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Tax tips for women in business

27 April 2016

We’re in the final quarter of the financial year and with 30 June approaching tax considerations, no doubt, are starting to make their way to the forefront of your mind. Remember though that tax planning needs to be considered all the time, both when year-end is approaching and as a factor of any key decision in your business.

Tax is a significant cost in earning your income; you need to consider its impact on structure, acquisition, income and expenses.  It makes a difference.  Tax planning is complicated. Are you on a cash or accruals basis? Do you qualify for certain small business concessions or not? 

Legislation is complex and wide ranging in the way it affects your particular business. I want to focus on some basic concepts that will help you consider your business and your tax planning more broadly.

1. Consider the impact of tax thresholds and timing

The Australian tax system differentiates significantly between levels of income.  This means that there is an advantage to spreading income between different individuals or entities, where legally possible.  This should be Step One in your tax planning.

Step Two is to consider the implications of this not only in this year but in future years.  There is no gain in picking up the benefit of the differing tax thresholds for one year if it jeopardies your capacity to do this in future years.

How might this work?  Let’s look at a simple example, (while remembering this is a very complicated topic!).  Let’s say that you as a business owner personally need income of $240,000 over a three-year period. It might be a much better option tax wise for you to take $80,000 per annum for three years than the full amount of $240,000 in one year, as your tax rate will be much lower.

As an aside, if you’re in a company structure and paying company tax then you should have an income of at least $80,000 before you even consider leaving money within the company.  Why pay 30% in the company if you’re only paying 30% outside the company?

2. Plan for future years not just the current one

Keep up to date! Be aware of changing legislation, tax rates and tax thresholds. Changes in tax rates (or tax thresholds) from one year to another also need reviewing.

3. Don’t spend to generate tax deductions unless your business benefits

Now that we have thresholds and timing in perspective lets think about the other side of tax.  Tax is a payment based on your income minus your expenses. 

This means that for every expense (including depreciation or other deductible amounts) you reduce your income and then pay tax on the remaining balance. 

If your tax rate is 45% for example, then for every dollar you spend on business related expenses you will save 45c in tax due to that dollar spend.  Yes that’s correct.  The one-dollar item will still cost you 55c; and that is really the point I want to make. 

Don’t spend money on something purely because it generates a tax deduction. Spending your dollar to simply reduce your tax means you’ve effectively thrown the other 55 cents away.  You are still better having 55c in your pocket and paying 45c tax UNLESS you genuinely need the items for your business.

Plan to Do Your Tax Planning Early

Smart tax planning is not filling in a list of itemised expenses, collecting invoices and dockets, or simply ferreting out the best deductions for this year. It requires you to think carefully and strategically about your long-term business plans. Done properly, it should set your tax affairs in better order for future income years.

Speak to your accountant and business advisors about the best way to set up your business and your affairs. Their fees are tax deductible, and no-one knows both your business and the tax legislation better than they do. The earlier you think about it, the more benefits you can accrue for your business. Registered tax professionals are given more time to lodge as well, so if you are not expecting a refund, then this can be a handy extension to the payment deadline. 

Review the impacts of tax thresholds and timing.  Don’t get so caught up in saving money in the current year’s return that you fail to look at the implications for the future. Finally don’t be tempted to rush out and purchase products and services you don’t really need because you think you will prevent the taxman from getting your hard earned dollars. 

David Henderson

Consulting Professional. Business Coach, Trainer & Mentor

David Henderson Online: http://www.davidhendersononline.com

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