It’s that time of year to start thinking about Tax Planning as the financial year is starting to draw to an end.
To ensure you are Financially Well Organised you must:
1. Review your tax position before 30 June;
2. Implement any strategies required to reduce your tax payable;
3. Ensure you comply with all tax and superannuation laws applicable to your structure; and
4. Plan your cash flows for 2012/13
What is Tax Planning?
Tax Planning is the process of gaining an understanding of your estimated tax position prior to 30 June and implementing effective but legal strategies to minimize taxation. It is also an essential part of wealth creation through tax efficient strategies.
It involves reviewing your actual results for the first 9 months of the year and estimating your expected results for the whole year so that you can implement any strategies prior to 30 June.
From a business perspective, Tax Planning is critical to ensure you retain more after-tax income to use in your business, reduce debt, invest or use for living expenses.
In these post GFC times, cash is still tight, so understanding your taxation commitments is critical for managing your future cash flows. You need to have an accurate estimate of the timing and amounts of your:
1. 2012/13 quarterly PAYG Instalments; and
2. Estimate of the balance of what your 2011/12 tax will be
With regard to PAYG Instalments, in some cases instalments can be varied downwards to reflect the true results that the business is achieving. Tax instalments are typically based on the last Tax Return that is lodged and that maybe as long as 12 months ago. The businesses performance may have changed substantially since this time. If you are paying more tax than necessary, you are taking away vital cash flow from your business.
Being Financially Well Organised™ is about ensuring that you are maximising all of your after tax returns.
Tax Planning strategies focus on the following:
1. Strategies for obtaining tax deductions;
2. Strategies for moving income away from an entity paying a high rate of tax to an entity paying a lower rate of tax;
3. Strategies for moving profits and losses between tax years, either to defer tax or take advantage of more favourable tax rates; and
4. Strategies for reducing the amount of assessable capital gains from an investment sold at a profit.
To ensure you maximise your after tax returns and have adequately planned for your 2012/13 tax payment, make sure you complete your Tax Planning review well before 30 June. Once 30 June rolls by, it’s too late and there will be nothing you can do. You may end up paying more tax than necessary.
The nasty side of not tax planning
With multiple entities, including companies, trusts and superannuation funds, there are also the complexities that require annual attention to ensure you don’t fall foul of the tax and superannuation laws. Failure to address all of your legal requirements can result in additional, unnecessary tax and penalties. The ATO has tightened up on many areas of the law over recent years, so it is critical to make sure you address your obligations each year before 30 June. Anyone who has a company, trust or superannuation fund, must complete an annual tax compliance review to make sure they maximise their after tax returns. We are reviewing all of your pre 30 June compliance requirements.
Some areas you need to address before 30 June:
• Have you paid out the correct amount of dividends to meet your Division 7A requirements? Not meeting these requirements could mean that the original profits are effectively taxed at 62.55%.
• Have you paid your commercial rent to your superannuation fund in accordance with your signed lease agreement? Failing to do so may be a breach of the superannuation law which could result in your fund losing its tax concession benefits, meaning it could end up being taxed at 45% instead of 15%.
• Have you maximised your deductible superannuation contributions for the year? For over 50’s, this is the last year of the transitional contribution cap of $50,000.
• Have you considered your distribution strategy from your trust? Failing to do so and documenting your plans after 30 June may render the distribution ineffective and tax the income at 45% instead of your marginal rates of tax.
• Have you paid the correct amount pension for the year? If you don’t, you may place the tax free status of your super fund in jeopardy.
Don’t worry, that is why we’re your accountants. We’ll be in touch soon to discuss ensuring you have addressed your Tax Planning before 30 June.