Just How Much Tax Can I Save By Tax Planning?
Written by: Adam Ramage | Accounting Team
Tax planning is an important and ongoing process that can provide significant benefits for both individuals and businesses. There is a certain annual element in active tax planning as the dynamic nature of the Federal and State Government budget processes means changes in legislation can impact your tax position.
Not only this, current business conditions mean this year may be significantly different to the next. This is why we believe proactive planning is crucial to identifying your opportunities and understanding the implications of taxes on your personal and business financial position.
We emphasize professional tax planning focuses on ethically minimising overall tax obligations and does not involve tax avoidance. The amount of tax savings achievable is contingent upon your individual circumstances, and there is no one-size-fits-all strategy.
A strategy to bring forward expenses may save thousands for you and your business, whereas for another business properly utilising Small Business Capital Gains Concessions can provide savings of up to 100% of any tax.
Timing + The Stage 3 Tax Cuts
An update to the Stage 3 Tax Cuts previously legislated accounted for on 24 January 2024.
Whilst this is yet to be formally approved by parliament, the changes appear likely. This does mean there can be a lasting benefit if you are able to delay income from the 2024 year to the 2025 year.
Current Tax Rates for the year ended 30th of June 2024:
| Taxable Income | Marginal Tax Rate |
| $0 – $18,200 | 0% |
| $18,201 – $45,000 | 19% |
| $45,001 – $120,000 | 32.5% |
| $120,001 – $180,000 | 37% |
| $180,001 + over | 45% |
Proposed Tax Rates for year ended 30th of June 2025:
| Taxable Income | Marginal Tax Rate |
| $0 – $18,200 | 0% |
| $18,201 – $45,000 | 16% |
| $45,001 – $135,000 | 30% |
| $135,001 – $190,000 | 37% |
| $190,001 + over | 45% |
Financial Plan: How Much Can You Save?
Now is a good time to remind you that this article is general in nature, and may not be relevant to your particular circumstances. We have tried to cover multiple options for you to consider, and yet any statements within should not be considered specific advice.
We work with our clients to ensure they utilise appropriate strategies with an awareness of possible cash flow impacts now and in the future. We recommend contacting us to discuss your individual and business needs and ensure you take advantage of opportunities relevant to you.
With that noted, here are some simple examples of what be achieved with tax planning:
Example 1: Bringing forward expenses of $30,000 – a company with an estimated profit of $150,000.
- 2024 Tax Saving at the company rate of $7,500
Example 2: Bringing forward expenses of $30,000 – a sole trader with an estimated profit of $150,000.
- 2024 Tax Saving at an individual tax rate of $11,700 (assuming appropriate health insurance)
Example 3:Pay additional superannuation via salary sacrifice $6,000 – an individual earning $120,000.
- 2024 Tax Saving at an individual tax rate of $2,070 (NOTE: Superannuation fund will pay $900 tax)
Example 4: Partners in a mechanic shop aged 57 + 59 sell the business premises for $600,000 which they purchased for $200,000 in 2014. Capital Gain $400,00. *By confirming the individual partners can access a combination of Small Business Concessions, NO TAX may be payable on that gain, saving up to $180,000.
Financial Reporting: How to Use Timing Benefits
For both cash based businesses and those that invoice for goods and services, altering the timing of income provides opportunities for saving tax, and balancing cashflow needs with your tax position. You may be able to defer income to a future period, or if your circumstances warrant, actually bring income forward. If you are considering deferring income, you need to plan for the cash flow impact of doing so, and also consider Australian Taxation Office (ATO) requirements for Work In Progress.
The same timing can be used for incurring expenses, and when they are paid. For example, for plant and equipment, it is not just when you place an order or receive and invoice. You also need to be aware of the concept of “installed and ready for use”. And of course, good tax planning will take into account the cash flow impact of purchases as well.
NOTE: Don’t forget the “Instant Asset Write Off” threshold for the year ended 30th June 2024 is now $20,000 (This means the asset must cost less than $20,000).
What can I do to access timing benefits? Here are some examples of actions you can take:
- Pay reimbursements to employees pre-June 30th;
- Pay employee bonuses pre-June 30th;
- Pay Superannuation before cut off dates in June (check if using software to pay superannuation as needs to be with the superfund by June 30th);
- Write off bad debts pre-June 30th;
- Prepay expenses complying with the prepayment rules;
- Purchase consumables pre-June 30th;
- Bring forward expenses such as repairs to the current year that would be incurred in the near future;
- Pre-pay Accounting fees; and
- Pre-pay Income Protection Premiums.
Giving Your Savings A Timing Boost
If you utilise tax planning to arrive at a position which impacts on your likely income tax payable, do not forget that you can vary your income tax instalments, boosting your cash flow. Additionally if it appears your Company may be in a loss position, make sure you speak to your tax professional about “Loss Carry Back” opportunities.
Structuring For Business + Investments
Structuring for tax efficiency. The ability to structure your business, personal and investment affairs for optimal tax efficiency should be part of your tax planning.
For example, Family Trusts can distribute income amongst family members in the most effective way. This means you can undertake income splitting. Structuring your business in a company can enable you to grow your balance sheet (assets) without having to pay tax at personal income tax rates, rather businesses operating as companies are subject to a tax rate on profits of only 25%.
A combination of a Company, Family Trust and Superannuation can assist in reducing your overall tax liability as you grow your overall financial position.
