Five Key Tax Busting Strategies

For the next couple of weeks we'll be starting to focus on your end of financial year planning.  But, to keep it interesting (?), we'll only deal with the issues in summary form, and attend to the detail when we actually do your End of Year tax.

The reality is we all pay a lot of tax - whether income tax, withholding tax, PAYG instalments, or GST.  There are two fundamental principles for managing tax: don't pay more than you have to (maximising after tax profits) and don't pay it until you need to (managing cashflows).  Here are five ways to achieve them.

1. Make your entity structures work for you

Different tax rates apply to individual, companies, trusts and super funds.  Structures change to manage risk, tax and efficiency.  So, tax planning seeks to use the lower tax rates, perhaps permanently (like super) or to defer (with a company).

2. Pay costs with pre-tax dollars

Some expenses can be structured to improve tax efficiency.  A good example is life insurance; it can be paid by you (so is not tax deductible) or by a super fund (and becomes a pre-tax deduction).

3. Ensure the GST Registration is right

You only need to register when annual turnover is likely to exceed $75,000, so you can avoid the paperwork and including GST in your price until this level of turnover appears likely.  If turnover is under $2m you can account for GST on a cash basis, that is when it is collected and not when it is billed.  It will not change the amount to pay but it will change the timing of payments.

4. Know where you are financially in the current year.

The ATO requires you to keep records to accurately pay GST each quarter and tax each year.  But, your main goal should be to use the information to improve the business - what you measure you can manage.

However, as PAYG tax instalments are based on the last tax return lodged, as is GST, having financials up to date may permit the variation or reduction of those instalments.  Don't pay them each quarter and then wait for a year to claim back the overpayment.

5. Don't forget the children

The amount that can be distributed by a trust tax free to a child is now fairly small, but may still be a worthwhile tax saving.  Older children can be paid a wage, at commercial rates, for the work they do after school hours or over school holidays.  It may be possible to improve the Family Tax Benefits received by use of the entity structure.

All are quite simple strategies but they can put more money into your account.  These are some of the issues we consider when either end of year tax planning or when preparing tax returns.  Sometimes, a lot of little changes can achieve a material benefit in total.