Many business owners hear the word TAXATION and shudder. It’s something that often gets pushed to the back burner, and when tax time comes around, there is a mad scramble to get everything together for their accountant. However, what many business owners forget is that a little tax planning can greatly reduce tax expense and the fear of an unbudgeted tax debt. While tax rules are complicated and every business and family has a different situation, knowing how to use tax planning properly helps you keep more of your hard-earned income.
What is Tax Planning?
Each organisation has different needs when it comes to tax planning. However, generally speaking, there are four types of tax planning to consider:
- Short-range tax planning is done annually and designed to help your business meet your annual ATO obligations, with awareness of specific opportunities which may change from year-to-year;
- Long-range tax planning addresses longer periods of time, with more complex financial goals, including commercial and marital risk management, with more specific objectives in mind;
- Structural tax planning focuses on developing provisions within the law that help improve your tax outcomes;
- Strategic intergenerational tax planning is designed to maximise wealth transfer and ensure future control is considered.
You can choose to use all of these methods or focus on the ones that help you meet your specific goals. Tax planning is important for small business owners as it is the best way to minimise the impact of tax exposure. You will also improve efficiencies in how taxes are budgeted and provided for each year.
Benefits of Tax Planning
When you understand how to adopt an excellent tax strategy, you can see significant benefits including:
- Lower tax rate: This is of course always the main goal. With the right planning, you can reduce your effective tax rate using lesser known or currently available tax strategies;
- Reduced taxable income: Instead of focusing on a reduced tax rate, you also find ways to more broadly distribute income and reduce how much income is taxed;
- Flexibility in tax payment: Proper planning provides a more flexible approach to paying your taxes allowing you to reduce the impact on your company or other business entity;
- Tax credits: Better tax planning allows you to find legitimate ways to leverage tax credits including maximising the availability and use of company franking credits (tax already paid by other entities).
All of these benefits help improve your bottom line, putting more money either in your pocket for personal wealth creation or back into your company for growth opportunities.
Financial risk can arise if your tax planning is overly aggressive or poorly advised and which may well attract scrutiny from the Australian Taxation Office. If your tax position is challenged, it could lead to a negative impact on your cash flow, earnings, and even open your personal taxation position to further scrutiny. This is common with improper planning, or if a taxpayer tries to take advantage of an unsupported tax argument which can also put their reputation at risk with the ATO.
Your goal is to find legitimate and sound ways to reduce your net taxable position. Your tax planning should be designed to make the process low-risk while also minimising taxes owed through a legitimate and safe tax strategy.
Ways To Reduce Taxable Income
This is the big question close to the heart of every business owner. Whilst every circumstance is unique, just some of the ways to reduce taxable income include:
Home Based Business
If you operate all or even just some of your business from your home, there are categories of possible tax deductions including:
- Occupancy expenses including electricity, phone, depreciation, furniture repairs, cleaning, etc.
- Motor vehicle travel between your home and other locations related to your business
Keep in mind you can only claim occupancy expenses based on the area used in your home.
So, for example, if you only use 10% of your home space, you can only claim 10% of any expenses on the above list.
While not all small businesses require travel if you do travel it is possible to reduce your business taxes as business travel is deductible. This can be an area where it is tempting to claim your personal travel, but this can lead to serious implications. Some clients structure planning of their business travel so they can apportion some personal time as well. Your accountant can advise you of the records to be maintained. You can claim the business related percentage of :
- Train, tram, bus, taxi, or ride share fares
- Car hire fees and the costs such as fuel, tolls and car parking
- Meals, if you are away overnight
You can claim a tax deduction for business vehicle-related expenses including:
You can claim a deduction for expenses on your private vehicle to the extent it is used for business:
- Fuel and oil
- Repairs and servicing
- Interest on a motor vehicle loan
- Lease payments
- Insurance premiums
You can claim light meal expenses associated with staff meetings / functions. Keep your receipts organised so you can take advantage of this option.
You can claim a tax deduction for a gift or donation, as long as it is donated to a deductible gifts recipient (DGR). You can donate cash or property including things such as financial assets and comply with applicable gift conditions associated with the DGR in question.
A tax loss in a current year can be carried forward and claimed as a deduction for your business in a future year. As a sole trader, or an individual partner in a partnership, you can often offset current year losses as long as the claim is considered a tax loss and not related to non commercial activity. The timing to claim the loss is based on your business structure. So if you are a company, you may carry forward a tax loss for as long as you wish and then include it when you could use the help of an additional deduction. There are of course some compliance rules as well.
These are common deductions, yet they are often overlooked by small business owners. They can easily be included in your tax planning strategy. You can also learn how to avoid capital gains tax. Many Australian businesses fail to make use of potentially generous concessions in this area of tax planning.
Why Do Some People Pay No Taxes?
Some high earners with a good accountant can find ways to avoid taxes completely. For example, Greg Jericho of The Guardian put it this way in his article titled “Millionaires in Australia are managing a tax bill of $0”:
“The big-ticket item the data shows is that in 2016-17 a growing number of millionaires were able to avoid paying tax. Sixty-nine people who earned more than $1m in 2016-17 paid $0 in tax – an increase from 62 in 2015-16, and 48 in the year before that.
How did they do it? Well let’s just say it helps to have a good accountant, and it helps to pay that person a lot of money.”
If you would like to learn more about tax planning for your company, family or personal situation, book a complimentary discovery meeting. Either of our two principals would be more than happy to meet you without obligation.