Tax planning: where are the real benefits?

16 June 2011

The majority of tax planning falls into one of three categories - health and hygiene decisions that every business should review each year, timing benefits, and permanent savings. Some tax planning only creates timing benefits rather than real savings.

So the question is: what delivers real results?

Timing your savings
The tax savings that should ultimately materialise over the life of the business but they are moved. Typically, these are triggered by either deferring income or by bringing forward expenditure. This income or expenditure would otherwise have fallen in a later year causing the tax impact to also fall into that later year.

Your actions change that and bring the tax benefit into the current year. As a simple example, declaring bonuses prior to the end of June 30.

The declaration of the bonus prior to June 30 means that your company is committed and liable to the payment of the bonus, albeit that payment will not be made until after June 30.

In this case you are able to take up the deduction in the 2011 year whereas if you did not declare the bonus and simply paid it in say July 2011 then the tax deduction would fall into the 2012 year.

In either case you will be eligible for the tax deduction; you simply have the ability to bring forward the timing. Doing this has no impact on the recipient of the bonus. Recipients will only declare it in the year of receipt.

Subject to any differential tax rates that could apply to the tax saving between years, it normally makes sense to take advantage of the tax benefit at the earliest possible opportunity. It saves you cash, gives you the time value of the tax saved and the immediacy of the benefit create greater certainty for you.

Where you operate through an entity structure such as a company, if you have any years where you incur tax losses for the year, those losses are quarantined in the company and you will have to wait until a future year where profits are made to recoup those losses.

If your business is always profitable this is less of an issue.

Taking advantage of timing
However, there are plenty of businesses who have made profits in previous years but then find themselves in one or more loss years.

Taking advantage of timing benefits for tax normally makes good sense. And, there are a lot of opportunities to take advantage of those timing benefits. Sometimes the action of one day can make the difference of a year in when the tax is paid.

Contacts us

Call Bates Cosgrave on 02 9957 4033 before June 30 so that we can outline all of the opportunities in your business for tax timing benefits. Once you have this information, you can make the decisions on what you want to do.

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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.

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