Tax planning takes advantage of lawful and strategic ways to minimise tax liabilities this financial year and in future years. While it may minimise taxes in any given financial year, tax planning works best when used as part of a long-term financial strategy. This post will outline some tax planning considerations for businesses and individuals for 2021-22 and beyond:
What is Tax Planning and Why is it Important?
Tax planning minimises your business tax liability by taking advantage of any allowances, deductions, exemptions, and exclusions available. Essentially, efficient tax planning reduces your tax obligations to the legal minimum.
Importantly, tax planning isn’t a task to simply check off the list once a year. When done effectively, it’s a long-term strategy that involves reviewing past performance, predicting future financial performance, and planning accordingly.
Why is tax planning important?
Tax planning comes with several advantages for businesses and business owners, including:
- Get your business where you want it to be. Implementing tax planning strategies helps businesses and business owners achieve mid to long-term goals and can help to improve financial performance and cash flow, and minimise tax liabilities.
- Better business decisions. Purchase equipment, hire new team members and take out loans when it makes financial and tax sense for your business.
- Generate profits. Tax savings can be channelled into income-generating activities.
- Lower taxable income. Any reduction in tax payments is a form of business savings – savings that can be ploughed back into the business, used to pay off debt, invested, increase employee benefits, and used for just about anything else to sustain and grow the business.
The Tax Planning Process
The first step in the tax planning process involves compiling a comprehensive picture of the financial circumstances of the business or individual. This should outline recent profits and expenses, as well as planned future purchases, likely liabilities, and a financial forecast.
Next, the financial forecast should be analysed alongside the mid and long-term goals of the business or business owner. Again, tax planning is more than minimising tax payable, it’s an effective strategy that helps businesses and business owners move from where they are now to where they want to be.
With these goals in mind, tax professionals can suggest strategies and build a roadmap towards them that includes tax planning and tax minimisation.
Tax Minimisation Strategies
Common strategies for businesses to legally minimise the amount of taxes payable include:
- Temporary full expensing;
- Restructuring business entities;
- Purchasing a business premises; and
- Technology and equipment planning and purchases.
Business owners also benefit from engaging in tax planning. It’s a crucial component in long-term plans for retirement, succession planning, and wealth building. Common strategies, like timing superannuation contributions, ensure business owners personally minimise their tax liabilities today and into the future, including at retirement.
Additionally, tax planning is a critical element of estate planning. Any individuals looking to preserve their wealth and ensure their beneficiaries aren’t liable for taxes only payable as a result of poor tax planning. Common strategies for estate tax planning include establishing trusts and structuring investments.
What’s the difference between tax planning and tax evasion?
It’s also important to note the difference between tax planning (and the tax minimisation that results from it) and tax evasion. Tax planning involves implementing legal strategies, whereas tax evasion ignores existing laws. Tax evasion occurs when businesses or business owners intentionally do not report income or profits, inflate expenses, or implement other similar (illegal) methods to reduce their tax liability.
Tax Planning Strategies: How can they help?
Here are three tax measures savvy business owners and individuals will take advantage of for the 2021-22 tax year:
Superannuation and carry forward concessional contributions
There are limits to the contributions you can make to your superannuation fund before incurring additional tax.
Concessional contributions for superannuation are currently capped at $27,500 (increased from $25,000 on 1 July 2021). Individuals who did not reach the limit of their concessional contributions in the last 5 years can carry forward unused concessional contributions, with the oldest unused contributions being applied first.
Here are some tax considerations:
- If you want to maximise contributions to your super fund, you should remain under the cap to avoid additional tax.
- If exceeding the cap is unavoidable, you should speak with a tax advisor to understand and/or minimise the tax impact.
- You should pay your superannuation contributions by mid-June 2022 at the latest. Your superannuation fund must receive the funds before the 30 June deadline to be deemed a 2021-22 contribution.
Instant Asset Write-Off & Depreciation
Australian small businesses can immediately claim an instant asset write-off for eligible new or secondhand assets purchased in the 2021-22 financial year. This pandemic-era incentive offers significant potential for tax savings for businesses with a tax liability for 2021-22.
Since these deductions can only be claimed in the financial year when the asset is first used or installed for use, the incentive means that there are no tax benefits in the subsequent financial years. Therefore, your business should consider the timing of your asset purchase because you want to claim the asset write-off in a year where you gain the most tax benefit from it.
Loss carry back tax offset
A tax loss occurs when your total deductions for a taxable year exceed your taxable income. Australia’s loss carry back tax offset allows businesses to offset a tax loss against earlier years with income tax liabilities.
You can choose whether to apply your business tax loss to a previous year and get a tax refund or carry it forward and apply it to a future taxable year. Companies often choose the loss carry back option because it results in a cash refund or tax liability reduction, which boosts business cash flow sooner.
If you’d like to discuss your tax planning strategies for 2021-22 and beyond, reach out for a free consultation.