The 2015 Federal Budget handed down by Treasurer Joe Hockey in May had some great incentives for small business.
Businesses with an annual turnover of under $2 million are now able to immediately claim tax deductions on purchases under $20,000; a great incentive to give the small business and retail sectors a confidence boost.
Assets valued at over $20,000 can also be placed in a depreciation pool and can be immediately deducted if their value falls below $20,000 before 30 June 2017 when this program ends.
While it’s an attractive incentive that’ll be a lifeline for some, those small businesses considering taking advantage of the new budget measure should do so with caution.
Organisations need to be measured and strategic when considering whether it’s something their business should pursue.
Buy, Buy, Buy?
Firstly, you need to ask yourself whether you are in a solid financial position before committing to additional expenditure.
Small businesses across Australia are still doing it tough and for many of them cash flow is one of the biggest concerns. Although these incentives are enticing, businesses need to be prudent with their spending and consider what other impacts it may have.
If the availability of a tax deduction is the main reason your business is making an investment under the new rules you could be exposing yourself to an unnecessary risk.
New spending still means cash coming out of the business, regardless of the amount or whether it can be claimed back. The business should be able to handle the additional outflow and if it impacts on the business’ ability to meet its other financial commitments, the tax deduction may not be worth it at all.
It is imperative to understand and have an effective working capital cycle – i.e. how are you converting debtors and stock into cash and what are your creditor terms? This will determine how much cash you have at any point in the business.
If businesses are looking to borrow to fund further investment, it is important to ensure appropriate debt facilities are utilised. Avoid the use of high interest credit cards and overdraft facilities and consider longer term fixed loans. Also ensure that any ongoing interest charges and principal repayments can be met.
As the immediate tax deduction is only available to small businesses it will be important that taxpayers consider their eligibility for the $20,000 asset write-off. In particular whether annual turnover is and will remain under the $2 million threshold.
This may require greater scrutiny on the business’ turnover throughout the year, particularly around the timing of the purchase intended to be written off, because you may not know whether you will be under or over the $2 million turnover limit at the end the year.
Getting the right advice
Above all of this, one thing to remember is while there are considerations that need to be made before launching into spending new money, there are always support networks that can help you make the right financial decisions.
It’s absolutely vital you work with a bank and other financial advisers to ensure any new spending – whether it’s eligible for a tax deduction or not – does not place pressure on the most important thing in your business, your bottom line.
From a professional perspective, I’ve seen an increased demand from businesses seeking to engage advisers when they find themselves in financial distress, hoping to return to a solid financial footing.
Any business that wants to focus on finding the right structure and strategy to thrive as an organisation, rather than resisting assistance, is giving themselves the best opportunity to continue growing.
As advisors we know how much hard work, passion and sacrifice goes into building a business, and it can be heartbreaking when they falter.
What we frequently discover however, is many business owners are so close to the businesses they’ve built it’s hard to imagine a different way of doing things, but sometimes it’s a necessary evil.
That’s where an independent, expert perspective can be the difference between getting back on track and closing the doors for good.