Episode 22: Tax Planning (and preparing for your Tax return)

Tax

Jul 15

June 7, 2021

Sarah and Trudi both strongly believe that tax planning is an important process for businesses to undertake on a yearly basis.

In this episode, Trudi gives us a deep dive into tax planning – what it is, who should do it and what it actually involves. Not all accountants offer tax planning as a service and for some, it may involve little more than a “back of the envelope” type calculation. It is, however, something that Trudi and TCK Accountants recommend to all their business clients because it provides an opportunity to sit down and review the year to date, how you are tracking to budget, and the plans for the remainder of the financial year.

She talks about some of the possible strategies to be considered such as purchase of assets, contributions to superannuation, dividends/trust distributions, director loans as well as providing some examples of real strategies implemented by clients.

Sarah also talks to the importance of early tax planning from a financing perspective. Lead times to obtain finance and in some cases, the lead time to purchase assets are blowing out, so if purchasing large assets to obtain depreciation or write off deductions is part of your plan then leaving tax planning until May/June will impact the ability to implement the plan by 30 June. While tax planning is typically undertaken in March-May it’s never too early to discuss with your accountant and make sure you are booked in, and after listening to this episode you will know all the reasons why you should book it into your diary now.

Not to be missed for anyone in business!

Podcast Transcript Available Here

Duration: 16:03

Trudi Cowan: Hello Sarah.

Sarah Eifermann: Hi. 

Trudi Cowan: Welcome back. We are going to have a chat today…

Sarah Eifermann: Sorry, I feel like singing the Welcome back Carter theme song. Sorry to interrupt you there though. Should we just start that again?

Trudi Cowan: Today we're going to have a chat around tax planning and preparing for your tax return. As we sit here recording this, it is currently the end of May, and financial year-end is just about upon us. Tax planning, is something that I recommend to all my clients, particularly my business clients, because it's a session where we can sit down and forecast what do your tax picture look like for the current financial year? And is there anything we can do to sort of optimize that tax position for you, your business, your family so that you're only paying the tax that you have to? 

Sarah Eifermann: Yeah, I said that deliberately.

Trudi Cowan: The whole thing with tax planning is that often it's not even well known that it's an opportunity. It's not something that all accountants probably actively advertise and some accountants probably call it by a different name. Some accountants may not actually sort of formally have it as tax planning but  

Sarah Eifermann: It's part of the process

Trudi Cowan: It's part of a back-of-the-envelope process of how much tax you going to pay this year and do we need to do anything to change that or how much do your installments need to be. And it's not so much a formal process for some it's probably just a quick Calc,

Sarah Eifermann: And then some of you will never have heard about it at all because that tax conversation is held after the end of the financial year and then you can't actually do anything then anyway. 

Trudi Cowan: Exactly right. And that's the key thing with tax planning, to impact on your tax position it's really things that you need to do before 30 June, that's really when you can take the action to do anything about your tax position, and really you know ideally in a perfect world you'd be doing your tax planning, sort of, after you've got your 31 match results. Right after you've done that, and you've got three quarters of the year to use as actual figures and then you're only needing to estimate what's going to happen for the last three months of the financial year.

Sarah Eifermann: Yeah, and then also if as we've talked about before, if you need to go out and purchase assets and get the financing it gives you enough time. Yeah, before everybody else does that end of March, as an end of May, early June run, trying to hit the end of the financial year which never works in anyone's favor.

Trudi Cowan: Having said that, if you're listening to this now and go Well haven't done it, it's still pre-30 June, then it can still be done now. Right, it's just there are not as many options in terms of strategies to optimize your text that can be done now but put it on the schedule for next year but definitely put on the schedule to do a bit earlier for next year. So when we talk about, I guess tax planning what does it actually involve? 

Sarah Eifermann: Yeah, what is that. 

