It is inevitable that every owner of a family business will consider tax reduction strategies. In effect every dollar saved from a tax reduction strategy will give the business another dollar to work with – to invest in working capital, branding, OH & S system or to reward staff for their hard work.
However the tax reduction strategy for business owners is not the same across every type of business. Business accountants across Perth will have to consider the legal entity operating the business, the size of the business, the ownership model, commercial issues and also future expansion plans and possible tax issues associated with international expansion if that is on the cards.
How to save money and reduce taxes
It is important to note that every dollar spent in the business does not reduce your tax liability by a dollar. With the company tax rate ranging from 25% to 30% the reduction in your tax liability is only a partial offset at best. And while the reduction in your tax liability for other structures (like a sole trader or a discretionary trust) might generate a higher tax offset ranging upto 47% you still do not get a complete offset.
So spending money for no purpose to reduce taxes will not achieve a higher level of business wealth or family wealth.
Be careful on what you spend your money on
If you are spending money as a business owner – not every dollar spent in the business will give you a tax deduction. From an income tax perspective you can only enjoy a tax deduction (and a reduction in your tax liability) if you spend money in the business when it is necessarily incurred in the course of carrying on a business for the purpose of gaining or producing assessable income.
Some government grants deny tax deductions
So, if your business is generating income that is not assessable income you will not enjoy a tax deduction for it. For example – if you spend money to increase government grant money that is not assessable and not exempt income – that expenditure is not a tax deduction.
Some capital payments miss out on tax deductions
Likewise the payments of money within a business that has a capital purpose is also not a tax deduction. So if you are buying land and you spend more money on lawyers as part of the due diligence on the land – the legal fees paid to the lawyers will not generate you a tax deduction and will not reduce your tax liability.
The flip side of the above transaction is that the money spent now will become part of the purchase price of the capital asset (land). So when you ultimately sell the capital asset (land) later on you might enjoy a reduction in the taxable profit then.
Some payments are denied tax deductions
While no business will enjoy being fined from the government (including late super fines): the extra edge is that the payment of fines will not generate tax deductions for the business. And if you are paying fines incurred by your team (like a speeding fine) you will likely incur fringe benefits tax on the fine because you are effectively paying a private expense incurred by your team member.
Likewise if you pay bribes to government officials the payment of the bribe is denied a tax deduction.
Entertainment is not tax deduction
The provision of entertainment to your team for most small and medium sized businesses is not a tax deduction. This is due to the minor and infrequent exemption which means that fringe benefits tax does not apply to them entertainment paid so the item then is expressly excluded from becoming a tax deduction.
If fringe benefits tax applies to the entertainment then the underlying entertainment payment will enjoy a tax deduction. The net effect though (if you add the cost of fringe benefits tax and the tax benefit of entertainment as a tax deduction) is that the cost is higher.
Your tax structure is important
If you operate through a company your tax rate can vary from 25% to 30%. And difference in the tax rate on a business with $500k in profit can generate a tax saving of $25,000.
So understanding the tax structuring benefits of a company and the tax tests on a company enjoying a lower tax rate (as a base rate entity) can make a significant difference.
To be a base rate entity for tax purposes your company needs to generate a turnover of less than $50m and the passive income cannot be more than 4 times the companies assessable income.
So if a company had a turnover of $1m in sales the interest income from the company could not be $4m or more. If say, the interest income of the company was $3m the entire net taxable income of the company would be taxed a the lower company tax rate of 25%.
How can I reduce my net income in a year
If you are a business owner you will pay tax on your sales when you have a recoverable debt against the client/customer.
So for many business owners they will pay income tax on sales when they have not yet received the cash. And this can be different for goods and services tax for the same business owner – they only pay GST when they get paid and they pay income tax before they get paid.
If your business is generating rental income the tax outcome is different. Rental income is only taxed to a business generally when it is paid. So, you can reduce your taxable net income in a year by removing, for tax purposes, unpaid rental income. This can be the case even when your business shows the unpaid rental income as profits.
Likewise some businesses do not have a legally recoverable debt against their client even though they have raised a tax invoice. In effect the tax invoice becomes an invitation for the client to engage with them again (like an insurance broker) so you could properly reduce your taxable income by identifying when you have derived your taxable income and the proper basis of returning your income.
Conclusion
Getting a deduction on your taxes is important for every business owner across Perth. And the proper tax planning and business tax service is incredibly important to achieve this outcome.
Given the complexity of tax and modern business the benefit of enjoying a deduction on your taxes must be considered with a range of conflicting factors including complexity, asset protection, family succession, business wealth planning, indirect taxes and general commercial issues.
As Westcourt we are a business tax service with a single market, entrepreneurial business experience, proven technical tax leadership and a network to allow you to branch offshore so we are a natural choice for founder led family owned businesses – so why not give us a call?
