Look at any company that is in financial trouble and you will probably see the Tax Office as one of the larger creditors.
The reality is that we all pay a lot of tax — some of it income tax, some withholding tax, PAYG instalments and GST.
There are two fundamental principles to managing taxation: Don’t pay any more than you have to and don’t pay it before you need to.
The first is about maximising after tax profits, the second is about maximising your cashflow.
If you believe in these principles, here are five ways to achieve them:
1. Make your entity structures work for you
We have differential tax rates across individuals, companies, trusts and super funds.
As your business grows you will make increasing use of entity structures to manage risk, business efficiency and tax.
Where you have a mix of entity structures or individuals in your business then you should be aware of the tax rates that apply to each entity.
Your tax planning should seek to maximise the use of lower tax rates. It doesn’t make sense paying tax at 46 cents in the dollar when you could be paying 30%, 15% or even less.
2. Don’t pay costs in after tax dollars if they could be paid with pre-tax dollars
Some expenses can be structured in a way that improves their tax efficiency.
An example of this is life insurance. You either have it or should have it. Own it in your personal name and you will pay for it in after tax dollars.
Hold it through your superannuation fund and it should be paid in pre-tax dollars. There are lots of different examples and every dollar saved counts.
3. Don’t forget the children
There’s no getting away from it – kids are expensive. If you add up what they cost, you start to understand where some of your money is going.
If you have a family trust within your structure that either operates your business or is a shareholder of your business then it is likely that income will flow into that trust.
Where the trustee appoints some of the income of the trust to children they may pay either no tax or a reduced rate of tax.
You’re spending the money, so why not counter balance a part of it with the tax savings?
4. Get your GST registration right
If you are a small business entity with a turnover under $2 million per annum then when you register for GST you need to elect to account on a cash or accruals basis.
This choice will not change the amount of tax that you pay but it will change the timing of that payment.
If you are managing your cashflow closely then ideally you don’t want to have to pay the GST before you collect it. There is no one size fits all here.
Sometimes if your debtors exceed your creditors then being registered on a cash basis will be more cashflow effective.
Where creditors exceed debtors, accruals may be he way to go. You need advice on this one.
5. Know where you are up to in the current year
Where you are paying tax instalments the amount or the rate is determined based on your last tax return lodged.
If current year profits are tracking under the previous year then it is likely that you are paying more in tax instalments than is necessary.
You have the right to vary them downwards if this is the case. If there is a material difference, don’t wait for another year to get the tax benefit flow through.
Adjust it now and preserve your cashflow.
These are all quite simple strategies but they have one thing in common: They will all put more money in your bank account.
If your accountant hasn’t talked to you about this, ask the question and get some advice.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.