It’s tax planning time – tips to optimise profit

Tuesday, June 11, 2024

Stock Journal Article - June 2024

Author: Chris Scheid, Moore Australia

May and June are busy times of year for those involved in Primary Production.  Another important job to get done before the end of the financial year is tax planning.   This not only requires your own preparation but also getting an appointment with your accountant in time to review your year to date profit estimate and have the time to implement any strategies before 30 June 2024.  It’s a busy time for accountants too!  Of course, if your business has accumulated tax losses, firstly there are deeper issues to work through such as the causes of the lack profitability and cashflow meaning that tax planning and paying tax this financial year are the least of your issues.   Tax planning is more than just minimising tax payable next year and beyond. We should really call it ‘profit optimisation’ – what are the reasonable steps to take in this financial year to arrive at a tax payable figure that will result in a (taxable) business profit (and subsequent surplus cash) that will assist your business with its future plans.  These future plans may include investing on farm (eg new machinery, infrastructure), investing off farm, repaying debt or paying yourselves better (a holiday, children’s education, home improvements).  Tax planning is not about paying $0 tax!

We must remember too that your bank, as your business partner, uses your past year’s taxation financials to assess your ability to service current debt (eg at bank review) and debt serviceability for future borrowings.  From the bank’s perspective, primary production businesses that are paying tax are businesses that they want to lend to.  So there’s a ‘Goldilocks’ balance to strike here – not overpaying tax while having enough cash available for future investments.  

The optimum tax rates to aim for is somewhere between 15-25%.  This strikes the balance between business profitability, cash available for the operator’s four above choices. Your choice depends on your businesses/family strategy.  In this higher interest rate cycle we are currently operating in, the last point above is most important - you can only repay principal if you’re paying tax!   Furthermore, you’re only likely to pay tax if you are profitable.  Business profitability is at the centre of business resilience!  

So, what tools can your accountant use to assist ‘profit optimisation’?  Farm Management Deposits (FMDs) work well when income is variable from year to year, whereby any money deposited into a FMD is claimable as a deduction in the year of the deposit (up to a $800,000 limit per person). Alternatively, any money withdrawn from a FMD will be included as assessable income in the year it is withdrawn.

Increasing deductions in FY24 such as prepaying expense in FY24 and postponing income into FY25, 100% expensing assets less than $20k (that have arrived, been paid for, and in use in FY24) as an instant asset write off and concessional contributions paid into your superannuation up to $27,500 per person are other common strategies.  Of course, you need the cashflow to be able to afford each of these strategies. 

So, ‘profit optimisation’ done now, importantly assists to diagnose your current year’s business profitability (or lack thereof) and also your future FY25 course of action – repair the business (as there’s little/no profit and little tax payable) or continue with the business plan to invest cash into on farm investments, off farm investments, living better or repaying debt, according to businesses and family strategy.

It’s time to call your accountant!