Why should I do Tax Planning?

Over the next few weeks, Vision Consulting Group attention will turn to Tax Planning and Minimisation strategies that must be implemented before 30 June.

So here is quick Q & A regarding tax planning and minimisation strategies.

Why should I do Tax Planning?

Tax planning is essential as it provides you with the opportunity to actively seek ways to reduce your tax
liability. This can be achieved by implementing tailored strategies to reduce the impact of capital gains,
prepaying interest, investing in negatively geared investments, assessing your current structures and
other similar proactive measures prior to 30 June. After 30 June, your accountant is simply recording
history and can’t do anything proactive to help reduce tax.

Most importantly, tax planning also allows you to budget for your up-coming tax liability by estimating
the amount payable early (including PAYG Instalments).

If you have ever found yourself saying…. I have had a great year this year I wonder what my tax will be,
or I didn’t know about that tax instalment/liability, or I didn’t think my tax would be that large, or I wish I
paid less tax…. then you need to consider doing Tax Planning.

When should I see my accountant to complete Tax Planning?

Any time from Mid-April to Mid-June 2024 – Ideally, your March 2024 BAS should be
prepared and you are able to estimate the likely income for the remainder of the tax year.
Importantly, any later than mid-June and you may not have time to implement the chosen
strategies. Accordingly, if you wish to complete tax planning for the 2024 year, and haven’t
already arranged a meeting with your accountant, it is now time to consider the same.

What strategies are considered?

  • Application of new tax legislation (again quite a bit this year) or Federal Budget Announcements and how that might impact your business/tax position.
  • Deferral/Timing strategies such prepaying expenses, stock valuations, deferring income, paying superannuation for employees prior to 30 June.
  • New investment opportunities (mostly a deferral strategy also), like investing in new business equipment (immediate write-off rules), or negatively geared investments.
  • Whether we need to explore more complex structuring options like “bucket companies”, Self-Managed Superannuation Funds, changing structures to accommodate growth, new owners, maximise potential exemptions, loss carry back scheme for “tax loss” companies, and/or preparing a business for eventual sale.
  • Customising Trust Minutes to ensure income distributions go to the right place – particularly where significant changes from last year, or capital gains are involved.
  • Retirement based strategies including superannuation contributions.
  • And many more…. there are just too many possible strategies to list here, and it all depends on your unique circumstances.

How much does it cost?

That will depend on the complexity of your matters and group structure. A large percentage
of our clients undertake tax planning every year…. Even if it is just so they can budget / plan
for the expected tax liabilities for the next 12 months. Vision Consulting Group can provide a
fee estimate before commencing any work. In most cases it is between $1,100 and $2,500.
Complex businesses and structures can be more.

Other Common Questions/Statements about Tax Planning:

  • If I spend $1,000 on a deduction, that will increase my tax refund (or reduce my tax liability) by $1,000. – This is incorrect. It will only save you $1,000 multiplied by your applicable tax rate, which will typically be somewhere between 19% and 47%. So a maximum benefit of $470 per $1,000 spent.
  • I want to keep my income from going into the next tax bracket so I don’t pay more tax. – This is not really an accurate statement. You are taxed on your income based on “brackets” of income (referred to as Marginal Rates of tax). The Brackets are listed here. Essentially, you will be taxed $nil on the first $18,200, whether you earn $18,000 or $1million dollars. You always pay $nil on that first $18,200. You will be taxed 19% on the income that falls into the next bracket, whether you earn $45,000 or $1million dollars. So even on the top bracket, you will end up paying 45% (plus Medicare Levy – another 2% minimum) on the income ABOVE $180,000…. not all your income. Still a large rate of tax per dollar earned over $180,000.
  • Should I get Private Health Insurance? This is a not a simple question and should take into account your medical requirements, not just the tax consideration. Importantly, everyone pays Medicare Levy, whether you have Private Health Insurance or not. The Private Health Insurance just prevents the additional charge called “Medicare Care Levy Surcharge”, where you earn over certain amounts and don’t have appropriate hospital cover. More information is here. Importantly, it is a per day test…. so if you take out Private Health Insurance part way through the year, the Surcharge may still apply for the remainder of the year you weren’t covered.
  • Will purchasing more stock before year end help reduce my tax? The answer is no. Only the cost of stock “sold” before 30 June counts as a deduction. This is why you need to complete a stocktake each year.
  • Should I purchase a new asset in my business? This question is referring to the immediate write-off deduction. This only applies to businesses and has been significantly reduced for the 2024 year (<$20,000). Any purchase decisions should be evaluated with normal business logic – will it improve my business, generate more profit, improve efficiency so-on.
  • What new Tax Legislation applies? Too many to go through here and your accountant will discuss with you at your Tax Planning meeting what may impact you. There are some important changes that impact professional industries (lawyers, doctors, accountants, architects) and anyone operating their business/investments out of a Family Trust (new ATO interpretation of existing rules). A summary of new measures is posted here.
  • Should I make a voluntary superannuation contribution? Possibly. This will depend on the amount you have already contributed this year, your contribution limits, your Total Super Balance (TSB) and your current tax rates. This is something to discuss with your accountant prior to making any extra contributions. You will also need to check your eligibility to make such a contribution. Any contributions should be made no later than mid-June (check your super fund’s cut off dates) to ensure they are received by the Superannuation Fund on time (well before 30 June).
  • Should I setup a Self-Managed Superannuation Fund (SMSF)? A SMSF doesn’t change your ability to claim a deduction (no extra benefit tax wise), rather it just makes it a bit easier to transfer funds and allows you more control over your superannuation investments (control and influence). Whether that is worth it is a much bigger discussion and you should contact our office (Office line 9387 6444 or email support@visions.com.au).

