Tax Planning: Understanding, Tips & Measures.
By Anand Shukla
The ATO deems “Tax Planning” to be legitimate and legal measures taken by you to minimise taxes. Such planning is also considered within the realms of “tax effective” investing and there are many such options available for taxpayers and businesses alike. One of the reasons why you should have an accountant is so that your investments as well as your businesses are effectively tax planned. The best times for tax planning is in the month of May & June, this is because you could get a clear picture of what you could expect from the current year tax returns and also could form a blue print of what you could expect from the following year. Tax planning measures will vary between individuals and structures. Hence a “one size fits all” tax planning scheme would never be effective. An individual’s personal circumstances and the business’s working environment need to be considered in detail, along with future (long term & short term) plans. Having an objective is one thing and implementing a plan and executing it is the other. “Tax Planning” can be considered a bridge between the two.
Before I proceed, it is needless to mention that all thoughts, ideas, guidelines, comments and content of this article is general in nature and none of the ideas presented should be used without suitable financial and legal advice. The circumstances where the below measures can be applied will vary between individuals and between business structures. Hence making decisions solely based on the information presented is not advisable. Opinions are solely based on the current tax laws and experience of the writer
Some considerations for “tax planning” are as per below:
A salary sacrifice arrangement is the one that includes forgoing a part of your salary towards some other benefit. This arrangement is generally entered as an agreement with your employer. A common form of a salary sacrificing arrangement is salary sacrificing into super. By contributing extra into your superannuation fund you can not only reduce the taxes you pay but also boost your next egg for retirement benefits from superannuation. A salary sacrifice arrangement as mentioned above is legal and is considered to be a tax-effective arrangement to legally save tax.
The structure you choose actually trumps the tax treatments on income and distribution of monies. A company has a flat tax rate of 30% while on the other hand a family trust would generally have $0 tax as long as all incomes are distributed in accordance with the trust deed and the law. A partnership should follow a partnership agreement to distribute the income and a sole trader will follow an individual’s marginal rate of tax. Hence from the above example, it becomes clear that you will be liable for different rates of taxes depending on the structure your business operates in. At the company tax rate of 30%, tax payable on a $30,000 would be $9,000. By employing tax planning measures this $9,000 can be reduced to zero. That is correct! You could legally reduce this tax to zero by planning well and in advance.
Cash & Accrual Basis of accounting:
Most people are unaware of the benefits of having the choice to use either of these accounting methods. In some instances it would be beneficial to use accrual basis while on the other a cash basis accounting may be more suitable. The mode of accounting you choose has a significant effect on taxes. A watchful accountant should be able to make this distinction for you and help you understand the pros and cons of one over the other. Most business owners are caught in a territory where they actually do not know this distinction and hence may be losing a legal opportunity to either streamline their affairs and/or also save taxes. I have come across many business owners who have not made this distinction upfront nor were they aware of the two choices available to them.
Depreciation is an expense that has the potential to reduce the tax payable substantially. Using this effectively to legally reduce your taxes is one measure overlooked by many. There are many facets of depreciation and a pre-judgment of the end of the financial year figures can help you determine the suitable method of depreciation that can be used given your circumstances.
You may be eligible to pay certain expenses in advance for the forthcoming financial year to claim a deduction in the current financial year. You could probably anticipate such expenses in advance, get an invoice from the supplier, pay the invoice either in full or in part and claim this as a deduction on the tax return.
Employee Superannuation Payments:
Employers/Business owners generally pay superannuation guarantee contributions in the following quarter for the quarter just ended. You could pay the superannuation guarantee in advance to claim this as a deduction and legally reduce your taxes.
Capital Gains Tax:
If you have made a capital gain by selling any of your assets, for example a property or a running business, you may be eligible to reduce the taxable capital gain by taxing only 50%, 25% or completely tax free! However though, it is very important to note here, that this area of tax law is very specialised and an accurate understanding of the laws, application of the facts to the circumstances to determine the suitability of capital gains tax reductions and concessions is very critical and important.
Beware of Part IV A:
It is said that while you plan for the best you should be aware of the worst and hence Part IV A needs a special mention when we are talking “tax planning”. Aggressive tax planning measures or entering into schemes or arrangements where your only motive is to reduce your tax bills can be constituted to be tax avoidance measures and not tax planning measures. If the ATO deems your arrangements too aggressive, Part IV A may be applied by the commissioner of taxation and your arrangement may be considered illegal.
While I have mentioned a few of the many tax planning options available to you as a taxpayer, it is impossible to include many others that may be commonly used. However, what can be said with certainty is that each one of us would have at least one initiative that we can take, which may not only legally reduce the taxes we pay but also help us streamline our affairs and/or invest into our future.
This article is accompanied with a disclaimer, to avail a full copy of this disclaimer, please contact A One Accountants by writing to us on email@example.com and also by calling us on 03-86091889.