Tax planning is about more than simply reducing the amount of tax payable. Good tax planning helps individuals and businesses understand what tax may be payable, what deductions may be available, what needs to be done before 30 June, and how future cash flow may be affected.
The rules can vary significantly depending on whether income is earned by an individual, company or trust. The timing of payments, the structure used, the quality of record keeping, and the way money is moved between entities can all affect the final tax outcome. This article provides a general summary of some common tax planning issues to consider before year end.
For individuals, Australia uses progressive marginal tax rates. For the 2025–26 year, Australian resident individuals have a tax-free threshold and then pay increasing rates as taxable income rises, with the top marginal rate applying above $190,000. (Australian Taxation Office)
For companies, the lower 25% company tax rate generally applies to base rate entities. Broadly, this is aimed at companies carrying on business that meet the relevant turnover and passive income requirements. Other companies are generally taxed at 30%. (Australian Taxation Office)
Trusts are different again. A trust generally distributes income to beneficiaries, and those beneficiaries are then assessed on their share of the trust income. If trust income is not validly distributed, the trustee may be assessed at the top tax rate.
For individuals, deductions are generally narrower and must have a sufficient connection to earning assessable income. Common examples include motor vehicle expenses, self-education, work-related travel, work-related expenses, income protection insurance, donations, accountant’s fees, uniforms and protective clothing.
Work-related expenses may include items such as union fees, stationery, home office costs, internet and mobile phone expenses. However, the private portion of any expense must be excluded. For example, if a mobile phone is used partly for work and partly for personal use, only the work-related portion can generally be claimed.
For businesses, the starting point is broader. A business can generally claim expenses incurred in the ordinary course of carrying on the business, provided the expense is not private, domestic, capital in nature, or specifically disallowed. This can include items such as rent, wages, software, subscriptions, insurance, advertising, accounting fees, business interest, tools, equipment and operating costs.
For individuals using their own car for work-related purposes, the two common methods are the cents-per-kilometre method and the logbook method. Under the cents-per-kilometre method, the rate is 88 cents per kilometre for 2024–25 and 2025–26, capped at 5,000 work-related kilometres per car. The logbook requires a logbook to be kept for a period of 12 weeks to determine the business use percentage that can be claimed of all running costs. The logbook method may produce a larger deduction where business use is high, but it requires more detailed records. (Australian Taxation Office)
For entities, motor vehicle claims can be more complex. Whilst the running costs, depreciation and finance costs are all fully deductible Fringe Benefits Tax (FBT) must be considered. Some vehicles, such as certain utes, vans and electric vehicles are exempt from FBT. All other vehicles must either pay FBT on the private portion, or record an employee contribution equal to the private portion to reduce FBT to nil.
For employees and individuals working from home, the ATO fixed rate method for 2024–25 is 70 cents per hour. This rate covers certain running expenses, and if the fixed rate method is used, those covered expenses generally cannot be claimed separately as additional deductions. Alternatively, the actual cost method may be available where appropriate records are kept. (Australian Taxation Office)
For a business operating from home, deductions may include a portion of running costs and, in some cases, occupancy costs such as mortgage interest, rent or rates. However, using your home as a place of business can have other consequences, including potential capital gains tax implications when the property is sold.
Interest can be deductible where borrowed funds are used for income-producing or business purposes. It is best practice to keep business and private borrowings separate. If a loan is mixed between private and business use, the deductible portion needs to be calculated and supported.
For example, if funds from a mortgage or redraw facility are used partly for business purposes and partly for private purposes, only the business-related portion of the interest may be deductible. Where a business entity is claiming interest on a loan held in an individual’s name, careful documentation may be required to show the expense has been properly incurred by the business.
Entertainment is generally not deductible unless fringe benefits tax applies. The distinction between entertainment and non-entertainment can be difficult. For example, a staff meal or client lunch may be treated differently from light refreshments provided during a business meeting. The correct treatment depends on the facts.
Private expenses are not deductible. This includes normal travel from home to work, general living costs, gym memberships, ordinary clothing, family holidays, and other costs that are personal rather than income-producing.
Fines and penalties are not deductible. This includes penalties from the ATO, ASIC, courts, parking fines and traffic fines.
Capital costs are also treated differently from ordinary deductions. A capital cost is usually an amount spent to acquire, improve or establish something of lasting value, such as setting up a business structure, buying major equipment, or improving a property. These costs may need to be depreciated, claimed over time, or dealt with under the capital gains tax rules rather than deducted immediately.
