Tax.  When the topic rears it’s ugly head in most arenas (from the dinner table to the boardroom), the image of tax returns and possibly financial statements looms large.  But tax itself is a much larger and far wider reaching topic than a series of check-box items and red tape forms which need to be filled in each year.

So what is tax planning then?  Well broadly, tax planning is the exercise a taxpayer takes to structure their activities for the best possible commercial and lowest tax payable outcome.

Now, before we go any further, there are couple of key concepts here which need to be addressed before we go any further:

  1. In order to avoid your tax planning or structuring to be viewed as a scheme to avoid paying tax, it must be undertaken first and foremost for commercial purposes. That is, if there is no other reason for taking a particular approach other than  to reduce your tax it won’t be considered tax planning and could land you (and your advisor) in a whole world of trouble.
  2. It needs to be legal. Now, this should be an obvious one, but there are many people out there who bent the rules just a little too far and are now languishing in 4-star prison farms.  The ATO will catch you, you are not the first person to think of whatever it is you are thinking of.  Keep it legal.

When should tax planning be undertaken?  Tax planning can and should be undertaken at any stage of the year or business cycle.  Tax laws change regularly so reviewing your tax plan at least annually should be a bare minimum.  A good advisor will tailor a tax plan for you each year depending on your circumstances at that point in time.  Some years this might be a little tweak, some years it might be as big as a structure change.  Added to this, and I can’t emphasise this enough:  every single transaction you as an individual, or your business takes has a tax impact.  This tax impact needs to be taken into account before you sign on the dotted line.  Once you’ve signed, there’s very little we can do to help with the outcome.

What does this mean?  That new piece of equipment you are looking to buy:  the instant asset write-off may apply to the transaction, if it doesn’t a different depreciation method might.  Are you using finance to buy the truck or paying cash?  If you go down the finance path, will you have a balloon payment at the end?  If your business has several entities, which entity is buying the equipment?  Is it the correct entity?  How hard is it to unwind some of this if it’s done incorrectly?  In some cases very, if not impossible.

It can cost you time, money and a serious amount of stress if you don’t take the time to plan for tax outcomes of transactions.

So what sort of things should be considered when thinking about tax planning:

Now, as I mentioned before, Governments love to tinker with the tax rules which means they change.  A lot.  And frequently.  Normally these changes are announced in the budget (in Australia, this is normally May each year) however, in 2020 life has been a little different…all round.  The budget this year was deferred until October 2020 and a series of Government Stimulus announcements were made in order to assist businesses through a predicted downturn as a result of a COVID-19 shutdown.  So what does this mean for tax planning in 2020?  Is there any point in undertaking any end-of-financial year tax planning because the budget isn’t until October?

Of course, the answer has to be yes (and I’m not just a little biased here).  It’s very easy when a business is growing to take your eye off the proverbial financial ball.  When faced with a downturn, it becomes imperative to keep on track.  Spending the time to focus on your finances means you will be in a stronger position when the pendulum swings the other way again.  So, for 2020, despite their being no budget, there are still many issues to consider as part of your tax planning.  So much so, we have created a checklist, available here here for you to download and work through.

Financial year 2020 has been strange.  Well, at least the end of it has been.  Now more than ever, when cash is tight, it is important not to take your eye off the ball and make sure your tax affairs are structured in the best possible way to keep you ahead of the game.

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