What’s changing on 1 July 2024?

Here’s a summary of the key changes coming into effect on 1 July 2024:

  • Tax cuts reduce personal income tax rates and change the thresholds.
  • Superannuation guarantee increases from 11% to 11.5% – check the impact on any salary package arrangements.
  • Superannuation caps increase from $27,500 to $30,000 for concessional super contributions and from $110,000 to $120,000 for non-concessional contributions.
  • Luxury car tax threshold increases to $91,387 for fuel-efficient vehicles and $80,567 for all others.
  • Car limit for depreciation increases to $69,674.
  • $300 energy relief credit for households comes into effect (credited automatically quarterly).

For business

  • $325 energy relief credit for small business commences (for small businesses that meet the relevant State or Territory definition of a ‘small customer’).
  • $20k instant asset write-off extended to 30 June 2025 (subject to the passage of legislation).

ATO fires warning shot on Trust Distributions

The ATO has warned that it is looking closely at how trusts distribute income and to who.

The way in which trusts distribute income has come under intense scrutiny in recent years. Trust distribution arrangements need to be carefully considered by trustees before taking steps to appoint or distribute income to beneficiaries.

What does your trust deed say?

An area of concern is that trustees are not considering the trust deed before income is appointed. The answer to what the trust can do, and who it can allocate income to and how, is normally in the trust deed. This should be your first point of call.

Review your deed

  • Conduct a review of the trust deed and any amendments to ensure trustees are making decisions consistent with the terms of the deed;
  • Check the trust vesting date. The trust deed will specify what happens when the trust vests. If the trust vests, the trustees might be directed to distribute the income and property of the trust to particular beneficiaries. The trustee may no longer have the discretion to decide who to appoint income or capital to;
  • Check who the intended beneficiaries are, and also keep in mind that some beneficiaries might have different entitlements to income and capital under the trust deed;
  • Timing and requirements for resolutions – Check the deed for any conditions and requirements for trustee resolutions, including the need to have the resolution in writing and the timing of when it’s required to be made. For example, the deed might require trustees to take certain actions before 30 June;
  • If you are looking to stream capital gains or franked distributions to certain beneficiaries, check the trust deed doesn’t prevent this and the streaming requirements have been met.

Family trust and interposed entity elections

A family trust election helps wrap the workings of the trust around a specific individual’s family group. These elections can help protect trust losses, company losses, and franking credits but can also cause significant tax problems if they are used incorrectly.

An interposed entity election makes an entity a member of the family group of an individual.

Where these elections are in place, it is essential that trustees understand the implications before making any decisions on distributions. Distributions of trust income outside the specified individual’s family group will trigger family trust distribution tax at penalty rates.

Who receives the benefit?

The ATO is also on the lookout for arrangements where amounts are allocated or appointed to beneficiaries, but they don’t receive the real financial benefit of the distribution. If the arrangement has the effect of reducing the overall tax paid on the income of the trust, then this will normally increase the level of risk involved and attract the ATO’s attention.

Increased reporting on tax returns

Changes have been made to capture more information on the tax return about how trusts distribute income. These include:

  • Trust tax return – four new capital gains tax labels have been added. This information should be provided to beneficiaries to match what is reported in their returns.
  • Beneficiaries – all beneficiaries of trust income will be required to lodge a new trust income schedule. This schedule should align to your distributions as set out in the trust’s statement of distribution.

Trusts can be an excellent vehicle for many reasons including the flexibility to determine how income is distributed. The cost of that flexibility is strong controls and compliance. The ATO is increasingly strident about how trusts are distributing income, and the tax impact of those distributions. It’s important for trustees to get it right because if trust distributions are found to be invalid, the tax ramifications can be significant.