Advanced Tax Planning Strategies
Long-term tax planning is prepared at the beginning of the financial year and focuses on the financial goals over an extended period. The effect may not be seen in the early stages, but it is an effective plan in the long run.
Here are some advanced tax planning strategies that can help to strategically optimise your business and individual tax positions:
Evaluation of your business structure
A business structure influences your tax rate, capacity to acquire capital, paperwork you must submit, and your personal liability. That is why a constant evaluation of your business structure is necessary.
The following are some questions that you should answer on a regular basis to know whether your current business structure is still right for you:
- Has your company grown over the years? (e.g., added a number of employees, relocated your workplace, branched out, etc.)
- Is your business still accomplishing what you need it to do?
- Do you have the right directors, shareholders, and trustees?
- Do you have the right processes, procedures and financial systems in place?
Investment ownership
Reviewing the ownership of your investments might be a long-term tax planning approach. It’s important to understand that different ownership arrangements provide different benefits.
For example, if you buy an investment property through a Self-Managed Superannuation Fund (SMSF), you only have to pay 15% income tax on the rental income. Hence, if you are in a higher tax band and pay more than 15% in income tax, this may be a wise tax plan for you (after considering all the other implications and regulations of SMSF).
Due to potential capital gains tax and stamp duty implications, any change in ownership must be carefully considered. Before you make an offer to purchase any new asset, discuss with your accountant to figure out the right entity to hold the asset.
Use a bucket company or corporate beneficiary
A bucket company or corporate beneficiary is an option if you have excess business income or funds for investment in your own name and would like to pay the company tax rate of 30% instead of the highest marginal personal tax rate of 47%. This is normally a tax deferral, which may help your cash flow now, as the income may be distributed via franked dividends from the company to the shareholders at some point in the future.
Preferably, this may be implemented at a time when your income and tax rate are lower. There are certain expenses and complications, so this is not for everyone, but when it works, it can be quite successful at tax management, risk reduction, and wealth creation.
Realisation of capital losses
The difference between what you paid for an item and what you sold it for is referred to as a capital gain or loss. A capital loss occurs when you sell an asset for less than its acquisition cost.
Any capital gains are usually taxable, that is why you should consider selling any non-performing investments you own prior to 30 June of any financial year to realise a capital loss and reduce or eliminate any potential capital gains tax burden. Capital losses that have not been utilised can be carried forward to offset future capital gains.
Trustee resolutions
In general, trustees must issue legal distribution resolutions for all trusts before 30 June of any financial year (or an earlier date if stated in the trust deed). We always advise “reading the trust deed,” since each trust deed is unique.
Appropriate trust resolutions can be a really effective tax planning strategy for your whole family group so we encourage clients to really consider who the beneficiaries of a trust are and how to best allocate distributions.
“DIV 7A” loans (private company)
Loan is defined in “Division 7A” as a cash advance, a credit provision, a payment for a shareholder or their associate, and a loan of money.
In “DIV 7A”, the required principal and interest repayments on loans must be made by 30 June for any financial year for business owners who have borrowed money from their business.
Before the deadline for filing the company return, current-year loans must either be fully repaid or a loan agreement must be signed; otherwise, they risk the loan being treated as an unfranked dividend in the individual’s tax return.
Book a Star Strategy Meeting
At Star Advisers, we ensure to give our clients the proper guidance and knowledge during the tax planning process. We can create a personalised tax planning analysis for you so go ahead and book your tax planning meeting with us now!