Tax payable on business profits

[gooram]

Hi all,

I have a question related to profits earned through our business this year.

I know I should talk to an accountant about it, but I figured I'd put it out here first.

Let's say our business turns a profit of $200k for example.
Now we want to leave a portion in the business and return a portion to shareholders (all 2 of them).
I assume regardless of what is done with the profits, the 30% business tax applies to the whole 200k?
What if we decided, rather than paying out to shareholders, to put this money into employee super funds (all 2 of them) in lump sum payments.
Is the entire amount still subject to business tax before the lump sum payments are made?

Ok, next question, lets say we pay the tax on the whole amount, and we are left with 140k in after tax profit. 100k is left in the business and each shareholder receives a dividend of 20k. Is this 20k now subject to income tax for each shareholder when they submit their personal tax returns?

Thanks for anyone with the answers to these most pertinent questions for us.

Gooram

 

[Pushka]

If your company made a profit of $200K then it will be taxed at 30% (your accountant will do any adjustments for depreciation etc etc). If you draw an amount of say $20,000 then this will be put to your personal Income tax bill, and the company profit reduced by an equivalent amount. You draw dividends with imputation when the company has paid tax from previous years; you have to put the amount of the dividend into your tax return as income, but the imputation credit is then applied as tax already paid (30%). So depending on your income, you may need to pay additional tax, or not!

If you put this $200 k into your Super, it means that the company profit is zero, no tax payable by the company (but your money will be locked away!)

At least, that's my understanding.

 

[gooram]

If your company made a profit of $200K then it will be taxed at 30% (your accountant will do any adjustments for depreciation etc etc). If you draw an amount of say $20,000 then this will be put to your personal Income tax bill, and the company profit reduced by an equivalent amount. You draw dividends with imputation when the company has paid tax from previous years; you have to put the amount of the dividend into your tax return as income, but the imputation credit is then applied as tax already paid (30%). So depending on your income, you may need to pay additional tax, or not!

If you put this $200 k into your Super, it means that the company profit is zero, no tax payable by the company (but your money will be locked away!)

At least, that's my understanding.

Thanks Pushka, that's brilliant!

 

[Pushka]

I should add, there may be some limits on how much you can contribute by Salary sacrifice - we have never been in that fortunate position of contributing too much!

 

[hb1]

well done gooram for a successful year
but aren't you leaving your tax planning just a little late with just over a week to sort it out?
normally I'd be planning about May.............

pushka, the limits for super contribution are.........
under 35...$15,260
35-49...$42,385
50-70....$105,113
after july 1st...a flat $50k

so gooram, if your over 50 dump $200k ($100k for each director) into super , superfund pays 15% tax
your company pay 0% tax....easy

lots of other ideas, but just a bit late now.............

 

[handyandy]

I should add, there may be some limits on how much you can contribute by Salary sacrifice - we have never been in that fortunate position of contributing too much!

It would appear the the contribution limit is now $50k regardless of age

http://www.ato.gov.au/super/content...&page=2&H2=&pc=&mnu=26958&mfp=001/007&st=&cy=

In previous years this was based on age of the employee

http://www.ato.gov.au/super/content...age=16&H16=&pc=&mnu=26958&mfp=001/007&st=&cy=

So based on the $50k limit the maximum you can reduce the profit by the $100k.

As already discussed on the remaining $100k the company tax would then be $30k and when you declare a dividend of $35k for each share holder this dividend will have an imputation of 30%.

So in reality the dividend is really worth $50k before your marginal tax is applied.

Cheers

 

[Pushka]

I think they were talking about the current year. in which case, they can dump the whole lot into Super if they are over 50. Nice timing if you are! This year is the Year of putting 1 million into Super, so maybe those age limits dont even apply for this year only?

 

[gooram]

well done gooram for a successful year
but aren't you leaving your tax planning just a little late with just over a week to sort it out?
normally I'd be planning about May.............

pushka, the limits for super contribution are.........
under 35...$15,260
35-49...$42,385
50-70....$105,113
after july 1st...a flat $50k

so gooram, if your over 50 dump $200k ($100k for each director) into super , superfund pays 15% tax
your company pay 0% tax....easy

lots of other ideas, but just a bit late now.............

Hi hb1,

Yes indeed we are leaving it too late... this is our first year of trading so it's just got away from us.

One of us would be in the under 30 bracket and the other in the 35-49 bracket. So the partner (the old geezer ) wants to go the super route, but as you can imagine I'm not too keen to lock it away for 30 years.

I'd love to hear your other ideas, for future reference.

Thanks,
Gooram

 

[Mry]

It is hard to tell people what to do with their business profits when they run a company. Sometimes it depends on investment goals, balance sheet positions, franking account balance and your future intentions. Some people like super, others find it too restrictive to their circumstances.