Trudi Cowan: So, for me, I start off with sending out my clients a questionnaire to get a little bit more of a feel for how they're feeling about their business, I guess, you know, are they happy with the results so far are they happy with what they're charging clients or their prices on their products. Have they got any plan are they wanting to sort of action in the next 3 6 12 months that might become relevant to actually our compensation planning? So, it's really relevant to your tax position. 

You know if you're planning growth does that mean you need new assets, you've got new employees coming on. Are there things that you need to buy or do or are your results not as good as your thoughts and therefore your plans are more around how do we save her money, how do I keep our cash so that we've got our cash to be able to pay our suppliers.

Sarah Eifermann: And it stays solvent. 

Trudi Cowan: Yeah, and so all those sorts of things are really relevant. So I start with that question so that I can start the work, having a bit of a sense of how you're feeling and where you're at with your business. And then the next thing that I would do is basically go through your books, make sure everything was up to date looking accurate, making sure that you know your GST liability account is reflective of what the ICAO is saying that it is making sure your bank accounts are tying up to your bank actual physical bank statements, and then I would take your profit and loss, up to, let's use the example to 31 March, and then extrapolate that out for the full year. So what is an estimated Profit Loss going to look like for the month of April and May? And June. 

Yeah, that gives us an estimated profit for the year for your business. And from there, I basically do an estimated tax calculation. So, based on that profit, how much tax Are you going to have to pay for the year. Yeah, based on that we pull that through to your financial your personal tax position as well so we add-in. If you've got investment properties or dividends or interest or anything else going on, we populate that all in, as well, and start to build some strategies around. Are you in a tax-efficient space, or do we need to put some strategies in to make it a bit more tax effective, or how do we build in some of those planning ideas that you mentioned in the questionnaire? 

So it might be that you had a really good year, the massive profit you got $100,000 profit sitting in the company, but you've told me in the questionnaire that you need to go and buy a new truck, and you also need a new use. Right. The way the tax rules work at the moment if you bought a new truck, you might be able to write off 100% of the value. Okay, so that could bring that $100,000 profit, right down to an old truck, are you might say it might bring you right down to 40 or 50,000. 

Sarah Eifermann: Yeah, depending on what you buy, though right? 

Trudi Cowan: Depending on what you buy, right, that is then going to mean that you're only paying tax on 50,000 instead of 100. Right. And that's just one of the strategies that we can look at that point in time to improve your position. 

Sarah Eifermann: Just one.

Trudi Cowan: That's just one. 

Some of the others that we can look at personal superannuation contributions Yeah, business owners aren't always good at paying their own super. That's a really good time of year to reflect on that say how much you have paid. Do you have the cash? 

Sarah Eifermann: To find the cash as well 

Trudi Cowan: Then pay some more into superannuation, and does it improve our position if we then can claim a deduction for that superannuation contribution. We can look at things like

Sarah Eifermann: Well tax planning has a big implication in lending as well I mean we have a mutual client at the moment that did his tax planning with you came to me and said I want to buy a vehicle and I said you want to buy a car and a house in 12 months if you depreciate the value of your income now, it's going to create problems for you in the future, how and you're going to have more success in the next 12 months, then you've had in the previous 12 months because he's in startup phase Yeah, you will actually need the depreciation in next financial year, not in this financial year. 

Trudi Cowan: Because you need your income for this year for these purposes.

Sarah Eifermann: And for his ability to get a home loan so I mean, there are so many different applications of it. Yeah, and with the right advisors in your corner, it definitely makes life a lot easier later on because you're forecasting, what's coming.

  Trudi Cowan: Yeah, hence five-year plan, throw that in there, 

Sarah Eifermann: But you're forecasting what's coming in your life as well. And then you're able to manipulate your circumstances to match those needs as best as you can achieve.

Trudi Cowan: And look. Often, I find that tax planning works really well for those that are coming to me saying, we need to get a mortgage next year. Yes, right, we are planning on buying a house, well we can sit down and forecast your tax position, and it almost works the other way, okay well you need the high income to get that. So don't go and buy that use because it's actually more beneficial for you in your circumstances, to have that $100,000 profit sitting there than it is to go and buy that use and then maybe compromise your ability to get that mortgage.

