Tax Planning Strategies for Small Businesses

Effective tax planning is essential for small businesses in Australia. Beyond meeting compliance obligations, strategic tax management can help businesses improve cash flow, reduce liabilities, and maximise long-term growth opportunities. The following guide outlines key tax planning strategies for small businesses.

1. Review Your Business Structure

The structure of a business—sole trader, partnership, company, or trust—has a direct impact on tax obligations, flexibility in distributing income and asset protection.

Companies: Many trading companies qualify as base rate entities (BREs) and are subject to the reduced company tax rate of 25% (rather than 30%), provided aggregated turnover is under $50 million and no more than 80% of income is passive. Dividend distribution and franking credit management should be carefully timed, as the franking rate is linked to the previous year’s tax rate.
Trusts and partnerships: These structures provide flexibility in distributing profits, but they require accurate documentation of resolutions and awareness of anti-avoidance rules.
Sole traders: While simple and cost-effective, income is taxed at the individual’s marginal rate. As profits increase, it may be beneficial to transition to a company or trust structure.

Best practice: Conduct an annual review of your business structure to ensure it remains tax-effective and aligned with your growth plans.

2. Manage Goods and Services Tax (GST) Obligations

GST registration and reporting settings directly affect compliance requirements and cash flow.

Threshold: Registration is compulsory once turnover reaches $75,000 (or $150,000 for not-for-profits). Voluntary registration may be advantageous where significant GST credits can be claimed.
Cash versus accrual basis: Many small businesses benefit from accounting for GST on a cash basis, as this aligns liabilities with actual customer payments and avoids remitting GST on unpaid invoices. Eligibility generally requires aggregated turnover of less than $10 million.

Best practice: Monitor turnover regularly and ensure registration occurs as soon as the threshold is exceeded. Where possible, adopt GST accounting methods that complement cash flow.

3. Leverage the Instant Asset Write-Off

For 2025–26, small businesses with aggregated turnover below $10 million may immediately deduct the full cost of eligible new or second hand assets costing less than $20,000 each. Assets must be first used, or installed ready for use, during the income year. Assets exceeding this threshold must be depreciated under the small business pool rules. Government announcements may extend or amend this measure beyond 30 June 2025, but businesses should rely on current legislation when planning.

Best practice: Structure asset purchases so that individual items fall under the $20,000 threshold and maintain accurate records of business use.

4. Time Income and Deductions Strategically

Taxable income can often be managed through the strategic timing of income recognition and deductions:

Prepaying expenses (up to 12 months) such as rent, insurance, or software can accelerate deductions into the current year.
Deferring income—for example, by issuing invoices after 30 June—may, where commercially appropriate legitimately reduce current year taxable income.
Bad debts should be written off before year-end to ensure deductibility.

Best practice: Implement a tax calendar to identify opportunities for managing timing decisions throughout the year.

5. Manage Trading Stock Valuation

Trading stock must be valued at year-end, with businesses able to choose between cost, market selling value, or replacement value. Selecting the most appropriate method may reduce taxable income, particularly for slow-moving or obsolete stock.

Best practice: Conduct a comprehensive stocktake before 30 June and maintain supporting documentation for valuation decisions.

6. Utilise Superannuation as a Planning Tool

Superannuation remains a highly effective tax planning mechanism for both owners and employees.

The concessional contributions cap increased to $30,000 from 1 July 2024. Employer superannuation guarantee contributions, salary sacrifice, and personal deductible contributions all count towards this cap.
Unused concessional cap amounts from previous years may be carried forward, subject to eligibility.
Employers must ensure timely payment of superannuation guarantee obligations to avoid penalties.

Best practice: Track contributions throughout the year to prevent exceeding the cap, and consider superannuation as part of a broader remuneration and retirement strategy.

7. Apply Small Business Concessions

Small businesses may be eligible for targeted concessions:

Amendment period extension: For assessments from 2024–25 onwards, small businesses generally have up to four years to lodge amendments.
Skills and Training Boost: This program ceased on 30 June 2024. Eligible expenditure incurred up to this date can be claimed in the 2024–25 tax return.

Best practice: Review eligibility for concessions annually and maintain clear records to substantiate claims.

8. Plan Early for Capital Gains Tax (CGT) Concessions

The small business CGT concessions can significantly reduce or eliminate capital gains on the sale of business assets. These include the 15-year exemption, 50% active asset reduction, retirement exemption, and rollover provisions. Eligibility requires careful planning and compliance with detailed conditions, such as the active asset test and significant individual test.

Best practice: Conduct a CGT eligibility review well in advance of any planned business sale or restructure.

9. Monitor Pay-As-You-Go (PAYG) Instalments

PAYG instalments allow businesses to spread tax payments throughout the year.

If profitability declines or significant deductions arise, businesses can vary instalments downward to align with expected taxable income.
Conversely, increasing instalments may prevent large tax bills at year-end.

Best practice: Review PAYG instalments each quarter to maintain accurate and manageable tax payments.

10. Substantiate Motor Vehicle and Home Office Claims

The Australian Taxation Office (ATO) frequently reviews claims relating to motor vehicles and home offices.

Motor vehicles: Individuals may claim using the cents-per-kilometre method (up to 5,000 km per car) or the logbook method (requiring a 12-week logbook). For company-owned or trust owned vehicles, businesses generally need to use the logbook method and consider fringe benefits tax (FBT) obligations where private use occurs.
Home office expenses: Deductions can be calculated using the fixed-rate method or actual running costs, provided adequate records are maintained.

Best practice: Ensure logbooks and expense records are accurate, up to date, and retained in the event of an ATO review.

11. Strengthen Record-Keeping and Systems

Accurate record-keeping reduces compliance risk and ensures deductions are not overlooked.

Implement cloud-based accounting systems with bank feeds and digital receipt capture.
Reconcile BAS and superannuation obligations regularly.
Maintain current ABN and GST registration details for suppliers.

Best practice: Prepare a year-end documentation pack including reconciliations, stocktake records, and fixed asset registers to streamline tax return preparation.

12. Seek Professional Advice

While small business owners can implement many tax strategies independently, professional advice is valuable when:

Changing business structures or introducing new investors
Purchasing or selling significant assets
Managing trust distributions or Division 7A loans
Confirming eligibility for small business CGT concessions
Reviewing PAYG installments.

Best practice: Schedule a mid-year or pre-year-end consultation with a qualified tax agent to identify tailored opportunities.

Conclusion

Tax planning for small businesses in Australia is not about aggressive tax minimisation. It is about aligning financial management with legislative frameworks to achieve sustainable outcomes. By reviewing business structures, leveraging concessions, managing cash flow, and maintaining strong compliance systems, small business owners can significantly reduce tax risk and position their enterprises for long-term success.