Look at any company that is in financial trouble and you will probably see the Tax Office as one of the larger creditors.
The reality is that we all pay a lot of tax - some of it income tax, some withholding tax, PAYG instalments and GST. The late Kerry Packer famously told a Senate enquiry, "Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you you're not spending it that well that we should be donating extra!"
While it's true that no one wants to pay more tax that they have to, recent changes to tax legislation are focused on getting tax into the Government's coffers from segments of the economy doing it tough, which is effectively mismanagement of the tax base of the country.
The Government's approach to taxing super profits is equally perplexing. Mining contributes about 8% of Australia's GDP and the industry benefits from a range of tax concessions and tax-free components, yet the
Government has introduced two key changes that kills a lot of the breaks: the Mining Resources Rent Tax and changes to the Living Away from Home Allowance (LAFHA) scheme that makes bringing in the right talent less
attractive to employers.
So if the Government isn't going to help you with your tax position, then you have to set it up so that it's most tax effective. There are two
fundamental principles to managing taxation:
1. Don't pay any more than you have to; and
2. Don't pay it before you need to.
The first principle of effective tax management is about maximising after tax profits; the second is about maximising your cash flow. Here are some ways to achieve these principles in practice:
Make your entity structures work for you
We have differential tax rates across individuals, companies, trusts and super funds. As your business grows you will make increasing use of entity structures to manage risk, business efficiency, and tax. Where you have a mix of entity structures or individuals in your business then you should be aware of the tax rates that apply to each entity.
Your tax planning should seek to maximise the use of lower tax rates. It doesn't make sense paying tax at 46 cents in the dollar when you could be paying 30 cents, 15 cents or even less.
Don't pay costs in after tax dollars if they could be paid with pre-tax dollars – some expenses can be structured in a way that improves their tax efficiency. One example is life insurance – something that we either already have or should have.
If you own the life insurance in your personal name you will pay for it in after tax dollars. Hold it through your superannuation fund and it should be paid in pre tax dollars. There are lots of different examples and every dollar saved counts.
Don't forget the children
There's no getting away from it – kids are expensive. If you add up what they cost, you start to understand where some of your money is going.
If you have a family trust within your structure that either operates your business or is a shareholder of your business, then it is likely that income will flow into that trust.
Where the trustee appoints some of the income of the trust to children they might pay either no tax or a reduced rate of tax. You're spending the money anyway so why not counter balance part of it with the tax savings.
Get your GST registration right
f you are a small business entity with a turnover under $2 million per annum then when you registered for GST you elected to account on a cash or accruals basis.
This choice will not change the amount of tax that you pay but it will change the timing of that payment. If you are managing your cash flow closely then ideally, you don't want to have to pay GST before you collect it.
There is no one size fits all here. Sometimes, if your debtors exceed your creditors, then being registered on a cash basis will be more cash flow effective. Where creditors exceed debtors, accruals might be the way to go. You need advice on this one.
Know where you are up to in the current year
Where you are paying tax instalments, the amount or the rate is determined by your last tax return lodged.
If current year profits are tracking under the previous year, then it is likely that you are paying more in tax instalments than is necessary. You have the right to vary them downwards if this is the case. If there is a material difference; don't wait for another year to get the tax benefit flow through. Adjust it now and preserve your cash flow. Be sure to have accurate and reliable budgets before varying any tax installments - varying is easy, quantifying where you will be is the hard bit.
These are all quite simple strategies but they have one thing in common. They will all put more money in your bank account.
To find out how else you can manage your tax position, get in touch with our team for a confidential chat. Call us on (02) 9957 4033 or drop an email to the team
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Last updated March 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.