a sole trader or a partner in a partnership, the benefits of reducing your taxable income could include:

• reducing your marginal tax rate, for example, from 37% to 30%, or from 30% to 16%; and
• avoiding liability for the Medicare levy surcharge (MLS) (at least 1% of your income for MLS purposes) if you do not have appropriate level of private health insurance hospital cover.

Tip! - As the end of the income year approaches, talk to your tax adviser about ways to minimise your tax bill.

Division 7A issues

If you operate your business through a company, you will need to consider any arrangements between the company and associated entities, such as shareholders and trusts, involving a loan, the forgiveness of a debt or the use of the company’s assets, to see if a deemed dividend under Division 7A might arise.

You should ensure that the required minimum yearly repayments (MYR) under complying Division 7A loans are made by 30 June. Appropriate directors’ resolutions are needed for any dividends declared by 30 June that will be ‘offset’ against a shareholder’s obligation to make the MYR.

The ATO is continuing to treat unpaid present entitlements (UPEs) of corporate beneficiaries as Division 7A loans, as it awaits the High Court’s decision on its appeal against a decision that a UPE was not a loan for the purposes of Division 7A (the Bendel case).

Tip! - Division 7A can be a minefield. Talk to your tax adviser to avoid being assessed on an unfranked deemed dividend.

Bad debts

Your business may be entitled to a deduction for bad debts provided the debt is written off before the end of the income year. A debt that is merely doubtful is not deductible.

Writing off a bad debt does not necessarily require highly technical accounting entries. It is sufficient that some form of written record is kept to evidence the decision to write off the debt from the accounts. A directors’ resolution should be sufficient.

The debt must have been owed to you and is genuinely bad. This means it must be an amount that you have determined is unlikely to be recovered through any reasonable and commercial attempts.

Unless your business is a money-lending business, a bad debt deduction is not allowed if the debt has not been previously included in assessable income. So, if your business accounts for assessable income on a cash basis, an amount is not included in assessable income until it is received. Therefore, writing off a debt for an amount of unpaid income will have no income tax consequences for your business, as it has never been previously assessed.

If you operate your business through a company, the continuity of ownership or the same/similar business tests must be satisfied. Different tests apply if you operate your business through a trust, depending on the type of trust. Only one test applies — the income injection test — if the trust has made a family trust election (FTE).

Trustee resolutions

If you operate your business through a trust and you wish to make beneficiaries presently entitled to trust income for the 2024–25 income year, you should ensure your trustee resolutions are effective. This includes where you may want to make beneficiaries specifically entitled to franked dividends and capital gains that are included in trust income to stream these amounts.

Note that you do not have to prepare the trust accounts by 30 June to make beneficiaries presently entitled to trust income.

It is important that the trustee:

• makes decisions consistent with the terms of the trust deed. Check that the trust has not vested, as this may impact distribution decisions;
• consider who the intended beneficiaries are and their entitlement to income and capital under the trust deed. If the trustee has made an FTE or interposed entity election (IEE), this may have a tax impact on distribution decisions;
• notify beneficiaries of their entitlements to allow beneficiaries to correctly report distributions in their tax returns, preventing trust income from being omitted;
• follows any requirements in the trust deed governing the making of trustee resolutions, including the need to make the resolution in writing and when it is required to be made (there is no standard ATO format). Resolutions making one or more beneficiaries presently entitled to the trust income need to be made by the end of the income year;
• ensures that resolutions are unambiguous; and
• if the trust has capital gains or franked distributions the trustee would like to stream to beneficiaries, confirm the trust deed does not prevent this and that the trustee has complied with the legislative requirements relating to streaming these amounts.

Trustee checklist

To help trustees, the ATO has published a useful checklist in the form of a series of questions.

• Do you have a complete copy of the trust deed?
• Who can you appoint income or capital to?
• Has the trust vested?
• Is there an FTE in force for the trust?
• When do you have to make resolutions?
• Does a resolution have to be in writing?
• Is the wording of your resolution clear and unambiguous?
• Is the entitlement vested?
• Can the entitlement be taken away?
• How should you calculate and report the income of the trust?
• Are you ‘streaming’ capital gains or franked distributions?
• Are you seeking to ‘stream’ other types of income?
• Have all entitled beneficiaries quoted their tax file number (TFN) to you?

Family trusts

Family trust distribution tax (FTDT) happens when a trust that has made an FTE, or an entity that has made an IEE, makes a distribution outside the ‘family group’ of the individual specified in the FTE. This includes when distributing to another entity. The rate of FTDT is 47%.

So, where an FTE or IEE has been made, it is important to identify who is in the family group.

For non-fixed (discretionary) trusts to be within the family group of the individual specified in the FTE of another trust, they would need to have either:

• an FTE with the same specified individual in place; or
• an IEE as a member of the specified individual’s family group.

There is also a risk of not satisfying the qualified person rules where dividends are paid to a discretionary trust that has not made a family trust election. This means there could be restrictions or even the inability for the trust to pass on to beneficiaries franking credits attached to distributions of dividend income.

Tip! - Talk to your tax adviser – they can help you ensure that trustee resolutions are effective and that no liability to FTDT will arise.