Sarah Eifermann: And yes, it may mean more tax but at the end of the day, we've said this many many times. If you're paying the tax, you're making money. Yep, right and when it comes to lending the banks want to know you're making money.

Trudi Cowan: Yeah. And That's why I use the terms optimized tax position. Yes, and only pay you what you need to because sometimes you need to pay it, in order to be able to demonstrate that income for other reasons.

Sarah Eifermann: Yeah, and we're not talking tax avoidance here tax avoiding is not tax avoidance. It is not trying to stooge the ATO it is legitimately using the knowledge of your advisors, and your own forward planning to allow for beneficial outcomes, make business decisions. 

Trudi Cowan: Yes, it is a business decision of do I buy a use now or do I buy in three months, and there are lots of factors that will come into that question and tax is just one piece of it. Yeah, I will actually you know, often that clients will come to me, so I want this ute I need to reduce my tax, so I want to get by the ute, and I’ll go actually but you don't have the cash flow or the business to justify that purchase right, so you're wanting to go and spend $20,000 on the use in order to save yourself, maybe what three or $4,000 in tax right it doesn't make sense.

Sarah Eifermann: It has to be responsible, especially from a lending point of view, like in the business space commercial space as a finance space. The responsible lending laws do not apply the same way, best practice still does, I would say the same thing to you, can you afford these repayments. Yeah, because I'm not helping you buy something that you can't afford to make repayments on because you get the tax deduction this year, but the debt might go for three, four, or five years, you still need to make the payments on that.

Trudi Cowan: So while I call it to tax planning you probably just as easily call it, business planning, or year-end planning, 

Sarah Eifermann: Financial planning, 

Trudi Cowan: Because it's all around the. Where's your business at the moment, 

Sarah Eifermann: Financial business planning, I should clarify. 

Trudi Cowan: Yeah. Where's your business at the moment. Where do you need to get to what are some of the things that you're planning on doing and just in terms of timing, does it make sense to do them now, or a little bit later. Some of the other things that we might talk about at a tax planning point in time. If you're a company, do you need to pay a dividend? Does it make sense do you need to get some of the cash out of the business and you have profits there that are available for you to pay a dividend there? Does it make sense to do it right now? And that's often a discussion that we might have as part of the tax planning process. If you trade through a trust, and you're, and you've got a choice of who you're distributing that income to again at tax planning, we'll have a look at who do we want to distribute that income to and we can make some decisions around that at that point in time.

And I would typically include in my text planning process, helping you to actually prepare the appropriate minutes and documents that you need to go with your yes yeah distributions and with your dividends as well. Yes. All right, so that's a part of the process as well because those documents will need to be done pre-30 June, 

Sarah Eifermann: to allow it to occur. 

Trudi Cowan: Yeah, for it to happen properly within the right financial period. Yeah, it all works best if it's also, you know, distribution minutes have to be signed pre-30 June, and the timing of your dividend is impacted by when you sign as well so those documents all need to be done at that same time as well. 

Sarah Eifermann: Yeah, again like anything we talked about it's about planning it all out and being in front of it before it comes at you. 

Trudi Cowan: A couple of the other things that we might talk about during tax planning. If you're a company, and you've got director, loans, yes, and the employee, or sorry, the director owes money through the business you know there's tax implications of that type of loan. They've changed a couple of years ago and have become harder. So there have been announcements about changes but they haven't actually legislated, okay so if you try to work out what we're talking about it, the code division seven A loans, and there are rules around potential and being treated as a dividend to the individual. If they're not put on terms or repaid and things like that.

Sarah Eifermann: So I was talking about interest being calculated and making sure that they're backed by the 30th of June or the other additional implications that have been around for a while,

Trudi Cowan: So I would only bring that up as part of tax planning if I saw one of those loans available to see if you had the ability to repay that loan on 30 June. Or whether we needed to look at putting it on sort of loan 

Sarah Eifermann: 16 years ago, that money in and money out of the company to the director didn't matter. 

