Tax planning: More than compliance

Understandably, business owners often prioritise optimising profit, with less consideration and effort given to minimising and managing tax liability. However, every dollar of tax payable impacts the business's cash flow, so it’s worth carefully considering the options and finding ways to reduce your overall tax burden. The challenge in doing so is navigating the increasing complexity of Australian tax law, and expert advice is often needed.

Tax planning strategies should be more than a once-a-year activity. They should be part of an ongoing review process that also considers any legislative changes or requirements, your business’s financial position and structure, your strategy and aspirations, and more.

So, what does a best practice approach to tax planning involve, and how can small and medium enterprise (SME) owners work with their advisers to create effective strategies that go beyond compliance to minimise their tax liability? There are five key considerations you must address.

1. Stay on top of tax legislation and obligations

Effective tax planning isn’t a once-a-year activity when you submit your tax return; you should consider it a continuous cycle. Strategies must be maintained, reassessed and constantly monitored for changing circumstances, evolving tax legislation and compliance responsibilities.

If not fully understood and actively managed, tax obligations can result in additional costs or lost opportunities for businesses. Business owners must understand the impact tax legislation has on their business, its cash flow, its directors’ liabilities, and ultimately, on returns to owners.

Key areas SMEs should consider include:

Trust distributions, in particular, section 100A issues
Family remuneration through dividends or other income streams
Division 7A issues on shareholders’ loans
Capital gains tax, including potential CGT roll-overs and small business CGT concessions
Tax loss recoupment rules
Other small business concessions (e.g. full expensing of the cost of depreciating assets)
Tax governance, including process documentation
ATO areas of focus, including the Justified Tax program
PAYG instalments and Single Touch Payroll Reporting (STPR) requirements
Fringe benefits tax (FBT) and salary packaging
R&D Tax Incentive eligibility, if relevant
GST obligations and compliance
Transfer pricing and thin capitalisation rules (if the business has international involvements).

2. Understand your current position

A best practice approach to tax planning first requires a thorough review and understanding of your current position and future events, including but not limited to:

Business figures: Current budget and forecasts, expenditure and debt position
Current business structure
Future changes to business or family that may present planning opportunities
Current taxable position/liability
Strategic plan and future aspirations.

Having a clear picture of your business’s current ‘state of play’ will enable a holistic approach to tax planning and structuring – ultimately determining the strategies that could minimise your liability into the future.

3. Identify strategies to minimise your liability

The federal government realises that small businesses play an essential role as the ‘engine room’ of Australia’s economy and has measures in place to assist them. For example, a small business might be able to write off depreciating assets much sooner than a large company under temporary full expensing for depreciable assets and accelerated depreciation measures.

Other areas of focus for minimising tax liability include, but are not limited to:

Superannuation contributions: Including compulsory superannuation guarantee obligations and super concession eligibility
Consideration of cut-off expenses: Appropriately accrue costs related to the current income year and maximise deductions
Review of specific assets: Consider the recoverability and obsolescence of receivables and inventory
Trust distributions: Under tax law, trustees must make a resolution to distribute all trust income on or before 30 June each year. If not, the trustee will be taxed on any undistributed income at the highest marginal tax rate
CGT concessions for small business: If eligible, these four concessions allow you to disregard or defer some or all of a capital gain on an asset used in your business.

The approach to minimising your business’s tax liability must be optimised for the business structure. If a review of your current position shows your business structure isn’t the most tax-effective option for your business, it may be worth considering re-structuring to maximise your tax benefit.

4. Think about your business structure

Often, SME owners will ask how to create a structure that optimises their tax position early in the life of their business. The idea is to ‘future-proof’ with a strategy that works throughout the company’s life cycle and determine the best structure for a business’s tax positioning.

There are several key considerations, other than tax minimisation, to think about when ensuring the structure is fit for purpose:

Asset protection

Businesses often have valuable assets they want to protect. To accomplish this, many enterprises segregate assets into separate entities while structuring their business. That way, if something goes wrong, the owners can keep intellectual property (IP) and other valuables.

Future business aspirations

When structuring a business, it’s essential to plan ahead. This includes considering the possibility of future transactions, which could have significant implications for your structure. For example, if you use a unit trust to run your business in Australia, you can’t easily retain your profits within the structure to fund future growth. Ultimately, unit holders of the trust will incur the business's tax liability. This may be higher than the corporate tax rate and incur additional compliance costs in managing the reinvestment of profits into the trust. As such, you may consider restructuring your operating entity to help fund future growth.

Exit strategy

Planning your exit strategy is almost as important as starting the business itself. Having an exit strategy in place — whether it’s handing the business down to the next generation or setting up the structure for private equity, venture capital or IPO — often drives the best structure. With that in mind, you’ll want to think about when and how you might leave the business and how that transition might affect the company.

Number of unrelated parties involved

If unrelated parties are involved in owning a business, the choice of entity may be affected because certain entities may not be tax-effective. For example, using a discretionary trust to carry on a business owned by two unrelated families.

5. Consider the size of your business

Much like a business's structure, the best approach to taxation depends on the organisation's size. Early start-up businesses often operate at a loss, so tax isn’t always a priority. As businesses mature into larger, more profitable enterprises, managing cash flow and tax obligations quickly become top priorities.

For smaller businesses, working closely with your tax adviser is important. Not consulting with them when making decisions can often result in missing out on strategies that could save on taxes. Treat your external tax accountant like your business partner - as if you’re running the business with them. Whenever you do anything material, run it past them and ensure you’re taking the most tax-effective approach.

The ATO wants to see a tax governance structure for large corporations. This isn’t a practical step for SMEs, but it may be required later if the business grows much larger. For this reason, working closely with your tax accountant in the early stages of your business is essential to lay the foundation for sound and effective tax governance as it grows.

Planning for sustainability requirements

As already noted, consultation and planning with your business adviser should go beyond tax compliance to consider the changing regulatory environment and how it may impact your business. One area of increasing consideration for SMEs is sustainability reporting. With flow-on effects for their role in the supply chain, changing customer expectations, impacts on access to capital, and more, SMEs that embrace the sustainability journey and take the initiative with reporting will find their opportunities expand.

This article: What mandatory sustainability reporting means for small businesses from our sustainability team explains what mandatory sustainability reporting means for smaller businesses, and why you should get on the front foot.

When should you seek external help?

It’s best to speak with your tax adviser as you develop your business structure. This continuous process requires many touchpoints throughout your business's lifecycle, so starting as early as possible is critical.

Most businesses undertake formal tax planning between April and June each year. The exercise often includes estimating the group's tax liabilities for the year to assist with cash flow planning, distributing the income of any trust in a tax-effective manner that optimises the tax position of the whole group, and considering and implementing various tax strategies before the end of the year.