Minimise your tax; legally
Everybody wants to pay less tax and enjoy more from the income they earn. A taxation plan will help you to minimise your tax legally.
When it comes to being Financially Well Organised, you must have a strategy to pay the least amount of tax possible, within the boundaries of the law.
If you are paying more tax than necessary, you are taking away vital cash flow. When you look at the spread of tax rates below, it’s obvious that if your structure enables your income to be taxed at the lower marginal rates, you will have a greater amount of income to assist you in meeting your personal and financial goals.
Income Tax Rates
- Individuals pay marginal tax rates. In 2009/10 these rates are 0%, 15%, 30%, 38% and 45%. The higher your personal income, the higher tax rate applicable
- Companies pay tax at 30%
- Trustees of trusts only pay tax at 45% when the income isn’t distributed to beneficiaries, otherwise the beneficiary is taxed at their rate, which will either be at the individual or company rates
- Superannuation funds pay tax at 15%. However, when the fund is paying a pension the tax rate is 0% on the earnings in the pension account.
Let’s look at an example and strategies in reducing the average rate of tax when you’re on the same income:
Ben and Holly are considering purchasing new business premises. They currently operate their business through a partnership of individuals. Ben is the main operator for the business. They have one child at university, a 15-year-old child and a disabled child aged 10. They are concerned about the exposure of their assets to creditors and their family’s financial security, particularly now the business is experiencing good growth. They have a reasonable portion of their income taxed personally at the 38% and 45% marginal tax rates, and have been contributing to superannuation for some time. Ben and Holly use this opportunity to restructure the ownership of their affairs so they can manage the risks of the business effectively, and align their structure to their Estate Plan.
The strategies they have implemented are:
- They sold their business into a trust that has a company acting as Trustee. The shareholders of the Trustee Company are Ben and Holly. They have 60 shares issued to each of them. They paid some stamp duty on the transfer, but no Capital Gains Tax (CGT) was payable as they accessed the small business CGT exemptions. Ben and Holly are paid commercial wages for the work they do in the business. The balance of the profits are distributed between Holly, and the three children. Firstly, the university child who is over 18, pays tax at their marginal tax rates, therefore utilising the lower rates. The trustee can make a distribution to the disabled child who is also taxed at the marginal rates because the tax law enables a disabled child under 18 to receive passive income and have it taxed as if they were an adult, once again taking advantage of the lower marginal tax rates. The remaining child receives a small distribution which is tax free to them as a result of the minor tax laws and the low income offset. The net result is the income that was previously taxed at 38% and 45% is now being taxed between 0% and 30%. That is a significant difference. As the children grow older and earn their own income, a company could be used as a beneficiary to cap the tax rate at 30%. In using this strategy, there are additional tax laws that must be considered as well, including what is commonly referred to as Division 7A.
- They purchased the business premises in their Self Managed Superannuation Fund. The business is required to pay rent to the superannuation fund at commercial rates. In doing so the rental payments are claimed as a tax deduction in the trust, therefore reducing the amount of income in the trust, and are taxable at 15% in the company. When the superannuation fund starts paying a pension, the tax rate on these lease payments will be reduced to 0%.
We wrap up step 5 next week with Capital Gains Tax, as well as a handy taxation plan checklist.
Let FWO help you set out a Taxation Plan to ensure you’re paying the least amount of tax possible. Call 07 3833 3999 or email firstname.lastname@example.org