Trudi Cowan: It was a lot more flexibility around it, 

Sarah Eifermann: More flexible and some of my clients still think that's not how it is, and it's changed so much, with regards to that. 

Trudi Cowan: So, and the ATO does look very closely.

  Sarah Eifermann: A company is not yours yet right I mean you could be the beneficial owner of that entity,

Trudi Cowan: But the cash flow in that business is the components that belong to the company, not to you personally.

Sarah Eifermann: And so you can’t just use it as your own bank account, yeah. And so, I have had clients in the past that have used them as their own bank accounts and then gotten themselves into trouble we did seven A loans as a result. So,

Trudi Cowan: So you know, the tax planning session is also an opportunity to bring up some of these things. Yeah, I can raise with you potential issues that are going to happen, and we still have time to deal with them before the end of the financial year and come up with a plan of how we want to manage that particular option exactly, and other things that we might talk about is the business planning side of it. Okay, profit is down a little bit why our costs are up okay do we need to put our prices up? Your flat out, do we need to consider bringing on employees. So just having a bit more of a general discussion around how your business is tracking it’s as well a great opportunity to sit with your accountant and consider some of those things and ask some of those questions as your sort of leading into the new year and build it into your plan for the new financial year. 

Sarah Eifermann: Yes, yeah, planning, so it's just a really great opportunity to take stock. 

Trudi Cowan: I guess 

Sarah Eifermann: And even formally take stock. 

Trudi Cowan: Some accountants would also incorporate preparing budgets, into their tax planning process as well. Yeah. So, with that big cash flow or profit and loss budgets for the new financial year. That would all sort of getting down as well. So yeah, lots can go into tax planning, that can be sort of narrow quick back of the envelope calculation is how much tax you're going to have to pay at least you're aware, yes, or it can be a full-blown detailed process that allows you to consider strategies to optimize your tax position, as well as looking at plans for the business over the next coming year.

Sarah Eifermann: Yeah, and that's why I really do firmly believe it needs to happen in April. Yep, at the latest because it gives you the time to move forward. So, we've definitely missed the boat for April this year for people. Yes, it's still a little bit of time to do predicting June 30 Maybe not by the time this episode comes out, but it, even if you've missed it for this year, put it in the diary and book the appointments now, because if you haven't done it in the past, you don't know the value of it Yeah, and it's easy to think, oh, I don't need to do that everyone should do it. If you're running a business, you should be doing that.

Trudi Cowan: Because again, it puts you in front of your financials, it forces you to take the time to look at how you're performing, and to have some of those really important discussions. 

Sarah Eifermann: Absolutely. If you have any questions on this, feel free to ring Trudi direct 

Trudi Cowan: Yes, 

Sarah Eifermann: Or ask us a direct message to our Instagram or click the link in ICA and leave a message for us there. Any last final words of wisdom on this?

Trudi Cowan: Last final words of wisdom are that we are coming up to the end of the financial year. So, if you didn't get a chance to do tax planning, you can still get ready for your tax return, right, right, get your books up to date. Make sure everything is balancing. Make sure you're happy with it, you've got all your supporting documents that your accounting is going to want to need so that you're nice and ready to go in and speak to your accountant then and get your end stuff done. Nice and early.

Sarah Eifermann: Agree. Agreed, thanks for listening to today's episode. 

Trudi Cowan: Thanks for listening. 

Sarah Eifermann: Bye 

Trudi Cowan: Bye.

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Just two industry experts (and guests) having a friendly chat and sharing our knowledge. We aim to raise your knowledge base and dis-spell any myths surrounding finance. tax and a range of other financial topics.

This is a safe space to ask questions and hear useful info on financial matters.

Episode 22: Tax Planning (and preparing for your Tax return)

Podcast Transcript Available Here

Episode 23: A Business Owner’s Mindset: Should you just stay employed or on contract?

Episode 21: Business Plans