*If you are utilising a Family Trust, make sure the trustee documents a resolution before June 30th each year regarding how any income of the trust is to be distributed. The law requires this to be done before June 30 each year.*
You may also have heard of Bucket Companies. These are companies that may receive distributions or dividends from other entities, and are used to hold those profits and are subject to the tax rate depending on if the income is “Active” (25%) or Passive (30%). Bucket companies can also be and effective way to move funds from a trading company to a low risk investment company, providing useful asset protection.
Small Business Capital Gains Tax Concessions
For business owners, in addition to the standard 50% discount on capital gains that individuals can access if the hold an investment for more than twelve months, you should be aware of the Small Business Capital Gains Concessions. These concessions can, in certain circumstances, significantly reduce or even eliminate any tax on capital gains. Note that eligibility criteria apply for these concessions, and structuring your affairs as mentioned above can impact your outcomes with Capital Gains Tax.
Want to know more about Capital Gains Tax? Check out this previous article we put together: A Guide To Capital Gains Tax – FAQs
Investments + Capital Gains Tax
Capital Gains Tax is a common area where tax planning can ensure you understand the impact of disposing of an investment, be it property or other investments. With property, you need to be aware of how contract dates impact your tax position, so if you are considering the sale of an investment, you should ensure you understand the taxation timing impact.
Investments + Deductions
Capital allowances on buildings and deprecation on plants are valid deductions, and if you do purchase a property, you should consider obtaining a “Tax Depreciation Schedule” to ensure all available deductions are claimed.
For your investment properties and business buildings, it is important to note that repairs are generally deductible, whereas property improvements are normally classified as capital expenses by the ATO, and as such deductions are more limited. If you are considering repairs or improvements, you may want to discuss this with your tax professional before proceeding.
Superannuation
There are two distinct components of tax concessions with superannuation. The first and most commonly spoken about is deductions for concessional superannuation contributions. Whilst a complying superannuation fund will pay tax on concessional contributions, it is only at the 15% tax rate. Superannuation funds will pay tax on concessional contributions, it is only at the 15% tax rate. Superannuation for high-income earners can see an additional tax levied. The second concession involves the earnings of your fund on its assets. Net income of the fund is also taxed at 15%, whereas if you have investment earnings in your personal name, those earnings will be taxed at your marginal tax rate.
Record Keeping
Record keeping is one area that should be included in your overall tax planning. Keeping an optimum set of records enables you and your tax professional to identify all opportunities for deductions and tax-saving strategies. Claiming all legitimate expenses including donations is paramount to tax savings.
For businesses that hold inventory (including livestock), note that a stock take should be done at 30th of June each year. If applicable, the small business stock-take rules can be applied for savings. Quality record keeping can assist with both simple deductions (like claiming travel to your tax professional) or more complex (like a 12-week motor vehicle log book to determine the deductible amount for the year).
Fringe Benefits Tax – Exempt Items
There are some opportunities under the Finge Benefits Tax Legislation that may provide benefits to you. For example, if you predominantly use a laptop or phone for work purposes, you could choose to “salary package” that item. These are both examples of FBT Exempt items, meaning you would effectively get a deduction for the laptop in the year you sacrifice it, rather than an individual having to depreciate over time.
Division 7A
Compliance with Division 7A legislation is crucial for companies withdrawing funds without proper declarations.
If you have a company and you draw funds out of company profits without declaring a dividend or taking the funds as income, then there is effectively a loan, which is captured under the Division 7A legislation. This legislation requires minimum loan repayments and also has a legislated interest rate, which increased from July 1st 2023 from 4.77% to 8.27%. If you have or are intending to have a Division 7A loan in place, you need to be aware of this change in interest rate.
Note that if you have a Family Trust and this makes a distribution to a company, if the distribution is not paid, this may need to be treated as a Division 7A loan. Despite the requirements of Division 7A, there remain benefits with using companies in your business structures, both overall and from a timing perspective.
Research + Development
Businesses engaged in Research and Development activities should be aware of the Research and Development Tax Incentive, providing a refundable tax offset for eligible activities.
Whilst this will apply to a smaller number of businesses, and strict eligibility rules apply, if your business does conduct Research and Development, make sure you are aware of the opportunities and obligations. The Research and Development Tax Incentive provides a refundable tax offset for approved activities of your Company tax rate plus 18.5% if your aggregated turnover is less that $20 Million. Note: only companies are eligible for the Research and Development Tax Incentive.
Farm Management Deposits
Primary producers can effectively defer income through Farm Management Deposits, offering flexibility in managing income from high-earning years to future tax years.
Primary producers are able to defer income in a particular year by depositing funds into a Farm Management Deposit. This amount must be held in the account for at least 12 months (except in case of drought or flood), but can remain for longer. Eligibility criteria apply. This is a very effective method of moving income from a “high-income year” to a future tax year.
The Little Things
Some other items you can discuss with your tax professional include:
- Tax Audit Insurance;
- Salary Packaging;
- Investment Bonds;
- Claiming against employer allowances;
- Eligible Termination Payments (ETPs) including tax-free redundancies.
The Number One Take-Away + Why Canny Accounting?
No personal or business situation will be identical to another, so there is no one strategy for everyone.
Canny Accounting will work with you to identify your opportunities, that take your personal and business circumstances into account, developing a strategy tailored for you and your business.
Get in touch with our team to discuss how we can start putting some strategies in place to better your tax position now and for the coming years.
