Tax planning does not have to be a year-end task. For business owners effective tax planning should ideally start from 1 July.
For a successful outcome at tax time, tax planning strategies should be established early on and worked on throughout the entire year, and not treated as a one-off exercise.
There are simple tax planning strategies that you can consider throughout the year to better your tax position come crunch time.
Tax planning 101 – maximise the extent of your deductible debt. If your business is generating a loss, it is sometimes better to hold the debt at a shareholder level rather than with the entity. This enables the shareholder to claim the interest deductions. This strategy is also effective when the shareholder has other sources of income and a tax rate that is greater than the business entity.
Instant asset write-off is a common but temporary tax incentive that can dramatically impact your tax position. Just be aware of the relevant thresholds and criteria that may apply at the time, as these incentives are continuously amended.
If your business is undertaking research and development you could be eligible for the R&D Tax Incentive, that provides a 43.5% refundable tax offset. Having proper documentation is crucial for this incentive to ensure you minimise rejection from the ATO and maximise your overall claim. You cannot ‘put together’ documentation at the end, this needs to be maintained throughout the entire process.
Before accessing a tax incentive, think about the implications it could have on other aspects of your tax position, it is best to consult an advisor first.
Many business owners are aware of the potential benefits of using a Discretionary Trust. The main advantage is that any income generated by the trust from operating a business or holding investments, including capital gains, can be distributed to beneficiaries in lower tax brackets. The trustees of a trust have the discretion to distribute income and capital as they see fit and no beneficiary has a fixed entitlement to receive income, meaning you can stream income in a tax effective way.
It is important you are aware of the various tax rates and how they affect different entities and your business. For most SMEs the tax rate has been lowered to 25%, and 30% for larger companies. Foreign dividends are taxable for individuals however exempt for companies. Only individuals and trusts are eligible for a tax discount on their capital gains. You should constantly review the tax profiles of all the entities in your group to ensure you have the most effective structure in place.
If you have borrowed money for investments such as property loans, margin loans on shares or business loans, check with your lender to see if you can prepay interest to gain an early tax-deduction by paying 12 months of interest in advance to receive a one-off benefit.
Financial risks can arise if your tax planning strategies are overly aggressive or poorly advised. Your goal is to find legitimate and helpful ways to reduce your taxable position. Tax planning should be low risk and minimise your taxes in a safe way. Talk to the tax experts at Growth iQ today to se how they can improve your tax position >> Schedule a free consult