What is Tax Planning and Why is it Important?
Tax planning for a proactive accountant can sometimes be a year long process. Strategies are often implemented at the beginning of the financial year with your progress tracked each quarter (which normally coincides with the preparation of your BAS). You may notice that your PAYG Tax Instalments vary each quarter – this is not a result of the ATO being unable to decide on how much tax you should pre-pay, but likely your accountant varying your instalments based on your current tax position – so you are only paying what you need to pay.
Tax planning meetings are usually held between April and June each financial year. This is where your accountant assesses your current tax position and looks for ways to minimise your tax liability, maximise your after-tax position and even boost your cash flow.
What do accountants consider during tax planning?
There are a few great tax minimisation strategies that accountants will investigate, based on your circumstances. These can include, but are not limited to, the following:
Instant asset write-off
The ATO’s temporary full expensing measures allows businesses to claim an immediate deduction for the costs of new assets that are acquired and installed ready for use. If you are eligible for temporary full expensing, you can continue to utilise this tax deduction up to the 30th June 2023 – as long as your assets are in your possession and ready for use. If you are considering the purchase of new equipment, vehicles or whatever it is you need to deck out your office (new computer perhaps?), it’s vital that you assess your options to ensure these are available to you before the cut off date.
Loss Carry Back
Trading companies that incur tax losses in the current financial year may be entitled to the loss carry back tax offset. To be eligible, the trading company would need to have made profits and paid tax in previous financial years. This tax offset allows the company to receive a refund of tax paid in earlier years, which will be either refunded to the company or offset against any tax debt owed.
The ATO has limited the amount that can be contributed to your nominated superannuation fund with their concessional contributions cap. This annual cap currently sits at $27,500 and includes any contributions made to your fund by your employer, related business or you individually, where the contributor is claiming it as a tax deduction. Individuals who have a super balance of less than $500,000, who have not used their contributions cap in previous years (2019 – 2022) may be eligible to carry forward any unused cap to the 2023 financial year. This means you may be able to increase your contributions to super in 2023 obtaining a higher tax deduction, which can result in significant tax savings.
Tax Rates and Dividends
The company tax rate for most SME’s is 25%, and 30% for larger companies and passive investment companies. When a company pays a fully franked dividend it passes on the franking credit at the company’s tax rate (25% or 30%) – however, that does not mean the ultimate recipient of this dividend is taxed at the same rates. Individual tax rates vary depending on what other income has been received during the year, which makes it important to address when dividends are issued and how. If your Family Trust owns the shares in your trading company, then it may be beneficial to distribute any dividend income to lower income earners within your family group, or a passive investment company. If a passive investment company is the end recipient of a fully franked dividend, there may be additional top-up tax that needs to be paid to the ATO.
Every financial year before 30 June trustees need to decide who is going to receive income from their discretionary trust and how much. This decision needs to be in writing and signed before the financial year concludes. As part of tax planning, your estimated year end position will be established, allowing your Trust Distribution Minutes to be reviewed and adjusted appropriately.
Reviewing your current tax structures
With the ATO tightening the rules and regulations around certain tax structures, it is always beneficial to review how your business is structured and whether you are getting the most from it. Tax planning is the perfect time to review how your business is currently structured and if it’s the most beneficial option to your current circumstances.
What do I need to do for tax planning?
Tax planning is an ongoing process that is best guided by a proactive, experienced accountant. They can review and assess your potential year end position and provide guidance and advice on ways to effectively minimise your tax, tailored to your circumstances. If you have already paid for your 2023 tax planning meeting, one of our admin team members will reach out to you in the coming weeks to book in your meeting. If you feel you could benefit from tax planning and you’re either an existing client who doesn’t have this service included in their package, or you’re not yet a client, please contact our office to book a meeting with us.