How do you reduce business tax
- Thread starter DexV2
- Start date
If you are aiming to use company profits to reduce tax liability (spending $1 to save 30c), then you have to be smart about how the money is being spent, so you dont fall into the trap of 'saving tax'.
Ask yourself, how does a new car benefit the company? Will the car draw you in income (ie - charge the car out in jobs), or will it save you 30c/$1 and cost you further in interest/registration/insurance/maintenance etc? Thats the trap.
If you have excess funds to use in the company, and want to benefit yourself, first thing would be to up your Superannuation to $25,000. If your taxable income is rather low, then you could pay yourself some franked dividends if that cash is retained from year past.
I also think advertising is a wise spend. Whilst it is a deductable expense, it also draws you in potential new customers which means it is not a wasted 30c/$1, as it potentially can draw much more then the $1 spent in increased revenue.
Another is to forward purchase any consumables or items of equipment you use always so you are reducing your tax liability, but also benefit of the items purchased which you are going to use regularly anyway.
These are a few, Im sure there are plenty of other ideas floating around from the likes of accountants and larger business people.
pinkboy
Ask yourself, how does a new car benefit the company? Will the car draw you in income (ie - charge the car out in jobs), or will it save you 30c/$1 and cost you further in interest/registration/insurance/maintenance etc? Thats the trap.
If you have excess funds to use in the company, and want to benefit yourself, first thing would be to up your Superannuation to $25,000. If your taxable income is rather low, then you could pay yourself some franked dividends if that cash is retained from year past.
I also think advertising is a wise spend. Whilst it is a deductable expense, it also draws you in potential new customers which means it is not a wasted 30c/$1, as it potentially can draw much more then the $1 spent in increased revenue.
Another is to forward purchase any consumables or items of equipment you use always so you are reducing your tax liability, but also benefit of the items purchased which you are going to use regularly anyway.
These are a few, Im sure there are plenty of other ideas floating around from the likes of accountants and larger business people.
pinkboy
Totally agree with Pinkboy.
Is your business in a company structure or is it just a sole-trader setup? That changes a bit. if you are in a sole trade or partnership structure and paying more than 30% tax, look at converting to a company to reduce to 30%
Personally I LOVE paying business tax ..it means you are making a decent profit
. Believe me, when you have a few years of not paying tax (because you have not earned enough) you will be mighty stressed and questioning is the business worth it.
Is your business in a company structure or is it just a sole-trader setup? That changes a bit. if you are in a sole trade or partnership structure and paying more than 30% tax, look at converting to a company to reduce to 30%
Personally I LOVE paying business tax ..it means you are making a decent profit
. Believe me, when you have a few years of not paying tax (because you have not earned enough) you will be mighty stressed and questioning is the business worth it.
Look forward to hear what your accountant says, he/she might come up with something creative?
This is really Accounting 101....The question I'm often asked. However it has a vague answer.
Unless you propose anything illegal, addressing tax is really a matter of subjective thought. Are you seeking to reduce tax as you consider you are paying too much tax or is it just a goal...If so perhaps you need to understand if you are presently overpaying tax or perhaps your expectations are incorrect. Paying tax on profit is a indicator of success rather than a problem. No business ever went broke making a profit.
That said, the strategies available would fall into broad classes:
1. Avoidance. (Enough said)
2. Minimisation through increasing deductions. Buying your way out of a profit. Often these strategies come with onerous substantiation issues and FBT consequences. Other strategies identify under utilised deductions and seek to maximise benefits for minimal outlay. eg : Accelerated depreciation.
3. Deferring income (often difficult)
One of the strategies may involve review of operations and identifying cost excess. For example excess staff that can be converted into contractors. An example - A civil contracting company reducing employees and outsourcing more projects to contractors for an agreed fixed price.
I'm always wary of spending more to pay less tax. Outlaying $1,000 per month for a leased car to save $1,000pa in tax may be a poor choice. Spending $1,000pm for a new excavator that can avoid you renting one at a cost of $40,000pa a better decision perhaps ? I would rather be in the position of having an outrageous profit and paying more tax in an effective way than seeking ways to pay zero tax.
Having a good external advisor to discuss strategies is a must. If they have a good understanding of your business its likely a range of strategies can be implemented. One strategy will be limited effect. Instead make 10 smaller changes. Part cost saving, partly identifying where to invest for maximum return, identifying changes and them managing each one to ensure outcomes occur.
Unless you propose anything illegal, addressing tax is really a matter of subjective thought. Are you seeking to reduce tax as you consider you are paying too much tax or is it just a goal...If so perhaps you need to understand if you are presently overpaying tax or perhaps your expectations are incorrect. Paying tax on profit is a indicator of success rather than a problem. No business ever went broke making a profit.
That said, the strategies available would fall into broad classes:
1. Avoidance. (Enough said)
2. Minimisation through increasing deductions. Buying your way out of a profit. Often these strategies come with onerous substantiation issues and FBT consequences. Other strategies identify under utilised deductions and seek to maximise benefits for minimal outlay. eg : Accelerated depreciation.
3. Deferring income (often difficult)
One of the strategies may involve review of operations and identifying cost excess. For example excess staff that can be converted into contractors. An example - A civil contracting company reducing employees and outsourcing more projects to contractors for an agreed fixed price.
