It’s early in your business life and you are sitting with your accountant – perhaps for the first time. You talk about your business, your compliance requirements, what you expect from your accountant and sooner or later the conversation finds its way to ‘and I don’t want to pay too much tax’.
Too often this becomes the basis to measure your accountant by. And when you are talking with other business owners you compare your accountants by who achieves the best tax position for their client.
Playing the tax game is a popular pastime in Australia. None of us get excited about paying tax and less is always more attractive than more. The danger is however, when the primary focus becomes how we do we get our tax down, you lose sight of where your real focus should be in business. And that should be how to maximise your profits and drive value in your business.
It’s not hard not to pay tax. Plenty of small businesses pay little or no tax. The primary reason is that they are not making any money. You don’t have to be a rocket scientist to achieve this.
But unfortunately, in the search for the next great way to reduce their tax, business owners get caught in a never-ending spiral.
The broader market understands this. Take a look at the number of businesses that, as the end of the financial year approaches, advertise their products and services on the basis of the tax savings they offer. They know that businesses will react to the opportunity to obtain a tax deduction.
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This isn’t to say that tax is not important – it is. Simply though, it is secondary to business profitability. Successful businesses first and foremost drive their business performance to produce great results – strong profits and cashflows. Then tax is managed like any other expense of the business.
Make it efficient, manage it to a cost-effective level but accept that it is a cost of doing business. You pay for staff wages and rent because they are necessary to the operation of the business. Similarly, if you run a successful business you will pay some tax. Manage it by all means but don’t lose focus on your main objective in pursuit of paying less or no tax.
Keep in mind too that most tax deductions you are chasing will only return 30 cents in the dollar at the company rate and up to 46 cents in the dollar on personal rates. You still have a net cost.
Driving revenues and managing costs efficiently should produce the best possible outcome and profits for you. Once you understand your profit profile you can plan for your tax and any tax options available to you.
Your after tax profits will then be available to fund growth in your business and also return profits to shareholders through dividends. The risk of low or no profits is that you will not have the cash to fund your business growth. And that is a recipe for trouble. Too many businesses get into trouble because they run out of cash. Lack of profitability is one of the contributors to this.