You may have seen our Facebook post last month where I flexed my muscles and shared with you how I saved a client $44,676 in tax before breakfast. It was literally a walk in the park, and in fact- I could have saved them more, had we not been in such a time crunch.
You see, there’s a huge misconception between tax planning and preparation of tax returns. Most accountants make the mistake of doing both all in one hit, but in fact, tax planning has a certain timeframe where you can maximise your return: the 1st of April until the 30th of June.
You may think Christmas is the most wonderful time of the year, but for an Accountant, this is when all the magic happens. Our “gift” to you is the answer to every financial “what-if” scenario you can throw our way!
Through scenario planning, an Accountant can design a structure in which you get to pay yourself, contribute to your super fund, settle your Division 7A loans, prepayments, make big purchases for your business (Lamborghini???) and make large write offs before year end.
The saying “timing is everything” couldn’t be more true. Yes, there are regular things you as the business owner can check every year, like claiming business expenses or selling assets for a capital gain or loss. However, combining your “to-do” list with an accountant is what actually gets you results.
So, back to how I saved a client $44,676 in tax before breakfast: The best part about all of this is that there’s nothing extraordinary about this client that sets you apart from them! They’re a private mum and dad small business. While they paid themselves a wage, they also took drawings of over $90K from the business, which is where we had the most work. This is a big no-no for small business as it contravenes a provision called Division 7a, which basically means this amount will be distributed to you and you PERSONALLY will pay up to 46.5% tax on it! Through a clever tax planning session with your Accountant before the 30th of June, you can put strategies in place to avoid any nasties like this.
The way we helped this particular client, whose prime focus at present is on maximising cash flow, is we:
- prepared a Division 7a loan agreement for the directors who had taken drawings from the company. This is a 7 year loan agreement and the interest rate is dictated by the ATO, which in this case was 7.05%. The directors need to make principal and interest payments, but it will free up their cash flow for the short term.
- paid a specific fully franked dividend to the share holders, being mum and dad, which we determined based on some scenario planning we did for them. This dividend already has 30% tax paid on it which in this case was advantageous to the client. We did have to tackle something called ‘Franking Deficit Tax’ due to a lack of franking credits available; however, the client had stressed their priority for cash flow and were happy to factor this into their strategy.
While every business can achieve different results, these results don’t lie. Look out for a post early in the New Year to find out how you can also maximise your opportunities by working with us.
Remember, timing is everything.