Tax Minimisation and Planning For Small Business

Written by Nathan Watt

Tax Planning. What a phrase. It gets bandied around a bit, actually, probably just by accountants.  But clients tend to nod their head and agree that yes, if you say we need to plan our taxes, then we probably should. So what the hell are we talking about?

In my mind its two-fold;

  1. Tax Minimisation and how to do it
  2. Timing of Tax Payments

Tax Minisation and how to do it

Sounds all dark and mysterious, and smoke and mirrors, but in actuality the majority of “tax minimisation” that gets done, is completely ordinary and largely depends on how much cash you’ve got.

Things like making super contributions, prepaying interest, bringing forward your expenses, reviewing your asset register for anything that broke or you threw away or replaced.  These are all lumped under “tax minimisation strategies”.  Now firstly half of those things are just deferrals of tax, meaning they will “save” you this year, and every year you do it, but in any year you stop doing it, you’ll pay the tax.

Secondly, nothing there is difficult nor a secret. These things aren’t a new, shiny strategy, they are just sound business and wealth decisions that you can make just as easily on 1 July, as you do on 28th June when your accountant rings you and says “I need you to put $50k into super by tomorrow otherwise you’re going to pay tax!”.

Most businesses should have a fair idea of what their profit for the year is going to be at any given point.  If you don’t, (1) take a good hard look at yourself and (2) do something about it, and create a forecast. That doesn’t need to be that hard either and you can find out more here.

My point here is that if you know what your profit figure is, you know what your tax bill is going to be and you can be provisioning cash for it during the year (that means put it in a separate bank account each month).  Tax minimisation isn’t a process you just do after you finish the March quarter. It’s a process that should be running day-in day-out.  Having a sound bookkeeping and month end process will ensure you are tracking eligible deductions (and getting your GST correct).  Getting some advice from your accountant before you do things, and not just buying a car, but planning the work Christmas party or bonuses, can save you and your employees tax. These are all part of a broader tax minimisation process. Every transaction you enter into has tax implications, and getting advice before you do it, can save you thousands.  Once you’ve spent the cash, it’s all too late.

Lastly, and I can’t stress enough, is that the business’ cash isn’t yours. If you take cash out of the business, you have to pay tax on it.  You might be able to defer that tax for a year or two or three or seven, but eventually, after you’ve long spent the cash and forgotten about it, you’ll pay tax and be all surprised.

So to digress somewhat there are only 4 ways to get cash out of an entity and all of them have tax implications;

  1. As an expense (e.g salary, interest etc)
  2. As a loan (as in the business has lent you the cash and you need to repay it. True story. You have to repay it)
  3. As a dividend (Most time clients think it’s a dividend, it isn’t. Talk to your accountant before you do this)
  4. As a return of capital (don’t do this yourself. Just don’t)

So remember;

Taking cash out of the business bank account and putting it into yours. Tax.

Paying a personal expense from the business bank account or credit card. Tax.

Using business cash (or any business asset in fact) for anything other than business.  Tax.


Timing of Tax Payments

This is where I see the most value for business owners. But for some reason, few actually get an easily digestible timetable of when their taxes will be due, and an estimate of how much.  Why? They have lazy accountants.

The timing of tax payments is not a secret. The ATO outlines the due dates each year but in general these dates are pretty much the same every year.  The complicating factor is the timing of when you submit your tax returns to the ATO because this effects the instalments you make towards next year’s tax bill and can sandwich 2 ¼ years of tax into about 3 months.

Q: So what would an easily digestible timetable look like?

A: Something like this.

You can do this for each entity and individual in your group and roll them all up into one big group tax payments schedule, so you know when things are due and a very close estimate of how much (just remember to pay each entities taxes from their relevant bank account. One entity paying another entities tax bill? Tax).  It’s not as good as proper cash flow forecast, but it will stop the surprise tax bills.

So there you have it, your tax planning is done for the year. You’re welcome.

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