Tax Planning - Part 1
Welcome to the first instalment in our tax planning series. A stereotype often associated with having to get your tax done, is that it is a chore and is completed after year end. Even in a business context if your accountant assists you with the lodgement of business activity statements during the year, it is still done after the month or quarter is complete.
Tax planning is the opposite of that. It is the process of reviewing your financial landscape before year end to determine firstly what is your likely tax position, that is, how much tax would currently be payable if no action is taken. Secondly, what are some strategies and specific action that you can take to legally minimise your taxable position before year end.
This is something that might seem fancy, expensive or both. In fairness, there can be some truth to that, however we really want to shake up those connotations and demonstrate how valuable of an exercise tax planning can be. We are going to achieve this by considering how the common SMART goal setting framework can be applied to tax planning, and how this can help you get the most out of your relationship with your accountant.
To quickly recap, SMART is an acronym for Specific, Measurable, Attainable, Relevant and Timely. If you are not familiar I would suggest learning a little more about this goal setting framework as we believe it is a fairly fundamental approach that has broad application.
What exactly are you trying to achieve? Yes, obviously the point is to reduce your tax liability. Beyond that, questions often come down to should a purchase be acquired this financial year, or delayed until the following year. Also how should such purchases be funded, because remember cashflow is critical. When you talk to us about specific things you want to achieve in your business, we are then able to provide the right advice on how to help you achieve your goals.
Also be clear about what information you need from us. Perhaps a simple phone call might be enough to clarify your position. Accountants generally have a habit of over-complicating, and sometimes tax planning will be a lengthy process. But being specific upfront about what you are trying to achieve means we are able to assist tailored to your needs.
This is typically the accountants bread and butter. We take your actual results year to date, apply a fair estimate to the end of the year and then calculate the tax payable. We then calculate the reduction in tax based upon certain scenarios that we then subsequently suggest to you. Sounds good right?
Currently the concessional contribution superannuation cap is $25,000 annually. A small business might save significant tax by ensuring that enough contributions are made to the owners to reach that cap at the end of the year, however this may be terrible advice for you if the funds are not available to top up that cap. Therefore it would be unattainable (note advice like this is part of the reason that the accountants exemption has been removed when discussing superannuation).
It is easy as an accountant to run scenarios to save tax, however if they are not practical for the client to undertake then the real opportunity to add value to your client has been lost.
In a similar tangent to attainable, there is no point in being told about R&D grants if your business doesn’t do any R&D. However, communication to key. If it is something that you are considering, talk to us in advance because there are grants that may be available which will help you decide whether or not to undertake a particular activity, and importantly, when.
This one seems simple as logic would say to do it as close as possible to the end of financial year as the figures will be as accurate as possible. The more accurate the data, the more precise we are able to be in our calculations, but it depends! Technically you could do tax planning in July for the following financial year if you really wanted to. But there is a middle ground that you should determine with your accountant. Typically this is going to be in April, May or June, however not always.
For businesses that use manual accounting methods or only reconcile their records to complete each BAS, then using the data compiled to complete the March BAS is ideal. An exception to this is when the proposed action to be undertaken includes building or upgrading structural property that takes time to get approved and completed.
This is where the advancement of cloud accounting software such as Xero which offers near-live bank data and the ability for your accountant to login at the same time as you the client is invaluable. There is no time barrier due to completion of up to date figures, timeframes can be defined by specific client needs.
The reason it is important to consider your goals for tax planning, is that every person and business have very different requirements. We believe strongly in building relationships with our clients so that we understand them properly and so therefore are in the best position to offer the best advice that suits their needs.
If you are not getting this kind of service, get in touch with us today to find out more.