Right, welcome fellow entrepreneurs.  Have you ever been given a bill and it was WAAAAY more than you were expecting.  I got one this morning eek.  Right, now, let’s take that feeling and imagine you’ve just left your accountant’s office where you’ve been given a MASSIVE tax bill.  Are you with me?  Are you wondering how you are going to pay for it?  Better yet, are you wishing you had known about it sooner?  Perhaps none of these and you’re scared this might happen?  What if I told you there was one thing you needed to do, yep just one thing and you will never have to feel this way again.

Let me tell you the secret which will help you to manage your tax bills every year without ever having the shock and stress of a big bill which you can’t pay again: drum roll here please…tax planning.

In this video we are going to start with the very basics of what tax planning is and move on to why you should be doing it, every. Single. year.

Right, we’re at the very beginning what is tax planning? 

Investopedia defines tax planning to be “the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.”  And the ATO states that “you have a right to arrange your financial affairs to keep your tax to a minimum”.

So what is tax planning?  Well, I like to think of it as the arrangement of your business and personal financial affairs in such a way that you pay the lowest overall rate of tax, for the group, legally.  It can range from the simple end of the spectrum where we look at how to maximise the tax deductions you can take and the timing of taking them right through to the use of entities such as trusts and companies to spread the tax burden around the family group. 

Is this something you can do by yourself or something you should be talking to your accountant about?  Most definitely talk to your accountant!  This is not something you want to be doing entirely by yourself.  Get it wrong and the penalties can be high, get it right and the money you save can help pay for a holiday, pay off debt, pay the kids school fees…you get the idea.

There are a couple of things to note here:  firstly, we are doing this legally – you are not allowed to break the tax laws in an effort to reduce your tax and a word to the wise here:  your accountant and you can both end up in jail if you do do something illegal.  Secondly, we are not trying to get out of paying tax completely, we are just trying to pay as little as possible.

You know those news stories that come out every year about Kerry Stokes or Rupert Murdoch or any other notable name of choice and how they pay very little tax?  It’s the same tax law folks, they just sit down with their accountants and pay to have some serious tax planning to make sure they don’t have to pay a cent more than they absolutely have to.

So why do tax planning aside from paying less tax?

Well it may not get you a mention on the latest rich list, but who doesn’t want to save some tax?  The money is much better off in your pocket than the Government (who let’s face it, are not exactly great at spending it wisely).  Think of what you could do with the extra money you save from paying less tax.  You could put it into your mortgage to bring it down sooner, pay for your kids’ school fees, take a holiday, buy a new TV, or go on a shopping spree.  Or, if that doesn’t work for you, think of the amount of stress you won’t have because you haven’t got all these big bills lurking around which you need to pay to an organisation AKA the ATO which has more time, money and resources than you do to get the money out of you. 

It also means, that come tax-time, you’ll be organised and ready to go.  Added to which, your accountant, because you’ve been working with them on an ongoing basis, will also be able to process your work much quicker and more efficiently because they also have the information they need and the knowledge they require in order to ensure the paperwork is filled in correctly and accurately for you to achieve your financial goals and lodge your tax compliance.

Now tax planning is one of those things which is highly personalised, so whilst I can run through a couple of strategies and examples, it may not be suitable for your circumstances so if you’re watching this video and you think “wow, great, I want to be doing that” you REALLY REALLY need to talk to an accountant first to make sure it will work for you and your circumstances.

Right, let’s do this peeps. 

Now I write most of these articles for business owners, but just in case you’re an individual taxpayer that is, you have a salary and perhaps a couple of investments, and you saw the title, and you’ve watched this far, this bit is for you.  For you, most of your tax planning involves making sure you have claimed all your deductions.  As a very general rule of thumb you can claim pretty much anything you spend for work purposes provided it is not reimbursed by your employer.  Now, there are exemptions, but your accountant will tell you what, but well, they don’t know what they don’t know so it’s better to tell them anyway.  Some of the more common things to make sure you are claiming for are:

  • motor vehicle expenses
  • offsite parking
  • laundry allowance
  • professional subscriptions
  • working from home expenses
  • seminars/CPD training
  • union fees
  • income protection insurance

So let’s just tackle a couple of issues:

If you have a novated lease for your motor vehicle as a general rule, you will not be able to make a motor vehicle claim.  That’s because they are paid for pre-tax.  It is always best to keep a logbook as that gives us a choice as to the method for making a motor vehicle claim.  Without a logbook, we are limited as to how we can help you.

Laundry allowance is only available when you are wearing occupation specific or protective clothing or a compulsory uniform.

There have been some changes recently to the rules around making a working from home claim so make sure you keep a diary and a record of everything you spend.

Income protection insurance needs to be paid by yourself and not by your super fund.

Now this list is nowhere close to exhaustive but it does cover the more common deductions coming through on the returns at the moment.

Under the current rules, after-tax contributions to super are a good way to bump up your deductions, but you need to be careful around super.  Get it wrong and the penalties can be huge so again, talk to your accountant or financial planner first.

