Don’t Leave Money on the Table: Why Every Business Needs a Tax Plan
If you’re new to running a business, the term “tax planning” might be one you’re not familiar with. On the surface, it might even sound a bit dodgy—like something that could cross the line into tax evasion. But rest assured, tax planning is 100% legal. In fact, it’s one of the smartest things you can do for your business. If you’re working with an accountant and not taking advantage of tax planning, you might be missing out on valuable opportunities to minimise your tax liability and keep more of your hard-earned money.
What is Tax Planning?
Tax planning is the process of structuring your finances in the most tax-efficient way possible. The goal is simple: minimise your tax liability within the legal framework set by the ATO. This involves analyzing your income, business structure, and potential deductions to determine the best way to reduce your tax burden.
For many businesses, tax planning is completed in the last quarter of the financial year. By this time, your accountant will have enough data on how your business has been performing throughout the year. They can predict your income for the last few months and assess your current tax situation. Together, you’ll be able to create a tax plan that looks at different scenarios to see how you can reduce your tax liability.
Your accountant will consider both your business income and your personal income (and potentially your spouse's income too). They’ll make estimates based on what your tax liability would be if no changes were made. Then, they’ll run simulations to show what things like paying dividends, maximizing superannuation contributions, or issuing bonuses would look like. They’ll also look at the most cost-effective way to distribute income in a family trust, if that’s part of your structure.
The main benefit of tax planning is it helps you avoid “tax shock.” Instead of being hit with a massive tax bill come June 30, tax planning gives you a heads-up so you can prepare and take action to minimise your tax burden. Plus, it provides options for you to make informed decisions about how to handle your business finances before the end of the financial year.
Tax Planning for Different Business Structures
For family trusts and companies, tax planning is particularly important. These structures have more complex tax rules and more options available for managing tax, such as distributing income between family members, paying dividends, or issuing bonuses. Family trusts and companies also have additional legal obligations, like preparing annual trust resolutions, which are ideal opportunities for tax planning.
That said, tax planning is still valuable for sole traders, even though they don’t have the same range of tax planning options as larger structures. As a sole trader, you can’t distribute your income to family members, but there are still basic steps you can take to lower your tax bill. For example, by having a good tax estimate close to the end of the financial year, you’ll avoid the shock of an unexpected tax bill. You can also plan for contributions to superannuation, which can help reduce your taxable income, or plan to invest in equipment, which could provide depreciation deductions.
How Tax Planning Benefits You:
Avoid Tax Shock: Having a clear estimate of your tax liability before the EOFY means you won’t be blindsided by a big bill.
Minimise Your Tax Liability: There are numerous strategies to reduce tax, such as super contributions, dividend payments, and structuring distributions in trusts.
Better Decision-Making: Knowing your tax position early allows you to make more informed decisions about investing, expanding your business, or managing your income.
Legal and Compliant: Tax planning ensures you're fully compliant with ATO regulations while taking advantage of all available deductions and concessions.
Conclusion
Tax planning is not just for big businesses or those with complex structures—it’s a valuable tool for any business owner or sole trader looking to minimise their tax liability. By working with your accountant to develop a strategic tax plan, you’re not only ensuring you stay compliant with the ATO, but you’re also giving your business the best chance to grow and thrive financially. It might take a bit of time and effort, but the benefits of effective tax planning are well worth it.
If you haven’t already, consider discussing tax planning with your accountant before the end of the financial year. It could make a big difference to your bottom line and give you greater control over your business’s financial future.
