Over the last months we have been busy reviewing our clients’ tax positions. The purpose of this is to assess the potential tax impost for the year so that action can be taken to minimise it if necessary or otherwise plan for payment by the due date with no surprises later in the year. It also enables you to vary your June 2016 PAYG tax instalment should there have been a drop on taxable income compared to 2015, thus preserving valuable cash flow.
Assessing what your average and marginal tax rates is a critical element of undertaking tax planning. These will determine the real cash flow savings from any tax planning strategy. Just because something is 100% tax deductible doesn’t mean that the amount spent comes totally off your tax bill. This will depend on your tax rate. For example, if a 100% tax deductible expense cost $1000 –
The biggest mistake is thinking that if you have little left in your bank account, tax won’t be an issue. This can result in a major tax surprise later in the year – particularly if you lodge your tax return late. You need to recognise that the following outgoings are not tax deductible:
Also, generally, you are taxed on your share of profit, not what you actually draw out of a business. This simply means that if your profit is $100,000 and you draw only $50,000, you will still be taxed on $100,000. The cash might not be there for the 5 reasons above and/or you may have invested additional funds in receivables or stocks or reduced what you owe suppliers. Alternatively, if you draw $100,000 but your profit is $50,000, you will be taxed on $50,000 – but the catch here is that to do this you must have drawn off business working capital or borrowed money in the business to do it – which is generally unsustainable in the short/medium term.
So, our advice is and has always been – do your tax planning in a timely, structured and informative way and take control of your destiny!
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