For example, lets say the company is run by two 20 somethings who want to buy IPs in their own name. They should plan on having their taxable incomes each around the 75k mark (via a combination of dividends and/or salary - preferrably salary) since that is the threshold between the 30% tax rate in their own names and the 40% tax rate. And since their marginal tax rate under $75k is 31.5%, and the company's is 30% for each dollar, they are better of paying themselves up to that point so they can access the cash in the company for investing purposes or for personal use without Div 7a problems. Now the 75k includes consideration for negative gearing purposes (eg if their negative gearing losses are likely to be $10k, they should give themselves an assessable income amount out of the company of $85k).

If they were smart when they set up the company, they should have a discretionary trust owning the shares so that if they did pay dividends, they can distribute them as they see fit to lower income holders (of course with consideration to the PSB views of the ATO). After that you look at prepayments of expenditure, planning opportunities, etc. The company could even prepay some of the IP investors expenditure under the otherwise deductible rules where possible. After that, they could invest in super or just pay the tax bill.

If they were approaching retirement, I would consider super but I would also make sure that they paid people up to the 25k mark to take advantage of the 15% tax rate in people's own names before dumping the funds into super and paying 15% on the contribution made to it there.

Of course there could be other problems that you can look at but that gives a basic guide.

Here are a few excerpts from an article I wrote on end of year tax breaks, edited to remove the bad accounting jokes. Hopefully it might help and sorry for the length.

When someone asks me if they should buy a new car to get more tax breaks, I ask them "Do you need a new car?" If the answer is no, I'd tell them not to bother. Will their tax deductions go up if they do buy a new car? Yes they will. Then why would I, an accountant, tell people to not purchase a new car if their refund would go up?

The answer is simple - the goal of an educated business person and investor is not to maximise tax deductions, it is to have the most amount of cash at the bank to either use or invest with. Tax deductions are merely a tool to that end. If you want to spend $10,000 to get an additional $3,000 refund and that $10,000 is not something you actually need, you just lost $7,000. Whereas if you kept the $10,000 and paid $3,000 tax on it, you would only lose $3,000. What would you rather lose - $3,000 or $7,000?

The point is, don't go silly spending money to get tax breaks if you don't need what you are purchasing......

We go through a 3 step process to maximise tax breaks. Everyone should run through this regularly to improve their tax position.

1. Identify

This step is simple - you are likely spending money on items right now that are deductible but you are not claiming them as tax deductions.

Two weeks ago I had a client come in who was concerned about their tax bill. Their business was booming but little attention had been paid to their looming tax bill. In about 30 minutes, we had discovered an extra $7,000 in deductions from things they were spending money on but were not claiming. Staff lunches at the office, shared office space at home, claims for private vehicles used for travel, travel allowances, etc.

Last week I had an appointment with a new client and we found an extra $2,500 on her refund by me asking questions about what she does in a great amount of detail. Half of that money comes from large medical expenses that she can claim under the medical expenses offset.

Expenses regularly overlooked by investors are travel, depreciation, computer usage, internet and stationary.

2. Plan

This is where you plan out purchasing items or making changes to get more tax breaks.

Laptops, mobile phones, travel allowances, buying motor vehicles under a lease and prepaying it for 12 months, looking for items below $1,000 under the STS system, eating lunches at the office, splitting up bills to dedicate a certain percentage to a home office or for business expenses, etc......

By making a few changes, or becoming aware of the way tax works with certain expenses, you can reduce your tax exposure.

3. Outside the box

This is where the creative thought process goes into overdrive. If we have a business where we have squeezed it for every tax deduction possible it is time to look outside the business for tax breaks. This is where we look at things like negative gearing or salary sacrificing to super. We can even consider restructuring into say a discretionary trust so we can distribute profits to low income individuals or setting up companies to cap your tax rate.

For example, if your business makes over $150,000 a year, perhaps purchasing some rental properties might assist you to not only reduce your tax, but increase your nest egg or future passive earnings. We could combine that profits from your business with the current losses from negative gearing. Or we could look at using superannuation to prop you up.

 

[Pushka]

As we run a business, we have left most of the profit in the Business and paid taxes, rather than simply put it into Super or looked for tax deductions simply to reduce the Company tax bill. As a business that pays salaries, rents, telephone bills etc it means we never have to worry about cash flow, and never have to go into overdraft. It also means that in later years we pay ourselves fully franked dividends.

One thing you might need to watch out for if you do that, is that the ATO then assumes you will make that much profit every year, and your next BAS will make you pre-pay their predetermined amount of tax, based on the last year's tax return, if you forget to vary it! I forgot to vary it (reduce it) with the BAS2 statement so they sent me an acount with Interest payable, on a profit amount we were not going to achieve this year! That was in February, and only this week has it all been sorted out after numerous phonecalls to them!

Only the Tax Office can charge interest on an estimate of future liability!

 

[Mry]

As we run a business, we have left most of the profit in the Business and paid taxes, rather than simply put it into Super or looked for tax deductions simply to reduce the Company tax bill. As a business that pays salaries, rents, telephone bills etc it means we never have to worry about cash flow, and never have to go into overdraft. It also means that in later years we pay ourselves fully franked dividends.

