Coming into the last quarter of the financial year, smart businesses will be focussing on putting a tax planning strategy in place, because let’s face it, no one wants to have to pay more tax than they have to. So let’s have a look at what tax planning actually is and how it works:
Firstly, I want to make the distinction between 3 separate functions that business owners regularly group together, believing they are one and the same. Compliance only accountants (i.e. those that only do tax returns) will usually do all these 3 functions when completing your tax so let’s clarify:
- Bookkeeping – this is primarily transaction based and includes the reconciling of bank accounts, debtors, creditors, inventory plus payroll and lodge of activity statements and is performed on a regular basis i.e.fortnightly to monthly. (For new business owners: a bank reconciliation is advising what the deposits and withdrawals, in and out of a bank account or credit card are for e.g. a withdrawal of $100 to Telstra would be allocated to the Telephone expense account or perhaps a deposit of $1,000 from John Smith may go to your Sales revenue account. At the end of the financial year or period, your reconciliation should balance to the bank balance i.e. balancing the books. This results in accounting reports called the General Ledger and the Trial Balance which us Accountants use as the foundations for preparing financial statements and tax returns).
- Tax Returns – the end of financial year has passed, all bank accounts, credit cards, debtors, creditors and payroll have been reconciled to 30 June, any tax planning strategies have been implemented and accounted upon and now financial statements and tax returns can be prepared.
- Tax Planning – this starts in March-April of each financial year and is a process of designing a strategy to minimise tax payable whilst not interrupting the performance of the business. Effective tax minimisation occurs pre-30 June so any attempts to reduce tax when preparing your tax return will be very weak.
As a strategy, tax planning is tailored to the uniqueness of each business and each financial year. Just like American Football, there are thousands of different strategies the team can use before the next play begins. The reason tax planning is focussed on in March-April, is because three quarters of the financial year has now passed and we still have a few months to implement. The first step is to ensure all bookkeeping has been reconciled so your accountant can prepare interim financial reports to 31 March.
What this means is that we can now look at the business position and performance for three quarters of the year and based on prior years, this current year, and how you think the business is going to finish off the next 3 months we can forecast what the profit will be as at 30 June. That’s the first step. So now we know that “ok, at 30 June we believe our profit is going to be X, so let’s multiple that by 30% (being the company tax rate) to forecast our tax payable.” Now we’ve got a starting reference for profit and tax payable.
Let’s factor in some variables:
- carried forward trading losses to offset any profits?
- carried forward capital losses to offset any capital gains?
- any capital losses or gains in this current financial year?
- are you looking at purchasing or selling any assets?
- are you paying any dividends for the year?
- what wages have the business owners paid themselves?
- what superannuation have the business owners paid for themselves?
- is there the option to pre-pay expenses for 12 months such as interest, rent, insurance etc.?
- if you are trading via a discretionary trust, what is the best strategy to distribute trading profits, franked dividends and/or capital gains? (Note: make sure the trustee prepares and sign’s off on a distribution resolutions before 30 June! Super important)
These are a few of the common variables that can be mixed into the tax planning strategy. Not all will apply or be applicable but if so, they will alter the course of action.
Here’s an example of a massive tax saving I created for a client using the above and some more advanced strategies, so you can see it is definitely a worthwhile exercise.
If you are thinking that all of the above might as well be in another language then you need to be guided by your VCFO or accountant and have them create a strategy. We eat tax planning for breakfast, we even enjoy it, so now’s the time of year to get started!