Small Business Tax Management

In my experience too many small business owners, and individuals alike, make financial decisions based on the tax implications of the transaction. STOP IT.

Paying tax is GOOD - it means that you are making money.

Of course we all want to try and legally reduce the amount of tax that we pay, and there are many strategies that can assist with this goal. So my top 5 tax tips for small business and investors are:

  1. Turn non deductible borrowings into deductible borrowings. Any money that you have borrowed for personal reasons is costing you money - in more ways than just the interest. Wherever possible you should look to convert the loan that you have from one which is of a purely personal nature to one that is being used to derive income - e.g. if you have a share portfolio you could sell the shares, pay the proceeds off your mortgage and then redraw the funds to purchase a new share portfolio.
  2. Repairs to your investment property. This is a very tricky area and one which you need to be very careful of when fixing your investment property. If you "improve" and don't simply repair; then you can render the expense as a non deductible expense which then has to be added top the cost price of your property. So the golden rule is to seek advice BEFORE you spend to ensure that it will qualify as a deduction.
  3. Be wary of negative gearing. By its very nature negative gearing means that you must "lose" money in order to claim this against your other income. Call me silly, but that appears to be a very unsound goal. If I said to you - "Give me $1000 dollars now and maybe in a few years I will give you $2000, but no guarantees - you take all the risk, but you can claim that $1000 against your income now and get back around $300 from the tax man." Would you do it - not smart! Now cash flow positive investment properties are hard to find unless you have a substantial deposit - but they are out there. So make sure that before you buy that investment property you have spoken to someone with is skilled in this area and can show you in cold hard figures what the real position is. Negative gearing ahs its place in certain circumstances but it is not the godsend that many people propagate.
  4. Prepaying expenses to take advantage of the deduction early. This is still allowed however it has been reduced significantly. Your financial adviser will show you how this can be done legitimately.
  5. Advice, Advice, Advice. Would you walk into a used car lot and purchase a used Lada because your friends down the road had just done so and were loving it. Of course not you would do some research, get onto some online Lada forums and quiz the automobile club in your state about the quality of the Lada. I see too many people go out, buy an investment property and turn up to their accountants at the end of the year and expect them to fix their issues. If you want to go out and get an investment property go and get the right advice BEFORE you sign the contract. Purchasing the property in the right name is critical to getting the most out of your investment. The second part to this is: selecting the right adviser. This is discussed in detail in another article.

Of course we all want to legitimately reduce the amount of tax that we pay, but this must never be at the expense of the actual reason that you are planning to undertake a potential investment.

Understand your goals and make sure you communicate these to your advisors.

Published on March 3-st, 2008 in Financial Planning
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.