The Importance of Tax Planning: Why Do It and How Can Bonerath & Co. Help?

With the end of financial year peering around the corner, it's that time of year when taxes are high on many Australians' minds. But more than simply crunching your yearly figures come June 30th, have you considered tax planning?

In this article, we discuss the importance of tax planning and introduce some of the important considerations to be made while devising a tax planning strategy for you, your family or your business!

Why is a tax planning strategy important?

Tax planning is important as it provides you the opportunity to actively explore ways to reduce your tax liability. By implementing tailored strategies, you can minimise the impact of capital gains tax, pre-pay interest, commence tax-effective investing, evaluate your current structures, maximise tax deductions and tax credits, and take other proactive measures before June 30th — helping you to more effectively meet your business goals. After this deadline, your accountant can only record history and cannot proactively help reduce your tax bill.

Additionally, tax planning allows you to budget for your upcoming tax liability by estimating the amount payable in advance (including PAYG instalments) based on your taxable income. Many business owners appreciate planning for tax because of the cash flow assistance and management that comes with tax strategy. If you have ever wondered about your tax obligations, unexpected tax liabilities or wished to pay less tax, tax planning is something to consider.

When should I consult my accountant for tax planning?

Ideally, you should meet with your accountant for tax planning anytime between mid-April and mid-June. Meeting after mid-June may not leave enough time to implement chosen strategies. If you still need to arrange a meeting with your accountant for tax planning in the current financial year, now is the time to consider doing so.

Tax planning is beneficial for basically all taxpayers, whether you're a sole trader, in a partnership, use a family trust or company structure, there are benefits to be gained.

What strategies are involved in tax planning?

Tax planning strategies involve various aspects, including applying new tax legislation and budget measures, such as the Small Business Skills and Training Boost or the Instant Asset Write Off. Timing strategies such as pre-paying expenses, stock valuations, deferring revenue, and making superannuation payments for employees before June 30th are often considered. Exploring new tax-effective investment opportunities, such as immediate write-off rules for new business equipment or negatively-geared investments, are also some examples of tax strategies that are commonly adopted for Australian businesses.

Additionally, there may be a need to consider more complex structuring options to maximise tax benefits. For example, things like 'bucket companies', self-managed superannuation funds, changing structures to accommodate growth, new owners, maximising exemptions, utilising the loss carry-back scheme for 'tax loss' companies, and preparing a business for eventual sale. Customising Trust Minutes to ensure income distributions are correctly allocated, particularly when significant changes or capital gains are involved. Retirement-based strategies, including super fund contributions, are also relevant. The specific strategies implemented will depend on your unique circumstance and business structure.

How much does tax planning cost?

The cost of accessing professional tax planning services will depend on your revenue and group structure complexity. Many of our clients undertake tax planning annually, even if it is simply to budget and plan for expected tax liabilities in the next 12 months. We find that generally, the cash flow benefits gained from budgeting for income tax payable far outweighs the cost and fees related to tax planning. By reducing your tax liability and having a strong handle of cash flow, you may find that you're financially better off with a strategic tax plan in play.  

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Other commonly asked questions about tax planning

We answer some of the commonly asked questions about tax planning.

If I spend $2,500 on a deductible expense, will my personal tax refund increase by $2,500?

No, not necessarily: deductions save you an amount equal to your applicable income tax rate, typically between 19% and 45%. Therefore, the maximum benefit of a $2,500 deduction would be $1,125 (45% of $2,500). Importantly, the above figures only relate to personal income tax, which is applicable to sole traders, partnerships and individuals. The tax rate for companies remains at 30% or 25% for eligible companies.

You may notice many opportunistic marketing campaigns at this time of year, telling you to buy a product and "write it off as a tax deduction". It's important to remember that any related deductions are only a portion of the amount you've spent — it probably doesn't make sense to spend $1 to try to save 45c. At the end of the day, a 45% deduction means you're still out of pocket 55% of the cost of the product.

Is tax planning the same as tax avoidance schemes?

Absolutely not! Tax avoidance is illegal. Tax planning is utilising the strategies available to you that comply with the rules and regulations imposed by the Australian Taxation Office (ATO) to benefit you and your business. Tax avoidance is one of the many reasons why seeking professional tax advice can be so beneficial — to help avoid penalties for unknowingly breaching legislation as well as ensure compliance with your other obligations when it comes to tax.

Will purchasing more stock before year-end help reduce my tax?

The short answer is: probably not. Typically, only the cost of stock sold before June 30th counts as a deduction. Many businesses utilise a stocktake each year to determine the value of the closing stock compared to the opening stock. If the value of the closing stock is higher than the opening stock, this counts as assessable income. If the closing stock value is lower, this difference counts as a reduction in assessable income.

Should I purchase a new asset for my business?

Generally speaking, if you're planning to spend money, purely to claim a portion of that expense as a tax deduction, it may not be the smartest decision. However, the immediate asset write-off deduction was reintroduced under the 2023 Federal Budget, allowing small businesses with an aggregated annual turnover of less than $10 million to immediately deduct the total cost of eligible assets valued at less than $20,000. This deduction applies to assets that are first used or installed and ready for use within the mentioned time frame. It's important to note that the $20,000 threshold is applicable for each individual asset, meaning that small businesses can take advantage of instant write-offs for multiple assets.

For assets valued at $20,000 or more, which are not eligible for the immediate deduction, small businesses have the option to place them into the small business simplified depreciation pool. These assets can be depreciated at a rate of 15% in the first income year and then 30% in subsequent income years. However, it is important to consult your accountant to ensure the asset qualifies before making significant purchases. Certain assets, like motor vehicles, have deduction caps. It's crucial to evaluate purchase decisions based on their potential to improve your business, generate more profit, or enhance efficiency.

Should I make a voluntary superannuation contribution?

The decision to make a voluntary superannuation contribution depends on factors such as your previous contributions, contribution limits, Total Super Balance (TSB), and current tax rates. It's prudent to discuss superannuation contributions with your accountant and financial adviser before making any additional contributions. Contributions should be made no later than mid-June to ensure they are received by the Superannuation Fund in time for processing before June 30th.

How can Bonerath & Co. help with tax planning strategies?

Tax, like most important aspects of life, requires careful planning. To help get the most from their financial affairs, not just for the current tax year but for years ahead, many individuals and businesses choose to work with accountants and tax professionals who specialise in strategy rather than solely processing tax returns — if you come across opportunities where tax could have been reduced while preparing a tax return, it's too late to do anything about it. Proactively planning for tax helps protect your hard earned money.

At Bonerath & Co., we provide tailored accounting and tax services and solutions designed with your business in mind. Get the professional advice you deserve, that's tailored to you. Contact Bonerath & Co. to understand more about how we can help you!