Poor tax planning for business could cost you dearly. While most of us don’t like to even think about tax, it’s something that doesn’t go away. Head in the sand doesn’t work unfortunately. I know, I’ve seen many a business owner try and fail.
So, what is tax planning?
Tax planning is the plan you put in place with your accountant that will help to minimise your tax obligations legally. The key word here is legally. There are many ways to lower income tax, but not all are legal and the wrong ones will get you in a lot of trouble.
Ways to lower your income tax legally.
- Contribute extra to your retirement through your super funds. Paying additional contributions to your super fund can be done pre tax. Meaning the payment is deducted from your salary before it is tax calculated. This reduces your taxable salary making your tax contribution less. The Government endorses this incentive as it’s in the best interest to have as many people self funded in retirement to lessen the burden on the country’s welfare budget.
- Keep a good record of your business expenses. As the owner of a business, there are claimable deductions that you can make that will lower your taxable income (link to claimable blog). These could include home office, vehicle if you have appointments and stationery needed to perform your day to day tasks. Not having a good record of your expenses in business could cost you money in your pocket.
Red flags the ATO look for in poorly planned tax accounts.
- Deductions and Income: Your deductions far out way the income you made.
- Mixing business and pleasure: Mixing your personal expenses with your business expenses is a big red flag and definite no no.
- Poor investments: Investments that show little to no return or a return on investment that is way into the future if at all.
- Complex financial arrangements: Having complex financial arrangements with no obvious commercial purpose. That is a small business having the complex financial arrangement to that of a large corporation, costing more in expenses than apparent commercial gain.
- Loans: Claiming a loan that may never actually need to be repaid. I.e. a friend gifts you money and you claim it as a loan that is never expected to be repaid.
A good accountant will set up your tax plan to ensure it not only lowers your tax bill, but falls within the ATO guidelines. No one likes to pay the tax department, so don’t risk having to pay them with interest and penalty fees as well!
If you think your tax plan is not quite right or you are worried you may have accidentally miscalculated, please call the ATO to seek clarification. They are there to help. Alternatively, please feel free to contact us and we can make an appointment to assess your tax plan and advise on your tax health.