Beware Tax Planning, It's not all it's Cracked up to be

Don’t Waste Your Money on Tax Planning Opportunities If You Don’t Need To.

The end of the financial year isn’t far away, and whether you’ve made a profit or suffered a loss, it’s time to focus on tax planning. Tax planning is all fine and good, but you have to have the cash flow or funding to reap the benefits of most of the opportunities available.  

Hopefully, you’re aware that as a small business, the ATO allows you to claim a full deduction for the cost of equipment, fittings, computers and so on up to a cost of $ 30,000 per item. 

Superannuation contribution limits are $ 25,000 for employees of all ages.

If you have a family business where both you and your partner work in the business, you have the opportunity to contribute $ 50,000 which includes superannuation guarantee on your wages.

LET’S SEE HOW THIS MIGHT LOOK FROM A CASH FLOW PERSPECTIVE.

1. Assuming that both family members take a salary of $ 90,000, that means that superannuation guarantee contributions are $8,550 each. Don’t forget that to get the tax deduction in the current year. The contributions must be received by the fund on or before 30 June.

2. Additional superannuation contributions can be made up to $ 16,450 each ($ 25,000 maximum less $ 8,550 paid on wages). That gives a total of $ 32,900.

3. Let’s say that you need a new computer that costs $ 3,300, an item of equipment that costs $ 11,000 and you’ve seen a new ute that costs $ 28,000 at the end of year promotions.

4. Assuming that the business is estimated to make a profit of $ 100,000

5. In total, you need $ 75,200 to fund these payments.

FROM A TAX PLANNING PERSPECTIVE.

Now for the decisions, from a tax planning perspective, it may make sense to do all of these five tips, and whatever you’re thinking about for tax planning, you must see your accountant or adviser for their advice on what is best for you and your circumstances.

FROM A CASH FLOW PERSPECTIVE.

However, from a cash flow perspective, the chances are that while you’re expected to make $ 100,000 in profit, you won’t have anywhere near that amount of money in the bank account. 

Over the year you may have spent money buying other items of equipment, you may have been paying off outstanding debts or ATO accounts or purchasing more inventory. Added to that if you provide credit terms to your customers or clients, there will be sales that you’ve made that you haven’t received the money for yet. All of these will contribute to a bank balance that doesn’t align with your expected profit.

Now the question is do you take advantage of the tax planning opportunities, do you put personal funds into the business, do you seek funds from family or friends, do you use your credit card or do you apply for a business loan?

GET STARTED AS EARLY AS YOU CAN.

If you’re considering borrowing money, start the application process as early as you can. While some financial institutions will take time to process applications, others have quick application processes. In all cases, consider the interest rate, the repayment requirements and factor that into your upcoming cash flow before committing to the funding.

With winter around the corner, for some businesses, these are the low-income months of the year, so be wary of taking on additional requirements to make payments over this period.

Whether you’re making a profit or expect to suffer a loss, seek professional advice before the end of the year to discuss tax planning but also consider your business cash flow and don’t get sucked into additional costs just to save tax.

I’ve seen clients who have insisted on buying additional vehicles and equipment before the end of the financial year just to get the tax deduction, even though they didn’t need them and the consequences of those decisions on both profit and cash flow were significant.

WHILE NONE OF US LIKE PAYING TAX, REMEMBER THAT WHEN YOU PAY TAX, YOU HAVE THE BALANCE OF THE PROFIT AVAILABLE TO YOU, BUT WHEN YOU ELIMINATE YOUR PROFIT BY SPENDING, YOU’VE GOT NOTHING LEFT.

Continuing the example above with $ 100,000 profit and a small business tax rate of 27.5%, that’s $ 27,500 tax to pay which leaves $ 72,500 of after-tax profit and ultimately cash in the business. However, if you funded and spent the $ 75,200, there would be $ 24,800 of profit left with tax at 27.5% of $ 6,820, which would leave you with just $ 17,980 of after-tax profit and cash.

By all means, do your tax planning, but carefully consider the impact on your cash flow.

This is not tax or financial advice, before taking any action, seek advice from your own professional advisers