Many businesses are focused on optimising and running their enterprise. And rightly so.
However, they often overlook easy opportunities to improve their results, cash flow and efficiency by considering how to minimise and manage their tax liability.
In today's feature article, we show how easy it is to stay on top of your tax planning, with our top 5 tax planning strategies for business owners, which you can use to minimise your tax liability
At a glance
There are five key steps we recommend you implement when considering your financial planning:
Be proactive with your tax affairs
Understand your current and projected financial position
Identify strategies to minimise your tax liability
Think about your business structure from a range of perspectives
Consider where you are in your business lifecycle
Most important takeaway
The most critical takeaway from the feature article is that tax planning is a constant, iterative process.
It is definitely not a "set and forget" play, as your business, your personal investments and your life are always changing.
Therefore, make sure you stay in close contact with your accountant to ensure you have the best possible structure for you and your business at any given time.
______________________
Article
Many businesses are focused on optimising and running their enterprise. And rightly so.
However, they often overlook easy opportunities to improve their results, cash flow and efficiency by considering how to minimise and manage their tax liability. And while they may stay on top of their tax compliance, they let themselves down considerably more but not undergoing constant tax planning of their affairs, costing them considerable resource and efficiency advantages which outweigh any tax compliance benefits.
When managing your tax affairs, implement these five steps to ensure the best possible outcome.
1. Be proactive with your tax affairs - It is more than an annual exercise
Effective tax planning isn’t a once-a-year activity when you submit your tax return; you should consider it a continuous cycle.
Strategies must be maintained, reassessed and constantly monitored for changing circumstances, evolving tax legislation and compliance responsibilities.
Think of it this way. As your business grows, so too do the opportunities to capitalise on tax efficiencies.
For example, we see businesses run in the name of the owner to begin with (not ideal, but we understand why). As these businesses grow, they deliver more and more earnings to the owner. This pushes the the owner into higher tax brackets, with very little that can be done about it, without implementing a new structure. This also makes them a target to creditors given the cash flow coming to them and the owner also misses out on concessions available only to businesses
Even incorporated businesses have a similar challenge. Ultimately, you will want to withdraw funds from the business, but if it is directly owned by one or a few individuals, you lose the potential benefits of streaming and the flexibility to distribute to different people in differing amounts and times. You also make yourself a bigger target to would be creditors and litigants.
Therefore, if not fully understood and actively managed, tax obligations can result in additional costs or lost opportunities for businesses.
2. Understand your current and projected financial position
A best practice approach to tax planning first requires a thorough review and understanding of your current financial position and future events, including but not limited to:
Business figures: Current budget and forecasts, expenditure and debt position
Current business structure
Future changes to business or family that may present planning opportunities
Major purchases (e.g. residential or commercial property, business assets, investments etc)
Current taxable position/liability
Strategic plan and future aspirations.
Having a clear picture of your business’s current ‘state of play’ will enable a holistic approach to tax planning and structuring – ultimately determining the strategies that could minimise your liability into the future.
3. Identify strategies to minimise your tax liability
Governments know that strong businesses are the foundation of a strong economy. Therefore, they offer businesses concessions no other entities have.
For example, a small business might be able to write off depreciating assets a lot sooner than large companies, under temporary full expensing for depreciable asset and accelerated depreciation measures.
Other opportunities for businesses and their owners to minimise tax liabilities include (not exhaustive):
Superannuation contributions (concessional and non-concessional)
Advantaged write-offs
Business specific deductions
Trust distributions:
Note: Under the current tax law, it’s critical that trustees make a resolution to distribute all of the income of the trust on or before 30 June each year. If not, the trustee will be taxed on any undistributed income at the highest marginal tax rate
CGT concessions for small business: If eligible, these four concessions allow you to disregard or defer some or all of a capital gain on an asset used in your business
GST and excise concessions
The approach taken to minimising your business’s tax liability must be optimised for the business structure. If a review of your current position shows your business structure isn’t the most tax-effective option for your business, it may be worth considering re-structuring to maximise your tax benefit. Doing this often pays for itself.
4. Think about your business structure from a range of perspectives
Often, SME owners will ask how to create a structure that optimises their tax position early in the life of their business.
The idea is to ‘future-proof’ with a strategy that works throughout the company’s life cycle and determine a structure that works best for a business’ tax positioning.
There are several key considerations, other than tax minimisation, to think about when ensuring the structure is fit for purpose:
Asset protection
This one is critical, especially as your business grows and you become more appealing to would-be litigants and debtors.
Businesses often have valuable assets they want to protect.
To accomplish this, many enterprises segregate assets into separate entities while they’re structuring their business. That way, if something goes wrong, the owners can keep intellectual property (IP) and other valuables far away from any legal issues.
One example strategy of this is employing your team via a legal entity that is different to the entity deriving the income. Taking this a step further, businesses also then keep major assets and IP in a different entity again (i.e. a third entity).
Future business aspirations
When structuring a business, it’s essential to plan ahead. This includes considering the possibility of transacting down the road, as this could have major implications for your structure.
Even if the plan is not to sell, whether in the short or medium term, or even at all, having the flexibility to do so is always recommended.
At Sapphire Bay, we have seen many clients build successful businesses and who have then received unsolicited, compelling offers to sell. It's often a great outcome for the business owner.
Planned Exit strategy - Succession planning and legacy
Planning your exit strategy is almost as important as starting the business itself.
You’ll want to think about when and how you might leave the business, and how that transition might affect the company. Even if your plan is to pass on the business to the next generation, there are many considerations that go into this.
You will definitely want to ensure you do this in a way which is tax efficient, in line with your wishes and provides those inheriting your assets with the appropriate level of protection (sometimes, this protection is from themselves).
Consider your personal situation in tandem to your business aspirations
This is particularly important. You can't see your personal affairs as being totally distinct from your business(es) or investments, at least not when it comes to planning and structuring your affairs.
5. Consider where you are in your business lifecycle
When you're starting out, its understandable to start and just see if it will work. Further, early start-up businesses are often operating at a loss when they’re starting out, so tax isn’t always a priority.
As businesses mature into larger, more profitable enterprises, managing cash flow and tax obligations quickly become top priorities.
Once viable, for smaller businesses it’s important to work closely with your external tax accountant. Not consulting with them when making decisions can often result in missing out on strategies that could save on taxes.
Treat your external tax accountant like your business partner - as if you’re running the business with them. Whenever you do anything material, run it past them and ensure you’re taking the most tax effective approach.
The Closing Word
Our most successful clients are always on top of their affairs and managing them with the best information they have at any given time.
And as they evolve or something new happens, they reassess where they are to optimise their arrangements. Therefore, ensure you stay close to your accountant and other business advisors so you can continue doing what you do best - growing an incredible business.
________________________
Sapphire Bay Partners is always delighted to help new clients. We love working with dynamic, proactive clients and helping their businesses grow.
If you would like assistance, feel free to reach out to us.
Tel: + 61 3 9563 4666
Email: letstalk@sapphirebay.com.au
Important Information
This is general information only so it doesn’t take into account your objectives, financial situation or needs. Sapphire Bay Partners is not giving you advice or recommendations (including tax advice), and there may be other ways to manage finances, planning and decisions for your business.
Carefully consider what’s right for you, and ask your lawyer, accountant or financial planner if you need help. Alternatively, feel free to reach out to Sapphire Bay Partners for assistance or referrals to an appropriate professional. We’re always happy to help!
Comments