Tax Planning: More than compliance

Many businesses are feeling the pressure of rising costs, competition for talent and supply chain challenges, meaning every cent counts. As a result, business owners place a high priority on optimising cash flow - often with less consideration and effort given to minimising and managing their tax liability.

With a minimum company tax rate of 25 per cent, Australian businesses must carefully consider their options and find ways to reduce their overall tax burden – every dollar of tax payable reduces the after-tax profit of the business. The challenge in doing so is navigating the increasing complexity of Australian tax law, and expert advice is often needed.

So, what does a best practice approach to tax planning involve, and how can SME owners create effective strategies that go beyond compliance to minimise their tax liability? There are five key steps you must address:

1. Stay on top of taxation considerations
2. Understand your current position
3. Identify strategies to minimise your liability
4. Think about your business structure
5. Consider the size of your business

​And, when you should seek external help.

  1. Stay on top of taxation considerations

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.

If not fully understood and actively managed, tax obligations can result in additional costs or lost opportunities for businesses. Business owners must understand the impact tax legislation has on their business, its cashflow, their Director’s liabilities, and ultimately, on returns to owners.

Key areas SME business should consider include:

• Trust distributions, in particular, section 100A issues
• Family remuneration through dividends or other income streams
• Division 7A issues on shareholders’ loans
• Capital gains tax, including potential CGT roll-overs and small business CGT concessions
• Tax loss recoupment rules
• Other small business concessions (e.g. full expensing of the cost of depreciating assets)
• Tax governance, including process documentation
• ATO areas of focus, including the Justified Tax program
• PAYG instalments and Single Touch Payroll Reporting (STPR) requirements
• Fringe benefits tax (FBT) and salary packaging
• R&D Tax Incentive eligibility, if relevant
• GST obligations and compliance
• Transfer pricing and thin capitalisation rules (if the business has international involvements).

  2. Understand your current position

A best practice approach to tax planning first requires a thorough review and understanding of your current 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
• 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 liability

The Federal Government realises the important role small businesses play as the ‘engine room’ of Australia’s economy, so has measures in place to assist them. 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 areas of focus for tax liability minimisation include, but are not limited to:

• Superannuation contributions: Including compulsory superannuation guarantee obligations and super concession eligibility
• Consideration of cut off expenses: Appropriately accrue expenses related to the current income year and maximise deductions
• Review of specific assets: Consider the recoverability and obsolescence of receivables and inventory
• Trust distributions: 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: Understanding and assessing the eligibility of your business, for those with a turnover less than $50 million.

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.

  4. Think about your business structure

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

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.

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. For example, if you use a discretionary trust to run your business in Australia, you cannot introduce equity in the business to a non-family member in the business.

Exit strategy

Planning your exit strategy is almost as important as starting the business itself. Having an exit strategy in place — whether it’s handing the business down to the next generation or setting up the structure for private equity, venture capital or IPO — often drives what the best structure should look like. With that in mind, you’ll want to think about when and how you might leave the business, and how that transition might affect the company.

Number of unrelated parties involved

If unrelated parties are involved in owning a business, the choice of entities may be affected because certain entities may not be tax-effective, e.g. using a discretionary trust to carry on a business owned by two unrelated families.

  5. Consider the size of your business

Much like the structure and tax implications of a business, the best approach to taxation depends on the size of the organisation. 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.

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 ATO wants to see a tax governance structure for large corporations, which isn’t a practical step for SMEs, but may be required further down the track if the business grows to become much larger. For this reason, it’s still essential to work closely with your tax accountant in the early stages of your business to lay the foundation for sound and effective tax governance.

When should you seek external help?

Generally speaking, it’s best to talk with your tax adviser as you develop your structure. It’s a continuous process that requires a lot of touch points throughout the lifecycle of your business, so starting it as early as possible is critical.

Most businesses undertake formal tax planning between April and June each year. The exercise often includes estimating the tax liabilities of the group for the year to assist with cash flow planning, distributing the income of any trust in a tax-effective manner that optimises the tax position of the whole group, and consideration and implementation of various tax strategies before the end of the year

To learn more about structuring your business, tax planning and minimising your tax obligations, contact a BDO adviser today.