“Prevention is better than cure” is a saying I had drummed into me from a young age, and for good reason. It applies across a myriad of areas, having your car serviced regularly is better than inconveniently breaking down, regular check-ups with your doctor to pick up any problem early before it is serious. Likewise the tax you pay can be reduced and cause less havoc to your cash flow by preventive planning.
Good tax planning starts with a good diagnosis. Back of the envelope estimates of taxable income are rarely correct. A good diagnosis starts with working out what your tax is likely to be for your entities, yourself and other family members. Only when you know the extent of the problem and where the problem is, can the solutions become clear.
Good solutions don’t have unintended consequences. A consequence of many tax strategies is that they involve spending money, draining the cash flow of the business. Spending a dollar to save 30 cents does not make sense.
Strategies that don’t drain cash include for example:
- Accruing wages from the last pay day to the end of the financial year
- Utilising the generous overnight travel allowances for business owners
- Write off obsolete stock
- Crystalise bad debts or disputed customer invoices before the end of the year
Paying expenses in this financial year rather than next will cause a temporary reduction in cash flow. These deductions are only available to the those small businesses whose turnover is under $2 mill. These type of deductions include:
- Prepaying expenses that are due in the next month or two, such as rent, repairs, advertising, June quarter super payment.
- If you are planning on buying equipment early in the new financial year, do it before 30 June. If it is under $20,000 you can claim a full deduction, otherwise 15% of the value is deductible.
Making additional contributions into super is a common strategy to reduce tax. While the deduction is significant it must be balanced with cash flow. These additional payments take cash permanently out of the business. However, given the restrictions that are coming with getting money into super, some degree of additional contributions are worth considering.
A common consequence of some tax strategies is that shareholder loans from companies are created by keeping owners wages low. These loans have tax consequences.
If you have shareholder loans and the company goes into administration the loan needs to be repaid by the shareholders. Shareholder loans effectively negate the asset protection of a company.
With the tax rates for smaller businesses at 28.5% this financial year and next year potentially for all small businesses at 27.5%, operating from a company may be the better solution and therefore needs some serious consideration. Operating through a trust and dumping excess profits into a company, is no longer a viable option since the change in legislation in 2010.
Some questions to ask?
- Do you have you a formal tax strategy?
- Have you revisited your structures to take advantage of lower company tax rates?
Tax can be a significant expense. Good tax planning will reduce that expense without unwanted side effects.
Peter Ambrosiussen is a partner of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au