Tax planning is a proactive must-do activity for business owners who wish to minimise tax and improve their cashflow, maximise opportunities for growth, build personal prosperity and, of course… succeed in business.
There are actions you can take now which can significantly impact the amount of tax you pay. Not only can planning reduce your tax; inevitably it also provides more cash for your business or for extracting wealth for your personal needs. Your tax savings this financial year could be used for upgrading your car, topping up your super, reducing your home loan, paying for your children’s education, or enjoying a well-deserved holiday.
FIVE tax planning priorities for business owners to succeed in business:
#1 Taking action early can save you tax
Starting your tax planning early can make a significant difference in achieving optimal tax outcomes for you and your business. Strategies to save tax include:
- Planning your super contributions: You can contribute up to $25,000 in concessional super contributions and $100,000 in non-concessional contributions each year. Not only can additional contributions build your super, they can also assist to reduce your overall tax liability depending on your contribution type.
- Planning expenses and payments: To obtain tax deductions in 2019, you can bring forward business expenses before June 30, or pre-pay expenses such as rent or loan interest for up to 12 months. Small businesses purchasing capital equipment under $20,000 before June 30 can also claim a 100% deduction this year.
- Deferring income and capital gains: If you wish to reduce your taxable income, you may be able to defer your invoicing and receipt of investment income, as well as sale of Capital Gains assets until after June 30. Remember it’s the Contract Date, not the settlement date that determines when a sale occurs
#2 Make the most of your super
It’s no longer only self-employed people who can make contributions to super and receive a tax deduction. Legislation introduced in July 2017 enables everyone to contribute up to $25,000 in concessional super contributions each year. This includes anyone up to the age of 75 years of age (if certain conditions such as a ‘work test’ are met for over 65s). Concessional contributions include your employer Super Guarantee contributions and salary sacrifice contributions. These contributions are tax deductible, can reduce your overall assessable income, and contributions are taxed at 15% (unless you earn more than $250,000) which is usually much less than marginal tax rates. To be included in this year’s cap, your contributions must be received by your super fund before June 30.
#3 Benefit from a ‘bucket’ company
Establishing a ‘bucket’ company is one of the most under-utilised strategies for business owners, and yet one which can significantly reduce taxable income. Distributing income from a trust often results in individuals paying tax on the trust’s profits at marginal tax rates (which can be up to 47%), whereas paying distributions to a bucket company can cap the tax on profits at 27.5% or 30% (depending on your individual circumstances). A bucket company offers additional flexibility for business owners in that the cash within the bucket company may be used to invest in shares or property, or to lend to other entities at a stipulated interest rate. Australian tax laws are complex, so it’s vital to seek professional advice specific to your circumstances before establishing a bucket company.
#4 Trustees beware – take action for Trust Distributions
If you have a Discretionary or Family Trust, you must complete your trust distribution resolutions before June 30. Without a resolution outlining how the income from the Trust will be distributed, the Trustee may be liable for payment of the Trust’s income – assessed by the ATO at the highest marginal tax rate of 47% – rather than the intended beneficiaries being taxed. When preparing a trust distribution resolution, it can be complex to determine the most tax effective distribution of income and to identify any clauses in the Trust Deed which may affect outcomes, so it’s important not to leave this until the last minute. Trust distribution resolutions must be prepared and signed by Trustees before June 30 to avoid penalties.
#5 Factor in the Federal election
A change of government could result in significant changes to current tax and superannuation rules. Depending on the outcome of the election, you may need to factor in some time for fine tuning this year’s tax planning strategy and/or addressing longer term strategies relating to tax and super.
No one wants to pay more tax than is absolutely necessary. Tax law is complex , but a little tax planning advice can help you to minimise your tax and requires your careful attention if you want to succeed in business.
If I can help you to succeed in business, please contact me on +61 2 9699 9171 or email shane@makecentsaccounting.com.au
This information (including taxation) is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Make Cents Accounting strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.
