Australia – Small business owners can save thousands on tax

Australia – Small business owners can save thousands on tax

Small business owners can save thousands on tax thanks to these changes to law, says Greg Mawer, director of Accumulate.

Back in 2018, the Liberal government announced three stages of personal income tax cuts. In 2022, stage one and two have already been enacted.

It is rare that Liberal and Labor agree on anything except that small businesses are the backbone of the Australian economy. Coming into the 2022 federal election, Labor confirmed it would not reverse the stage three tax cuts introduced by the Liberals (a fair backflip from previous statements, but hey, whatever it takes to win an election, right?).

The third stage of the tax cuts is, to put it mildly, controversial. It significantly favours high income earners. For example, an individual earning $200,000 a year will save $9075 a year from the 2025 income tax year onwards, whereas an individual on $45,000 a year will not be any better off. You can now see why it is controversial!

The table below outlines the changes to the individual tax rates:


Whenever there are changes to the tax laws, good tax advisors will analyse the changes and determine how they can legally be taken advantage of for themselves and their clients.

If you are a sole trader or a wage and salary employee, there is little you can do to take advantage of these changes.

However, if you are in business and trade through a company, or trade though a discretionary trust and can distribute income to a company, there is much that can be done.

The strategy involves deferring declaring income in your personal name, quarantining it in a company environment, and then declaring income after the tax rates become more beneficial for individuals on July 1, 2024.

The worked example below shows how a small business owner can save significant tax.

A business owner makes $122,500 a year in taxable income.

Instead of paying income evenly across the years, let’s consider the example of declaring $45,000 a year for 2023 and 2024, and then $200,000 a year in 2025 and 2026.

As you can see above, the client saves $4,100 in income tax. Not only is there is a tax saving, but the tax is deferred well into the future, meaning the client will have more money in their hands to pay done debt, invest, or use as working capital in the business. Two birds with one stone!

As with everything in the world of tax, the complexity lies in the fine detail. A few other matters to consider when exploring this strategy:

  • Division 7A: If you have a company in your group structure and your accountant has not mentioned Division 7A, you should find a new accountant. These rules cover shareholders and their associates owing the company funds. If you need to take the funds out of the company, but don’t declare a dividend or wage to clear the funds taken, you will need to enter into a complying Division 7A loan agreement. Please speak to your accountant about this area of tax law;
  • Cashflow: You may not have the cashflow to move money around to implement the strategy;
  • Refinancing: If you are refinancing your loans in the next few years, would the back still allow you to refinance if you declare $45,000 instead of over $120,000 of taxable income?; and
  • Income protection: If you declare $45,000 instead of over $120,000, will this affect your income protection policy?

As with all matters financial, it is best you speak to your accountant or tax advisor to see if implementing this strategy is appropriate for your circumstances.