ATO general interest charge and shortfall interest charge also need care. From 1 July 2025, GIC and SIC incurred on or after that date are no longer deductible. This increases the after-tax cost of carrying ATO debt. (Australian Taxation Office)
Good records are essential. The ATO requires taxpayers to be able to substantiate deductions. In practice, this means keeping invoices, receipts, logbooks, diary entries, payment records, employment records, loan documents and other supporting evidence.
Another common issue is identifying who actually incurred the expense. A deduction generally needs to be claimed by the correct taxpayer or entity. For example, if a company wants to claim interest on a loan that is legally in an individual’s name, there may need to be further documentation, such as a loan agreement or on-lending arrangement, to support the company’s deduction.
Businesses should also ensure invoices are made out to the correct entity. If a business operates through a company or trust, but invoices are issued personally to the owner, this can create confusion and may weaken the deduction claim.
Small business entities may be able to claim an immediate deduction for certain prepaid expenses where the eligible service period is 12 months or less and ends in the next income year. This can be useful for expenses such as insurance, subscriptions, rent or interest.
However, prepayments usually create a timing benefit rather than a permanent tax saving. They bring forward a deduction into the current year, which may reduce this year’s tax but also means the deduction is not available again next year.
Bonuses and commissions are not usually deductible simply because an employer intends to pay them. To claim a deduction before 30 June, the business generally needs to be definitively committed to the payment before year end.
In practice, this may require written evidence confirming the employee’s entitlement and the exact amount payable. A general intention, estimate or informal plan may not be enough. A letter, board minute, payroll record or formal approval before 30 June can help support the deduction.
Businesses should review debtors before 30 June and identify any debts that are genuinely unrecoverable. A bad debt may be deductible if it has been written off as bad before year end.
The debt needs to be more than merely doubtful. The business should be able to show that reasonable steps have been taken to recover the amount and that there is a genuine basis for concluding it is unrecoverable. Legal action is not always required, but there should be evidence such as reminders, collection attempts, correspondence, insolvency information or internal notes.
Businesses that hold trading stock should complete a stocktake as at 30 June. This helps ensure closing stock is accurately recorded.
The business should also consider whether any stock is obsolete, damaged, slow-moving or worth less than cost. In some cases, stock can be valued at the lower of cost, market selling value or replacement value. If stock cannot be sold for its original cost, this may reduce taxable income.
Employer superannuation contributions are only deductible once they are received by the employee’s super fund. It is not enough for the employer to process the payment before 30 June if the fund receives it after year end.
Most payroll software providers publish a cut-off date for super clearing house payments. For the current financial year Xero recommends processing by 20 June, but as a practical risk-management point, paying earlier is safer. Businesses may wish to pay the balance of June quarter super as soon as possible and then move to more frequent payments. This can help maximise the deduction and prepare for PayDay super changes.
Businesses may consider bringing forward planned asset purchases before 30 June. However, it rarely makes sense to spend money purely to save tax. A deduction reduces taxable income, but the business still has to spend the cash.
For eligible small businesses, the $20,000 instant asset write-off applies on a per-asset basis for 2025–26. Assets costing $20,000 or more cannot be immediately written off under that threshold and are generally placed into the small business depreciation pool, which is claimed at 15% in the first year held and 30% of the balance thereafter. (Australian Taxation Office)
Motor vehicles also have a car limit. For 2025–26, the car limit is $69,674, which is the maximum value that can generally be used to calculate depreciation for an eligible car. (Australian Taxation Office)
The concessional contributions cap applies to before-tax contributions from all sources. This includes employer contributions, salary sacrifice and personal contributions where a tax deduction is claimed. The concessional contributions cap is $30,000 for 2025–26. (Australian Taxation Office)
If an individual wants to claim a tax deduction for a personal super contribution, they must lodge a valid notice of intent with their super fund and receive acknowledgement. This generally needs to be done before lodging the tax return, and within the required time limits. (Australian Taxation Office)
Carry-forward concessional contributions may also be available where a person has unused concessional cap amounts from previous years and meets the eligibility requirements. These amounts can be checked through myGov via the ATO’s super section.
Non-concessional contributions are after-tax contributions. They are not tax deductible, but they may allow individuals to move money into a tax-effective superannuation environment. The non-concessional contributions cap is $120,000 for 2025–26, subject to eligibility and total super balance rules. (Australian Taxation Office)
There are many more advanced super strategies, such holding business premises through a SMSF. These strategies require specific advice because they involve superannuation law, tax law, investment rules, related-party rules and cash flow considerations.
Director loans are relevant to companies. If a shareholder or associate withdraws company funds without treating the amount as wages, dividends, repayment of a genuine loan, or another properly documented transaction, Division 7A may apply.