I would hope though that you are maximising your own personal tax rates by paying yourselves to the point that you do make full use of your 30% marginal rate where possible. Its nice to have money in the company, but it is also nice to be able to fund IP deposits in other entities, pay off debt and/or use it for personal reasons. There's nothing wrong with returning the money to the company once you declare it as income as you can take it out later without Div 7A loan agreements.

 

[gooram]

We certainly want to be conservative with the amount that we take out of the business.
At the moment I guess we are 'cramming' to see what our options are at this point.

Another question I have is:
To purchase the business each partner contributed 30k of their own cash. Our accountant told us we can take this out of company profits, essentially tax free. I.e. without paying company tax and without paying personal tax (this bit makes sense since we have already paid tax on this hard-earned dough). Is this correct?

Thanks for all your feedback, it's been really helpful.

 

[Mry]

Yes, because you loan it to the company, and then you draw it back out later as the company repays the loan. Loan repayments are not deductible or assessable.

However, if the loan repayments are made out of company profits, there will still be tax to pay.

 

[Petal]

Help 5 Days To Go!!!!!!!!!!!!!!!!!!!!!

I am reading this tread with much interest as we are 5 working days from the end of financial year and our company will be making a profit of roughly $300,000 which is something completly new for us.

I sent our accountants an email a few weeks ago asking whether we should be putting a large sum of money in hubbys super fund (as he is 60) and we will be retiring soon. I did not receive an answer back so thought it wasn't really feasible as we would have to pay personal tax on it so there must not be any benefit.

Well reading these posts it seems that is exactly what we should be doing and quick smart.

It is just a simple matter of writing out a chq to hubbys current super fund?

Also if we want to pay ourselves a directors fee should we be doing it before 30 June or can that be sorted out later when the profit is worked out by the accountants??

As we are talking about a large amount of money here your responses are very very much appreciated.

Thanks
Petal

 

[Pushka]

Wow, yep, if you dont need the money pop it into Super, but you need to make sure the cheque is actually cleared to the super account by June 30,so it needs to go in a couple of days earlier than that. It is as simple as writing out the cheque and banking it. It is then 'salary sacrifice'. We have done it every year we have made a profit, not as nice as yours though! What about your Super Fund too?

When it is salary sacrifice, you dont pay either personal or company tax on the amount you put it. Your Super Fund will pay 15% tax on it as a contribution. But your Super Fund will take care of that.

I think the Directors fees need to also come out by June 30 too? And then put to your personal tax returns but that I am not too sure about.

 

[Welcome]

Excellent thread Mry + Others.

All our companies money is not easily accessible in a week...... is it possible for me to loan the company $40k and then draw it straight back out again as a dividend and then when the company has spare money (when RINKER pays out! ) take the $40k loan back? Or is it possible to record the dividend for the FY but then take the money out next FY?

Cheers

 

[Petal]

Wow, yep, if you dont need the money pop it into Super, but you need to make sure the cheque is actually cleared to the super account by June 30,so it needs to go in a couple of days earlier than that. It is as simple as writing out the cheque and banking it. It is then 'salary sacrifice'. We have done it every year we have made a profit, not as nice as yours though! What about your Super Fund too?

When it is salary sacrifice, you dont pay either personal or company tax on the amount you put it. Your Super Fund will pay 15% tax on it as a contribution. But your Super Fund will take care of that.

I think the Directors fees need to also come out by June 30 too? And then put to your personal tax returns but that I am not too sure about.

Thanks so much for that advice Pushka. Mine is Comm Govt and won't accept money willey nilley but that is ok as I am quite a bit younger than hubby so best to go into his so we can get it back out again.

I will be pounding on my accountants doors first thing monday to get this sorted out!!!

 

[Mry]

Petal, none of us replace your accountant but in most circumstances I would be looking at large super contributions unless you have something better to do with the money. Plus when your husband retires the money comes back tax free.

 

[Petal]

Thanks Mry, just been musing over these posts and am wondering why small companies like ours don't do this every year just to minimize their profits. Is it because there were limits on how much could be placed in super (and will be again after 01 July). It just seems too good to be true in a way that we can funnel our potential profits into super

Any thoughts on this will be much valued.

 

[gooram]

Thanks Mry, just been musing over these posts and am wondering why small companies like ours don't do this every year just to minimize their profits. Is it because there were limits on how much could be placed in super (and will be again after 01 July). It just seems too good to be true in a way that we can funnel our potential profits into super

Any thoughts on this will be much valued.

Hi Petal,

We've decided not to put our profits into super, our business partner who is 48 is going to put a small portion into super and take the rest as dividends.

The main reason for us is that we are only 30ish so locking this money away for 30 years doesn't really help us get to where we want to be.

But we are both keen to expand our portfolios and perhaps in a few years explore further business ideas. We choose to invest in our future ourselves, rather than rely on the super funds.
Having said that, if we were approaching 60 we would be putting the lot into super I would say.

Anyway, sounds like you had a great year, well done!