I'm always wary of spending more to pay less tax. Outlaying $1,000 per month for a leased car to save $1,000pa in tax may be a poor choice. Spending $1,000pm for a new excavator that can avoid you renting one at a cost of $40,000pa a better decision perhaps ? I would rather be in the position of having an outrageous profit and paying more tax in an effective way than seeking ways to pay zero tax.
Having a good external advisor to discuss strategies is a must. If they have a good understanding of your business its likely a range of strategies can be implemented. One strategy will be limited effect. Instead make 10 smaller changes. Part cost saving, partly identifying where to invest for maximum return, identifying changes and them managing each one to ensure outcomes occur.
Is the car going to be subject to FBT?, who will be paying for it? (utes are fbt exempt generally).
As pointed out by Paul there are other more effective ways of saving 30 cents.
For those seeking to reduce tax I will offer a simple and proven strategy.
I will invoice for tax advice $10K - $100K or whatever you wish. You get a $10K- $100K deduction. In return I will provide proven comprehensive tax advice on how to pay less tax.
...Pinkboys post is a good one. If you want to save tax perhaps look at areas where you can productively invest the $$$ so that future income growth is stimulated. Use leverage. Spending $1 to make $10.
- Employ a key person
- Advertising / marketing
- Invest in your wish list
- Payout a debt
Another key factor I often see small business avoid is to bank your surplus cash. Don't allow liquidity to sit in the bank and wait for an expense. Take it out and bank it in a fund for a bigger project or a stormy day. Operate lean. I bought a warehouse doing that. The Man Director was stunned when he sought ways to buy it. I told him we had the cash. Happiest man ever when he found he had $2m to spend.
I have never been a fan of throwing $$$ into financed cars as an example. Its a lot of cash for an asset you will never own. It makes money when its on the road but unless you are paid to drive and make money on the road (sales, service industry etc) its a cash burn. Even worse as cars sitting in a company car park. Fine if the liquidity is abundant but I always argue if the money could be better invested in either plant or people. That said I also ran the finance side of a large civil construction company and fought costs by disposal of redundant plant and surplus people so the organisation was lean and cost efficient to compete with any competitor. Cost competitiveness is a competitive advantage many companies don't pursue hard enough.
I will invoice for tax advice $10K - $100K or whatever you wish. You get a $10K- $100K deduction. In return I will provide proven comprehensive tax advice on how to pay less tax.
...Pinkboys post is a good one. If you want to save tax perhaps look at areas where you can productively invest the $$$ so that future income growth is stimulated. Use leverage. Spending $1 to make $10.
- Employ a key person
- Advertising / marketing
- Invest in your wish list
- Payout a debt
Another key factor I often see small business avoid is to bank your surplus cash. Don't allow liquidity to sit in the bank and wait for an expense. Take it out and bank it in a fund for a bigger project or a stormy day. Operate lean. I bought a warehouse doing that. The Man Director was stunned when he sought ways to buy it. I told him we had the cash. Happiest man ever when he found he had $2m to spend.
I have never been a fan of throwing $$$ into financed cars as an example. Its a lot of cash for an asset you will never own. It makes money when its on the road but unless you are paid to drive and make money on the road (sales, service industry etc) its a cash burn. Even worse as cars sitting in a company car park. Fine if the liquidity is abundant but I always argue if the money could be better invested in either plant or people. That said I also ran the finance side of a large civil construction company and fought costs by disposal of redundant plant and surplus people so the organisation was lean and cost efficient to compete with any competitor. Cost competitiveness is a competitive advantage many companies don't pursue hard enough.
Basic ideas around saving tax.
1. Claim everything you can legally and legitimately claim.
2. Divert income where possible and legal to family members on lower incomes.
3. Time incurring of income where possible to maximise tax benefits.
4. Utilise the tax haven to superannuation, incorporate family into the planning.
1. Claim everything you can legally and legitimately claim.
2. Divert income where possible and legal to family members on lower incomes.
3. Time incurring of income where possible to maximise tax benefits.
4. Utilise the tax haven to superannuation, incorporate family into the planning.
Great ideas guys! Thank you for the great insights and some really good points I have not thought about before.
As for the car it most like would be FBT, but could someone explain why/how that would change things?
As the moment my taxable income is quite low but I am a planner so I thought it would be worth educating myself in possible options if in the future I do have a larger taxable income value. Superannuation and consumables I can see applying to my current situation at the moment.
Could anyone link me to where I could find information of what consumables/equipment that may be tax deductible?
Keep the ideas coming!
As for the car it most like would be FBT, but could someone explain why/how that would change things?
As the moment my taxable income is quite low but I am a planner so I thought it would be worth educating myself in possible options if in the future I do have a larger taxable income value. Superannuation and consumables I can see applying to my current situation at the moment.
Could anyone link me to where I could find information of what consumables/equipment that may be tax deductible?
Keep the ideas coming!
Ok one of the scams is putting other relos on the books, ie. Wife. Pay her a salary and she can also salary sacrifice a pile into super (if she doesn't already work then this last bit is of particular benefit) You'd need to work out if this is worth the risk/hassle.
Importantly, if you have the ownership structure right, ie. Discretionary trust then you distribute franked dividends anyway.
Beyond that, best to focus on growing the pie, not on getting a little bigger piece of that pie through rorts.
Importantly, if you have the ownership structure right, ie. Discretionary trust then you distribute franked dividends anyway.
Beyond that, best to focus on growing the pie, not on getting a little bigger piece of that pie through rorts.
This is what I would advise also.
Be smart with reinvesting your profits so you can grow exponentially, whether within or outside of your existing business.