The issue is that a company may have paid tax at 25% or 30%, but the owner has then used the money personally without paying tax at their individual marginal rate. Division 7A is designed to prevent private company profits being accessed tax-free.
If Division 7A applies, the amount can be deemed to be an unfranked dividend, which can create a significant tax bill. To manage this, the amount may need to be repaid by the relevant lodgement date or placed under a complying Division 7A loan agreement. A complying loan generally requires a written agreement, minimum yearly repayments and interest at the ATO benchmark rate. (Australian Taxation Office)
Care also needs to be taken with repayments followed by redraws. If money is repaid shortly before year end and then redrawn shortly after, the repayment may be disregarded in some circumstances.
Division 7A can be used as a tax deferral strategy, but it can also compound over time and leave the business owner with large future repayment obligations and tax issues if not managed carefully.
If trust income is not validly distributed, it may be taxed to the trustee at the top rate. For trusts, it is critical to have a valid distribution resolution or minute in place before 30 June, unless the trust deed requires an earlier date. (Australian Taxation Office)
Trust distributions can allow income splitting within a family group or business group. The trustee should consider the taxable income of beneficiaries and distribute income in a tax-effective way, while also complying with the trust deed and tax law.
Where individual marginal rates are high, a trust may distribute income to a bucket company to cap the initial tax rate at the company tax rate. However, if the cash does not actually follow the distribution, Division 7A issues can arise through unpaid present entitlements or related arrangements.
Care is also needed when distributing income to family members who are not actually receiving the benefit of the distribution. For example, if income is distributed to an adult child, there should be clear records showing how that beneficiary benefited, such as payment of university fees or other specific expenses. General references to “living expenses” may not be enough.
Different business structures produce different tax outcomes. A sole trader, company, discretionary trust or unit trust may all be taxed differently.
The best structure depends on the circumstances. One aim may be to use lower individual marginal tax brackets where appropriate while keeping the overall average tax rate down. However, tax should not be the only factor.
There is little benefit in creating an overly complex structure if the tax saving is small and the additional accounting, legal and administration costs outweigh the benefit.
Business owners also need to consider present and future tax issues. For example, access to small business CGT concessions can be significantly affected by the structure used, ownership percentages, connected entities and the way assets are held.
Tax is only one part of the decision. Asset protection, commercial risk, succession planning, licensing requirements, finance requirements and future sale plans also need to be considered.
Tax planning should include cash flow planning. It is important to estimate the likely tax liability and compare it to PAYG instalments already paid during the year.
The due date for payment varies depending on the entity, size of taxpayer and whether a tax agent is used. For many taxpayers using a registered tax agent, the common final lodgement and payment date can be 15 May following the end of the financial year, but this depends on the taxpayer’s circumstances.
PAYG instalments can also create cash flow surprises. Each time an income tax return is lodged, the ATO may calculate future PAYG instalments based on the most recent return. This can be difficult in the first profitable year of business or after a year of significant growth.
For example, a business may make a $10,000 tax profit in its first year. The 2025 tax return may be due on 15 May 2026, with $10,000 payable. Once lodged, the taxpayer may also be entered into the PAYG instalment system. If no instalments have yet been paid for the 2026–27 year, the June 2026 BAS may include a catch-up instalment, creating another large payment due soon after.
If the estimated tax liability is lower than PAYG instalments already paid or payable, it may be possible to vary the June PAYG instalment. However, this should be done carefully. If the instalment is varied too low and the taxpayer ends up with a tax bill, penalties or interest may apply.
Tax planning can be very valuable, but it needs to be approached carefully. Some strategies are permanent savings, while others are only deferrals. A deferral can still be useful, but business owners need to understand that the tax may catch up later.
Superannuation can be a powerful planning tool, but money contributed to super generally cannot be accessed until a condition of release is met, such as reaching preservation age and retiring. Tax savings should therefore be balanced against access to cash.
It can also be difficult to balance minimising tax with finance requirements. For example, a business owner applying for finance may want to show stronger taxable income, while also wanting to reduce tax. These competing objectives need to be considered together.
The right approach depends on the individual circumstances of the taxpayer, the business structure, the cash flow position and future plans. Specific advice should be obtained before acting.
This article is general in nature and does not constitute financial advice. Tax laws are detailed and subject to change. A tailored review can help identify missed risks, such as invalid trust distributions, as well as missed opportunities, such as unused superannuation contribution caps.
Since 1989 Hillier’s Advisors have been delivering financial services to individuals, businesses and business owners across Newcastle and the wider Hunter Region. A major focus for the Hillier’s Advisors team and the work we do is providing the right financial advice when our clients need it, not just when they ask for it.