Are there any capital gains or losses which need to be allowed for?  A question we are asked a lot about is whether we need to calculate and include capital gains where a loss has been made and the answer is very simple:  Yes it does!  If you want to know more about capital gains tax in Australia and how it is calculated I will leave a link in the description to a video I have already done which goes into detail about capital gains tax in Australia and how it is calculated.

Now small businesses, let’s have a quick chat.  Strategies here can vary significantly because it’s driven by the structure you have chosen to have.  And remember, the best accountants will advise you on a structure which will set you up for your circumstances, don’t just assume a one-size-fits-all approach.  For example, as a trust structure you might be tempted to distribute excess profit to your children.  But again, there have been changes in this area and an increased focused on these types of transactions, so move cautiously.  A bucket company may be used or a self-managed super fund to help reduce tax.  But what to do with the money itself, once you are in a position to draw the funds, how do you invest them, do you spend them? 

If you run a Pty Ltd company, you might be looking to pay out dividends to the owners.  Now dividends need to be paid equally to all shareholders and I’m talking here the distribution per share, not the final dollar amount so, if you are a husband and wife with a 50:50 ownership you need to remember this.  If one of you is in a higher tax bracket, they maybe penalised by the payment of a dividend by being pushed into a higher tax bracket.  Is directly owning the shares in the company the best solution, would it be better for a trust to hold the shares and then the distribution can be controlled more effectively?

If you are a partnership is there anything we can do to help minimise the profit and distribute it in such a way that tax is minimised?

Common across all the different structures and individuals alike, is a review of the tax already paid for the year, versus what we think you will need to pay for the entire year.  It is for this reason that tax planning is best done in around April or May because if you need to pay a little bit extra to make sure you’re covered for the year, it can be done in the June quarter activity statement.  If you don’t have to submit an activity statement then you can make sure you have the money set aside to cover the expected bill.

Now, before we go into the more common tax planning mistakes we see, I want to ask you a question:  if you’ve watched the video this far, and you’re enjoying it, getting some value from it, why haven’t you subscribed yet?  Go on, click that button and hit the bell so you’re notified of the next video I release with useful content for business owners.

Right, some of the more common mistakes.  For individuals it falls predominantly into 2 buckets. First and foremost, you don’t claim everything you should, and that comes down to record keeping.  You are required, yes actually required to keep proof of purchase in order to make a claim.  This can be either a receipt, bank or credit card statement.  There are some fabulous apps such as myDeductions, Crunchr and so-on out there now where you can store receipts so it’s all organised and ready to go come tax time.  Let me tell you now, your accountant will not thank you if you turn up with a shoebox or something equally disorganised full of crumpled receipts to do your work.  Give them a little respect!  Secondly, timing folks.  The Australian financial year runs from 1 July to 30 June.  It is not a calendar year.  Make sure you pay for the deduction in the correct year as otherwise there is nothing we can do about it. 

For businesses, making sure your bookkeeping is done properly is the first mistake we see.  It’s either not up-to-date, incorrectly allocated or incomplete.  I know how easy it is to hand it over to your bookkeeper and say “you do it” and trust that they are, but you need to be checking to make sure it’s correct (as an FYI, this is where monthly or quarterly meetings with your accountant can go a REALLY long way) – whoever you employ to do the bookkeeping is effectively an employee of the business, they are acting in the role of accountant in your “finance function”.  Would you allow an employee to do their work without ever casting your eyes over it?  Heck no!  As the owner of the business it’s part of your role to be going through the figures to make sure they look correct.

The next mistake we see being made by businesses is…undertaking a transaction without first talking to their accountant.  You go off and buy equipment on finance…and the loan is in the wrong name, or you buy a car which you keep at home triggering FBT, the list is endless.  If you were a larger organisation you wouldn’t move without first talking to your finance team to make sure it was the right move.  I hear you saying “But Alex, they’ll charge me to do this work!”  Do you know what, so what if they do?  A) give them the respect their expertise requires and b) how much more does it cost you when you get it wrong?!  The FBT bill on a single car would in most cases be more than the cost of the phone call to the accountant to ask them the question…and that’s if they even charge you!

While we’re on this point, it is a mistake made by all clients individuals and businesses alike.  You are so afraid we as accountants will charge you, you don’t ask us the question in the first place.  But, and this is a big but, many accounting firms, ours included, work on fee packages these days, so the cost of this is built into your fee already, if it’s not, does the additional tax you have to pay outweigh the cost of the accountant bill?  Something to think about.  Rant over.

Right, one last over-arching comment.  Document retention.  The ATO are pretty strict about this and the tax law is really clear.  It is the taxpayer’s responsibility to maintain adequate documentation to support a transaction.  For a capital asset such as shares or investment properties or the like, this is from the date you sign the purchase contract!

Right, I could literally sit here for hours going through what you could do, but if you’ve read it this far, I think we’ll stop while the going is good!  Remember, before you go ahead and do anything in this article, talk to your accountant first, if you don’t have one, talk to me instead!  Take care and here’s to the start of your tax planning journey!

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