This is an extract from Jason Cunningham’s latest book, Have your cake and sell it too: the 7 key ingredients of business success.
We’ve all been there: standing around the barbie, listening to someone bang on about how little tax they pay. But scratch the surface and you’ll often find these people are not paying tax for one primary reason: they’re not making any money.
Paying tax is not necessarily a bad thing. For one, you get that warm inner glow from contributing to society. But more importantly, it means you’re making money.
Now let me be clear. As the late great Kerry Packer once said, if anyone is paying more tax than they should ‘they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra’.
Too many people focus on tax when tax should be a lower consideration; focus on value and return on investment, and only then on tax.
Tax is a significant outlay for most people, so it makes sense to take steps to pay your fair share only. But too many people get caught up in the notion of ‘maximising their minimising’, and in the effort to save a few dollars perversely end up spending more.
Australia has a long history of tax minimisation schemes, activities focused primarily on reducing tax rather than generating a return or acquiring an appreciating asset. Whether ostriches or trees, or a host of wacky schemes in between, Aussies have tried many and varied ways to get out of paying their fair share of tax.
But to what aim? The most a company will recoup on tax-minimisation spending is 30 cents in the dollar (excluding overseas multinationals), or 28.5 percentfor earnings under $2m. For individuals atthe top marginal rate, that rises to 47cents in the dollar (less than half).
Bottom line: it doesn’t make sense to spend money just to get a deduction. Always focus spending on a primary-income-generating purpose; the associated tax benefit should be secondary. I’d rather see my clients reinvest money into their business, or purchase assets that will appreciate and generate an income, such as property or shares.
If you’re after a simple, guaranteed tax deduction, I’ve got just the thing—I can bill you! (Accounting fees are tax deductible.) So if you wouldn’t give money to me just for the sake of a deduction, why try some grandand potentially very costly scheme that won’t add nearly as much value as my services?
Benefits of tax planning
While I strongly advise against spending money just to minimise tax, there are definitely advantages to legitimately reducing your exposure to tax overpaymenttax, and managing the cash flow of your tax obligations. This is best done as part of a tax-planning consultation with your accountant or business adviser.
There are three main benefits to tax planning:
- Tax planning is usually done before the end of the financial year, so you get advance notice of your likely tax obligations based on your previous liabilities and projections. This can help significantly with cash flow planning, and give you greater surety about the year ahead.
- Tax planning ensures that you take advantage of any new or existing government incentives for small businesses or households, and helps you manage any potentially negative impact of tax law changes. An example is the $20,000 immediate write-off announced in the 2015 federal budget, which enables small businesses to bring forward deductions on asset purchases up to $20k, rather than write them down over several years.
- Tax planning can also help with wealth-creation activities. Superannuation contributions are one of the only tax deductions that must be paid—and, importantly, received by your super fund—by 30 June. Your tax planning should examine whether there are tax benefits, in addition to the benefits of growing your super, if you make additional super contributions before the end of the financial year. Always speak to a qualified superannuation expert or financial planner before making any decisions.
Book your tax planning meeting today – speak to your adviser, or email firstname.lastname@example.org.