Author: Tony Rule, Partner, TAG Financial Services
In business, we have been taught that tax planning happens in the weeks and days leading up to 30 June. The first 50 weeks of the financial year were devoted to running the business (or being run by the business?) and the last two weeks were about talking to the accountant (if you had any available time) to work out what changes to make and rushing to get contributions into superannuation before 30 June.
Don’t get me wrong – superannuation contributions are a good thing and some tax planning is better than no tax planning at all.
But there is a better way – some of the most important tax planning can be performed at any time of the year.
Great Tax Planning
Firstly, let’s start with what is great tax planning. Great tax planning is about maximising your increase in wealth for any given year whilst controlling your tax implications.
This involves considering your business profit for the current year, determining your likely tax position (both in trading entities and personally) and then making sure that the risk to your accumulated wealth is minimised both now and in the future.
Common Issues
Often when I speak with business owners, they often have one or more of the following business issues:
Business Operating in a Trust
Where business owners have their trading operations in a trust (either a family or discretionary trust or a unit trust), that trust is required to distribute all of its profit to the beneficiaries or unit holders of that trust even though the trust usually does not have enough cash to “payout” the profits in any given year.
This often leaves the beneficiaries or unitholders paying tax on cash that they have not received yet and at a very high rate of tax (ie. up to 47% in some cases).
This is much higher than the 25% rate that is available to business owners. The preferred treatment would be to move the trading activities into a trading company to control the flow of dividends to shareholders.
Retained Earnings stuck in Trading Company
This amounts to the opposite of the first issue in that profits are made in a trading company, but those profits are trapped in that company due to the tax rate applicable on any dividends paid to its shareholders. In this situation, retained earnings and cash build up in the trading company because the tax that would be payable by the owners is too high.
The downside is that those retained earnings and cash are subject to business risk if legal action is ever taken by an employee, a customer, a supplier or an industry regulator against the company.
The preferred treatment here would be to make a payment of retained earnings out to a shareholder with the same rate of tax payable (so that fully franked dividends can be utilised without additional tax to pay).
Assets owned by a Trading Company
Where there are earnings and cash retained in a trading company, there can be a temptation to buy other assets in that trading company out of that available cash (rather than declaring dividends, paying top up tax and then purchasing in another entity).
This can include purchasing a related business or even an investment property. The problem with this is that if a trading company gets into financial trouble, then its assets are at risk of being lost (including a subsidiary company, property or other investment assets).
As with the point above, the preferred treatment would be to declare dividends to a shareholder with the same tax rate (ie. 25%).
Assets in Director’s name
We sometimes see situations where the director of the trading company has received dividends from the company (as a shareholder) and has then invested those dividends into property, shares and other investments in his/her own name – believing that these investments are completely safe.
It is important to remember that there are certain situations where the director of a company can be made responsible for the debts of their company which then puts any of the assets held in his or her name at risk. It is much preferred not to hold assets in the director’s name.
How Are These Fixed?
Many business issues can be rectified by correcting the structure of any particular group. These rectifications can significantly improve the asset protection of the group but can also significantly reduce the ongoing tax payable by the group into the future.
We find that where business owners are operating in a truly protected fashion and an efficient tax arrangement, this can often free the business owner (and the business) to focus on driving business growth and personal wealth. They are comforted that they are not going to lose their hard earned wealth and that they are not being unfairly taxed for their endeavours.
Often these rectifications are the most beneficial tax planning moves that a business owner can make. In undertaking any re-structure, due consideration needs to be given to capital gains tax that may apply to one or more transactions in re-structuring a group.
We find that in many situations, there are capital gains tax rollover relief available to businesses to assist business owners in transitioning from their “start up” phase to their “mature” phase.
Timing
Re-arranging or correcting your business structure is not limited to the last few weeks of the financial year and it often makes sense to undertake this at the start of the financial year. If you are concerned that your wealth protection and your tax efficiency are not where they should be, then now is the time to act.
The first step starts with a complimentary meeting to discuss your situation and to investigate how your business outcomes can be improved.
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If you have questions, please do not hesitate to contact us on 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2023. Please do not reproduce without the expressed written consent of the author.