Tax Planning (And Why You Should Care)
Written by: Danny Grigg l Accounting Team
What Do You Mean By Tax Planning?
Broadly, tax planning is the process of organising the affairs of a taxpayer or a group of taxpayers so that, as far as legally or commercially possible, the liability of the taxpayer or group of taxpayers to income and other taxes is minimised.
Tax planning is not limited to complex, high risk or sophisticated arrangements. Taxpayers contemplating even the most ordinary transactions should consider tax planning as part of the transaction (and, in particular, to Capital Gains Tax (CGT) issues) to ensure that they do not suffer adverse tax consequences.
Both advisors and taxpayers need to ensure that tax arrangements and schemes are within the law so as to not attract the promoter penalty regime or the anti-avoidance provisions and accompanying penalties.
That is why we work hand-in-hand with you to develop your tax plan and identify opportunities – for you.
Tax Planning advice can be particularly valuable in the following general situations:
- When considering the overall structure of a business or business group;
- Where the overall structure of a business or business group is being reconsidered due to a change in circumstances, e.g. a change in the tax laws that have reduced the viability or suitability of the present structure;
- Where there is a change in ownership of a business or business group or a merger or amalgamation of two businesses or groups;
- Where a business or individual needs advice as to how a proposed transaction, project or asset acquisition may best be structured from a tax point of view;
- Where a business or individual is likely to achieve a large taxable income for a particular income year, in which case consideration may be given to ways of reducing the taxable income before the end of the year;
- Where there is a change in personal circumstances, e.g. on retirement or marriage breakdown; and
- Where an individual prepares for the devolution or disposal of assets on death (succession planning).
The ATO’s view of tax planning is that you have the right to arrange your financial affairs to keep your tax to a minimum. This is often referred to as tax planning or tax-effective investing.
Tax planning is legitimate when you do it within the law. However, tax minimisation schemes that are outside the spirit of the law may attract our attention. We refer to these as tax avoidance schemes or arrangements and are not part of the way we work.
Involvement in a tax avoidance scheme can risk your investment, and you might also have to pay back tax, with interest and also with penalties.
Can Tax Planning Help You + Your Financial Plan? (The Answer is YES)
How it can help you, and the value involved, depends on your financial situation and your structure(s).
Tax planning can help you reduce the amount of tax you pay if you are an individual adding additional superannuation into your fund. If you are running a business and are looking to invest in capital expenditure or simply want to pay some business expenses earlier than they would otherwise be due. There are numerous ways to help reduce your tax payable, some require cash funds to take advantage of them, while there are others that don’t. We can also use taxation law to help reduce your tax in certain situations.
If you are selling a business and/or business property, the process this takes can be very important to the eventual tax payable in the year of sale. There may be certain Capitan Gains Tax (CGT) reductions or exemptions that can apply to your situation that you can significantly reduce the amount of tax payable and in some situations, if all the specific conditions are met, they may even be nil tax payable altogether. If you are considering selling your business, we highly recommend speaking to us before any plans are actually made, so that we can determine if there are actions that can or need to be taken to help your tax situation.
Although we believe tax planning should be a part of your business year-round, any tax plans need to be carried out prior to 30 June to be taken advantage of for the year in question.
Ask Your Investment Advisors… Again, Why Should You Care?
We consider the most value in tax planning comes from helping make better decisions. If there are a number of ways to invest, purchase an asset, or build your business, ensuring tax planning is part of your decision-making can (of course) save tax, boost cashflow, assist in preserving your business assets, support your retirement and provide you with real choices.
A Little Warning on Tax Avoidance + DIY “Cost Accounting”
You need to be aware of schemes as promoters are always looking for new ways to exploit the law or changes in the law. They will promote schemes to people and praise tax benefits that aren’t legally available.
Tax avoidance schemes range from mass-marketed arrangements advertised to the public to boutique or specialised arrangements offered directly to experienced investors. Some are marketed to individuals and may exploit people’s social or environmental conscience and generosity.
These schemes typically involve:
- Reducing a participant’s taxable income;
- Increasing their deductions against their income;
- Increasing rebates; and
- Avoiding tax and other obligations entirely.
A tax avoidance scheme may include complex transactions or distort the way funds are used to avoid tax or other obligations. It may also structure arrangements to:
- Incorrectly classify revenue as capital;
- Exploit concessional tax rates;
- Illegally release super funds early; and
- Inappropriately move funds through several entities, such as a series of trusts, to avoid or minimise tax that would otherwise be payable.
Superannuation Is A Low Tax Environment, But Look Out For Super Schemes Designed to Flout The (Tax) Law
The ATO is seeing a number of schemes targeting Australians planning for their retirement. These schemes encourage individuals to channel money appropriately through their self-managed super funds (SMSF).
They have launched Project Super Scheme Smart to help taxpayers and their advisers recognise the warning signs for these types of schemes.
The penalties for being involved in deliberate tax avoidance schemes are substantial. However, the penalties aren’t just financial – an individual may lose their right to be a trustee to their own superannuation fund or if some cases they could even go to jail.
Promoters of these schemes are also on their watch list.
Don’t Share Your Financial Records + How To Figure Out How To Recognise a Scheme?
These schemes have some common features, they;
- Are artificial or contrived with complex structures around an existing or newly created SMSF;
- Involve seemingly unnecessary steps or transactions;
- Are designed to give the taxpayer minimal or zero tax, or even a tax refund;
- Aim to bring forward a tax benefit; and
- Invariably sound ‘too good to be true’, and as such they generally are.
How To Start Your Tax Planning Now With The Accountants Geelong Trust?
The above warnings show it is important to get your tax planning right, and taking action early provides time for you to assess your options and make choices that are suitable from a business, investment, cash flow and overall value perspective. It is never too early to plan for tax, but there is the possibility you could leave it too late. We recommend contacting your advisor, having a discussion about your tax planning and making the best decisions going forward. Get in touch with our team today to make sure you’re on the front foot!
