Tax Planning - Putting You in Control
Hi and welcome to the CBG Partners Tip Sheet for April 2022.
My tip for this month is focused on Tax Planning and the tip is that every business needs to get their tax planning done well in advance of the 30 June Financial Year End date. So, the simple Tip is – Tax Planning: Get it Done Now!
Why Tax Planning
It’s all about CONTROL.
Control the Tax Outcome and minimise your Tax as much as practical.
Control Your Cashflow
Control Your Cashflow Timing
Control Your Future Strategic Plan Outcomes
If you are not undertaking a Tax Planning process, you are not in control of any of these things and you will not be prepared to meet the forward business challenges or opportunities with confidence.
Tax Planning Insights
Let’s have a look at these things in a bit more detail – we have given you the insight as to the why, so now we will dive into the how.
How do I control the Tax Outcome and get the magical tax minimisation result?
Know where your profits are at now and where they are likely to be by the Financial Year-End on 30 June.
Identify Tax Strategies to make sure that plans are in place to get the tax number to the best possible level.
Know Your Profits
Get Your Financial and Taxation Figures up to date to 31 March. Do this by getting your accounting data file up to date and reconciled. Then preparing what is called Interim Financial Statements.
Once the Interim Financials are done, then it's time to take a deep dive into what the business trading performance will look like over the last quarter of the Financial Year.
From the review of the forward performance of the last quarter, a Financial Forecast for the last quarter is prepared and then this is added to the Interim Financial Statements to 31 March, and this should then provide us with a fairly accurate position of what the Business Trading Profit and the Taxable Income for the Financial Year.
Tax Planning Strategies
Once we have a good understanding of Profit and Taxable Income, we can then have a look at applying Tax Planning strategies and applying various tax planning scenarios to our Forecasted 30 June Financial and Taxable Income position.
Examples of Tax Planning Strategies:
Instant Asset Write Off – for Items like Plant & Equipment, Motor Vehicle, Technology, Machinery
Invoice Deferrals
Prepayment of Expenses
Personal Superannuation Contributions
Entity Restructuring – Company, Trusts, etc
Dividend Strategies
Trust Distribution Strategies
Investment Planning
Gearing Strategies
Small Business Concessions
Personal Services Income Strategies
Accelerated Depreciation and Pooling
Primary Production Strategies
Tax Planning Scenarios
So now that we have our Financial Forecast and a good understanding of where our 30 June Profits and Taxable Income sits and we have worked through which tax planning strategies are the best fit for the specific circumstances of your business, we can then look at putting together various Tax Planning Scenarios to demonstrate what the benefit of applying these strategies will provide for the Tax Outcome.
An example of how this might work in practice might be as follows:
Scenario 1
This is what we call the baseline strategy or our “Do Nothing Strategy” – in this scenario we take our Forecast Financial Position that we worked out earlier and we decide if we do nothing and just allow the Financial Year to play out without looking at any Tax Planning Strategy implementation – what does our Tax Payable look like if we do nothing. Once we work this out, we can then gain a good understanding of what Tax benefit the implementation of the Various Tax planning strategies would provide.
The Magic Dust – Scenario 2 and beyond
These are our planning strategy scenarios or the point at which the magic dust is applied. This is where we take the strategies which are best fit for your business and circumstance and run an analysis to demonstrate the tax-saving benefit of each strategy individually and then also demonstrate what benefit of a combination of strategies implemented together.
So, let's have a look at what this might look like in an Example:
Let's say we sit down and determine that for your circumstance that you would consider the following:
You are looking at buying a new vehicle for $50,000
You want to make an additional Superannuation Contribution - $10,000
You will pay your June Employee Superannuation Contributions before 30 June - $10,000
You are considering deferring some of your Invoicing until after 30 June - $100,000
You are considering Prepaying some expenses - $30,000
We would then work through these strategies and apply them against that scenario one Forecast and demonstrate the Tax Savings Benefit of each individual strategy and then also combine various strategies and show combination strategy Tax Saving Benefits and then also demonstrate the Tax Saving Benefit of implementing all the proposed strategies. This will allow for the management of the fine line between the Tax Saving Benefit and the Cash Outflow required to achieve that Tax Savings benefit.
Remember we want to be in control of the Tax Outcome but at the same time, we want to be in control of our cash flow outcome as well. A phrase that we often use is that “we don’t want to go broke to get a Tax Saving” which means it’s no good saving tax using tax planning strategies but if we implement the strategies, it impacts our cash flow to the point where it impacts our business trading moving forward. It's all about finding the balance.
In this example, if across the business and individual structures, we had an average marginal tax rate of 30% and our baseline scenario estimated a Net Taxable Income of $500,000, the Tax Savings benefit would be as follows if we implemented all the suggested tax planning strategies.
Baseline Taxable Income $500,000
Baseline Tax Rate 30%
BASELINE TAX PAYABLE $150,000
If we apply all of the listed Tax Planning Strategies the Tax Payable position would be:
Baseline Taxable Income $500,000
Less
Tax Planning Strategies $200,000
Adjusted Taxable Income $300,000
Tax Rate Assumption 30%
Tax Payable $90,000
Total Tax Saving Benefit by Implementation of Tax Planning Strategies is $60,000.
Controlling Cashflow
As noted, it's not just all about the Tax Planning Strategies. We need to consider the cash flow impact of implementing those strategies. “We don’t want to go broke trying to get a tax saving”.
In our example, if you think about what our cash outlay is to achieve the tax-saving benefits we would need to consider the following:
To buy a car do we need to pay cash or can we borrow and spread that cash flow over 3 to 5 Years but still get the full tax benefit of the $50,000 in this financial year. What do we think the Tax position might be over the next few years – e.g., are we growing or slowing as if we get the tax deduction in full this year, then we can’t get the depreciation in future years. So, when thinking about our cash flow the main consideration is we could borrow and spread the cash flow impact of getting the tax benefit in this financial year.
Invoice deferral – our payment terms with our customers will determine the cash flow impact of this strategy. If our customers pay within 7 days from date of Invoice – then a $100,000 Invoice deferral will have minimal impact on Cashflow but if our customers pay us 60 days from invoice date, it could mean that it’s an extra 90 days until we see that $100,000 in our cashflow and what impact does that have on our trading over the next 3 months. The other consideration is that Deferring Invoices just defers the Tax Payable on those Invoices to the Next Financial Year, do we think will we have Profit in the next financial year, how would this deferral of Invoices impact that tax outcome.
These examples just show that it's not all about the Tax Savings and Controlling the Tax Outcomes – serious consideration also needs to be given to the cash flow impact of the tax planning strategies.
The other key point around cash flow control is understanding the timing of the tax positioning and how that impacts cash flow. If we have $150,000 to pay in tax in December of this year means we have to make an allowance for that amount by December, if we implement the tax planning strategies and we have to set aside $90,000 by December it will mean that across the next 6 to 8 months there might be an opportunity in terms of how the $60,000 could be applied within the business to provide further growth or achieve more profits. This is also how the Tax Planning and Cashflow Outcome planning can link to the overall business strategy planning which further adds to the overall business control approach.
The differences generated by tax savings will also change the future Tax Instalments over the next 12 months, which allows further cashflow savings in that initial 12-to-24-month period.
Tax Planning and Control
Tax Planning is more than just trying to minimise the Tax Outcome it does allow for much greater control of wider business outcomes, other than just Tax.
Once again, It’s all about CONTROL.
The plan is now simple, and our tip is that Tax Planning is a crucial part of the Annual Business Planning Calendar, and we recommend that you get in control of your business outcomes today!