Tax planning is the process of understanding your current and near future tax position. It presents a taxpayer or group of taxpayers the opportunity to implement tax effective strategies to minimize their tax liability for a given period within the constrains of the law.

Benefits of tax planning

Tax planning has multiple benefits which include:

• Giving you the opportunity to look at your business’s year-to-date financial performance and position and adjust as needed to meet your yearly target.
• Giving you the opportunity to implement tax concessions & strategies that are available to you and/or your business before the end of the financial year.
• As the tax deductions and planning strategies available are always changing, tax planning provides an opportunity to implement any budget or other recently legislated changes before the end of the financial year.
• Providing you with the knowledge of what tax will be payable. This allows you to utilise excess funds sooner and plan ahead for any tax payable rather than waiting to find out the outcome when the tax return is prepared.
• Determining distributions within a group of taxpayers to minimise the overall tax liability of the group.

How to do tax planning for your business

Step 1

The first step should be done a few months before the end of the financial year. You need to prepare an accurate year-to-date profit and loss report to the end of the previous month (e.g. if you are preparing tax planning in April, you would prepare a current P & L for July to March).

Once this is prepared, you must project the revenue and expenses for the remaining months of the financial year. This will provide your business with an estimated net profit for the financial year.

Step 2

Once step 1 is completed, you need to project what (if any) tax adjustments will need to be made to get to an estimate taxable income for the year. From there you multiply the taxable income by the relevant tax rate (2021 tax rate for a company with a turnover under $50 million is 26%). To get to the final figure of how much tax is payable on your business’s tax return, you must reduce the tax calculated by any PAYG Income Tax Instalments paid during the financial year.

Step 3

The estimate worked out above, is currently based on the projection of what will happen if you continue without taken advantage of any tax concessions or strategies available. This is the point, to consider what tax concessions and strategies are available to you, some examples can include:

• Purchasing assets to utilise the instant asset write off;
• Pre-paying costs such as rent or insurance to claim the deduction in the current year;
• Making donations to Australian charities;
• Incurring any repair costs needed.

Step 4

If your business operates from a company, consider if declaring a dividend is prudent. Reasons for declaring a dividend could include:

• Clearing a debit loan balance owing from a shareholder;
• Paying out retained earnings in the company and not leaving them exposed to future legal claims that could be made against the company;
• Paying income to a shareholder to recognise their work in the business.

If your business operates from a trust or a trust owns the shares in a company that operates your business, consider how best to distribute profits to use up lower income tax brackets of eligible beneficiaries.

Before declaring a dividend, it is very important to check that the company can declare a dividend. Please get advice on this before declaring a dividend to shareholders.   

Step 5

It is useful at this point to look at the projected taxable income of other taxpayers within the group. This could identify additional areas to assist with the tax planning of the business and the overall group. For example, it may be discovered that the salary being paid to the shareholder/director of the business is not utilising all of their lower income tax brackets. This could illustrate that additional wages should be paid to the director/shareholder which will provide a deduction to the business and allow the director/shareholder to utilise all their lower income tax brackets.

How can Catalyst assist you?

If you believe that you would benefit from tax planning but are unable to do it yourself, Catalyst Financial offers a tax planning service throughout the Apr to Jun quarter. Please contact our office for further details.