13/10/2020

Tax Effective Structuring

TAX PLANNING, I cannot stress this enough but tax planning is one of the most important kind of planning to do.  Throughout your life, you would plan almost everything, so why not plan your taxes.  Since everyone believes they pay too much on tax why not plan ahead before you sell those shares or buy an investment property.  We see too often people selling shares without considering the capital gains tax effect on those shares and realise after its been done they now have to pay tax on the profit of those shares.  They did not plan a head and did not make sure they put enough tax aside to cover that profit and find themselves with a payable and not know how to handle it.  Sometimes, you need to make a loss to make a gain.

Now I would like to point out the media is really selling you a lie.  The rich and famous are not dodging or avoiding paying taxes.  It would be completely illegal, not to mention stupid on their behalf.  The wealthiest earners in Australian are finding legal ways to reduce their tax bills and often it’s by using effective tax business structures.

Talking to a tax specialist is the first way to go ahead with tax planning, as we are across the pitfalls and have the experience to think outside of the box in order to use strategies to 100% legally reduce your tax bill.  There are multiple tax-effect opportunities but I will only mention the most common ones, as each entity should have a tailored tax structure to best benefit them.

The first tax-effective structure is a Company.  The tradies who lay your concrete and fix your toilet are the most underrated high-income earns in Australia.  Most tradies (Concreters, Plumbers and Builders) can easily earn 6-figure incomes, sometimes outpacing even doctors and lawyers.  It would be wise to use a company as the best tax-effective structure.  The company is taxed at a flat rate, compared to our highest personal tax brackets.  To make it simple, if you earn $400,000 a year, your tax bill would be over $160,000 at 45%. However as a company, your tax rate would only be 27.5%, you would roughly be saving around $50,000.  Now I don’t know about you but $50,000 would be much nicer to be kept in your own pocket, and just think what you could do with an extra $50,000 in savings. Of course there are many pros and cons when planning a tax structure, so it is not a yes or no deal, it takes careful consideration to decide on you think is best given all the information to hand.  It’s all about what you think and what is more important to you.

A second tax-effective structure is a Trust.  There are many different types of trusts which can operate here in Australia.  The most common one for high-income earners is a family (or discretionary) trust.  With this kind of trust, the assets are controlled but not own by the trust.  The key tax benefit is the trust allows the allocation of profits for tax purposes by way of distribution on paper.  This means you can choose who receives the money to pay the tax.  The beneficiaries receive distributions and it is then beneficial to distribute to the lowest income earners as they would pay the least amount of tax.  All the money distributed is taxed in the hands of the recipient however, which isn’t necessarily beneficial for them.  Often the trust needs to be prepared to pay any additional amount of tax which the beneficiary is required to pay.

An example explaining of how a trust would distribute income is a family trust distributing it’s $100,000 income.  We find the best possible tax outcome by distributing $20,000 to his wife, $10,000 each to two of the client’s children who are over 18 years old, $30,000 to yourself another $30,000 to a beneficiary company for future investments.

Another great option is a hybrid option with both a trust and company structure.  The most common way is to often run the business through a company, which is then often owned by a discretionary trust.  It provides the best asset protection and lets you use the company tax rate.  As it is a trust combination, the company has the ability to stream income, in the form of a dividend to the beneficiaries of the trust.

This is all completely legal and will minimise your tax substantially as the $20,000 distributed to the children is practically tax free as (provided they aren’t working) they would receive the $18,200 threshold.  A trust is a great option when you have multiple beneficiaries who do not have other tax liabilities.

Here at Venta, we are very passionate about finding the best tax-effective strategies for each of our clients.  We can advise you on a case by case basis, so contact us today to schedule an assessment and tailor-made just for you.

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