Do what this guy has done and buy things for your business now to make the most of the $20,000 tax deduction for small business. Pic Mark Brake Source: News Corp Australia

The small business sector has also become the darling of the Federal Government’s economic stimulus plan particularly now that the mining boom is running out of puff. In fact there were so many sweeteners in the recent budget that small business owners must be feeling like that kid at school who shoots to popularity for scoring the winning goal in the rugby final.

But there are some things you need to think about when making these sweet deals work for you and your business. KPMG tax expert Simon Le Maistre said that one of the main things to be aware of is that tax rates are coming down. Currently the tax rate is at 30 per cent and next year the government is set to cut it to 28 and a half per cent.

Mr Le Maistre said reaping the benefits of this is really a matter of timing and if you understand how to use it to your advantage then it can result in significant tax relief.

Firstly he said spend and spend now. The reason? To make sure you get the 30 per cent deduction this year. “If you’re looking to spend that money you ideally want to do it this year when you can get the full deduction for something under $20,000 and you’ll reduce your tax this year when you’re paying 30 per cent.”

He also said the much hyped $20,000 tax deduction is not really about that number, much more significant is its tax effect and for a company this is around a $6,000 immediate tax benefit.

“If you’re a restaurant and you’re going to go out and buy 20 tables, if each of those tables is worth $5,000 that could be a $100,000 deduction which could give you a tax benefit of $30,000. So it could amount to a very significant deduction this year”

Another thing Mr Le Maistre suggests is deferring income. He said because next year tax will drop to 28 and a half per cent, any dollar you push to next year you will be paying less tax on.

“If you’re looking to issue invoices in the next couple of weeks maybe issue them on the 1st of July or if someone wants to pay you in advance maybe get them to pay you on the 1st of July so you pay less tax and you’ll also give yourself a years grace before you need to pay the tax on it.”

The other issues small businesses need to ask themselves as the end of the financial year approaches is what decisions should they be making and what actions should they be taking before year end. Mr Le Maistre means things like writing off your bad debts and making sure your superannuation payments are paid and received by the super fund.

“Small business should also be thinking about and discussing prepayments of services like rent and training courses. “You should be making sure you do that stock take before year end and think about what in your stock is obsolete and what you should be getting extra deductions on,” he said.

Mr Le Maistre said, “One of the ways that small businesses can get caught out is if you’re a company and you have any loans from the company then you need to be careful to deal with it before year end or it could be treated as an unfranked dividend which is essentially a source of income that will be taxed.”

If that happens your company could almost have a tax rate of 60 per cent or higher because you get taxed as a company and you get taxed as an unfranked dividend as an individual.

“There are things we can do to play around the edges, but where we see things going wrong is where people miss these details and it’s not something as a business person that you think about but it what the tax office is looking at.”