Tax planning strategies
It is, as you read this article, not long before the end of the tax year. As a business owner, you have many things to do.
It has been said that the reason you go into business for yourself is so you can work sixteen hours a day to have other people work eight hours a day for you. There is a germ of truth in this for many businesses… It is time to turn your attention to tax planning matters if you have not already done so.
I have been practicing as an accountant in Australia for nearly twenty-five years. In my early days there were many “big ticket” planning activities that could be undertaken. Massive reductions in profits could be achieved using various opportunities - prepayments in particular, artificial investment schemes, distributions to charities and a wide other range of activities.
Most of these opportunities – loopholes, if you like – have been shut down and legitimate tax minimisation opportunities are far more limited than they once were. However, they exist and they should be utilised.
DON’T SPEND A DOLLAR TO SAVE 46 CENTS!
The next point to stress – and I stress this in every article I write on tax planning – is that there is no point in trying to save tax by entering into ill-fated or poorly executed tax schemes and losing your capital. Many people did this when they invested in afforestation or other similar schemes. They saved tax at their marginal rate – let’s say 46 per cent – but then lost the capital they invested. They spent a dollar to save forty-six cents. Net result – a loss of fifty-four cents. The purpose of tax planning is not to end up worse after tax planning than before tax planning – that might seem self- evident but history proves otherwise for some people!
Lesson number one is to not look first to any possible tax saving, but to the true investment value of any opportunity. Lesson number two is to refer to lesson number one.
START TAX PLANNING EARLY
I started this article by saying that because it is the end of the tax year it is time to turn your attention to tax planning matters. In truth, the best time to turn your attention to tax planning matters is on 1st July each year, as each new tax year begins. Some tax planning strategies require implementation at the beginning of the year. For example, if you are in the fortunate position of receiving a salary and being able to sacrifice an amount into superannuation over and above the compulsory nine per cent superannuation guarantee contributions, then to get the maximum benefit from this you would probably have had to start making those additional contributions from the very first pay cheque you received in the new financial year.
However, all is not lost. Some strategies can be implemented towards the end of the tax year, and there are still benefits to be obtained from other strategies which are implemented late, albeit the full benefit will not be obtained.
USE YOUR ACCOUNTANT’S EXPERTISE
If you are running a franchise business – or indeed any business – and you have not met with your accountant to discuss the results for the financial year that is soon going to end, then now is the time to do so.
All business owners should be regularly reviewing their financial results – preferably monthly but at least quarterly – and assessing the performance of the business, what is not working and what corrective action should be taken. Those meetings may or may not involve your accountant, depending on how closely involved your accountant is with your business. I would recommend though that, even if you do not otherwise meet with your accountant, you sit down with the results for, say, the first nine months of the financial year and review those results with your accountant.
Your accountant will have many ideas relating to taxation matters.
- If the business is making profits there will be strategies to minimise taxes. These may involve deferring income, prepaying expenses, making distributions from trusts, additional superannuation contributions, etc, etc. The list is long and what is appropriate will depend on your circumstances.
- If the business is making losses, there will be strategies to minimise taxes or help cash flows. These may involve making distributions to entities making losses, reducing salaries, payment of management fees between entities, etc. etc.
What is certain is that unless you are well versed in accounting and taxation matters, there will be strategies that you will not be aware of to save tax and improve cash flow – and this is the case whether your business is making profits or losses.
BROAD STRATEGIES TO EMPLOY
I am not in this article going to discuss specific tax planning strategies. Broadly, these strategies usually involve
- bringing forward expenses
- deferring income
- contributing to superannuation (which can involve maximising deductible contributions, making non-concessional contributions, splitting contributions with a spouse, spouse co-contributions etc. etc.)
None of these strategies employ rocket science and most business accountants will be able to identify legitimate tax saving opportunities using these strategies.
There is one additional strategy that is often overlooked but perhaps achieves the biggest savings of all – and that is having the correct business structure.
PROPER BUSINESS STRUCTURING
Choosing the best structure for your business is something that needs careful thought before you set up a business. It may be possible to change the structure after you have commenced business, but usually at some cost.
Tax minimisation is not the sole objective, and often not necessarily the primary objective, of choosing a structure.
Flexibility, asset protection and simplicity are other objectives that need to be considered. Tax minimisation is however certainly an important objective in business structuring.
Having the correct business structure – and this could involve any or all of a mix of partnerships, companies and trusts - can make a huge difference to the amount of tax that is paid. The ability to split income (with business partners), to make flexible distributions (through discretionary trusts) and to minimise taxes (for example, by paying company tax at 30 per cent rather than individual marginal rates of 47 per cent), can save many thousands or tens of thousands of dollars.
Your business structure can also make a huge difference to the taxes you pay when you dispose of your business. In simple terms, the tax on the profit on sale of a business can quite easily for most businesses be nil, but for some businesses can be in excess of 30
per cent. Sometimes the difference in the taxes you pay is simply due to the business structure that you set up in the first place. Business structuring is therefore critical.
The moral is:
- if you are about to set up a business, consider very carefully the structure you will use and which structure will suit you best.
- if you have an existing business structure, and it is not suitable, consider changing it. This is not a task to be lightly undertaken, and needs expert advice from your accountant, because of tax and other consequences of re-structuring.
Notwithstanding this, I have had many examples with clients where a change in structure has resulted in some short term cost, but far more significant long term cost savings.
Specific techniques to minimise your tax have not been discussed in this article – those specific techniques are dependent on your specific circumstances. However, if you do adopt the overarching strategies and principles outlined in this article, and combine them with specific techniques applicable to your business, you tax planning is likely to be highly effective.
Tim is a director of Lanyon Partners Chartered Accountants and heads up their franchising division. Tim has provided advice to, and acted for, many franchisees and franchisors, and is particularly active in advising on the purchase and set up of businesses.