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, together with a massive yawn then panic about what needs to be paid.  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:

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 (many, many, 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:

• Are you structured correctly to achieve the best possible tax outcome for your circumstances and also receive access capital gains tax concessions.
• Are you maximising the cashflow in your business effectively using tax management as a way to do so for example, are your PAYG instalments being managed to effectively match your cashflow?
• Would grouping for GST or Payroll Tax help with your tax outcomes? Do you have multiple 100%-owned entities in your group?  What about tax consolidation?
• As a director you are personally liable for many unpaid taxes (such as SGC and PAYG Withholding). Are you receiving adequate information each period to ensure you understand what the liabilities of the business are?
• Do you undertake overseas transactions? Do you have the most appropriate structures and processes in place to maximise returns from these transactions?
• Has a Division 7A loan agreement been prepared which covers all future loans from the business to owners and their associates?
• Have you ever read your trust deed? Do you understand the impact of its requirements on the various tax laws?
• Do you have the correct business structure for your business and industry. Perhaps you have outgrown your current structure, perhaps you are looking to expand, or even downsize.
• When did you last look at your contractors, could they be considered employees for Superannuation Guarantee purposes, payroll tax or income tax?
• If you’re going through a merger or acquisition, do you adequately understand the impact on the business?

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).  Life in 2020 was very different and the Federal budget ultimately wasn’t announced until October 2020.  For 2021 we are on-track for a normalised budget announcement, that is:  May 2021.  This means there will be many changes to take into account very close together, making planning all the more important.

It’s very easy when a business struggling to keep up with economic changes to take their eye off the proverbial financial ball.  2021 has been difficult for many, this makes it all the more important to keep on track.  Spending the time to focus on your businesses finances means you will be in a stronger position when the pendulum swings the other way again.  So much so, we have created a checklist, available here for you to download and work through.

Come and talk to us to understand more about how we can help you.

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