by Paul Jenkin
As most business owners are aware the amount of tax we pay to the government each year is getting out of control. Sometimes it seems that not only are we working for ourselves we are also working for the government.
There are however some simple things that we can do each year to legally minimise the amount of tax we pay.
1. Have the Correct Business Structure.
Having the ability to split your income is without doubt the best way to minimise tax. By working a family trust into your structure you have the ability to split income as long as you are earning genuine business or investment income. A family trust gives you the ability to have tax paid at the tax rates of the beneficiaries of your trust. Normally the beneficiaries of a trust would be a husband and wife as well as their children, although certain other family members can also be beneficiaries. The benefit is that the profit can be directed to those beneficiaries with the lowest income. This can save thousands of dollars in payments to the tax man each year.
For example, a business owner earning 150k per year as a sole trader would pay tax of about 56k per year. If he/she had a spouse and two children over 18 not earning any income, this figure could be reduced to 30k per year.
Many business owners choose to have a company as part of their structure. The benefit of a company is that if you would normally be in a higher tax bracket you can pay tax at a maximum rate of 30%. It should be noted however that this only applies as long as you are leaving those profits in the company and not personally drawing down on them.
With the abolition of the superannuation surcharge as of this financial year, salary sacrificing money into superannuation is now one of the most popular ways to reduce tax, particularly for those in the top tax bracket. If you are in the top tax bracket and put money into superannuation you will be able to claim a tax deduction at 48.5 cents in the dollar, whilst the money you put into superannuation is taxed at 15 cents in the dollar. Remember when you do take money out of superannuation it will be taxed. In general though it will be taxed at concessional rates. Overall, contributing extra money into superannuation can be a tax effective strategy, but should always be done after seeking the appropriate financial planning advice.
3. Overtime Meal Allowance.
Many business owners are unaware that when they are paying themselves a wage they may be entitled to receive an overtime meal allowance (depending on the award they are covered by) of $21.10 per day. In effect this means that for every day a tax payer works overtime you can receive up to $21.10 tax free.
4. Timing of Income & Dividends.
With the tax brackets creeping out each year, (in particular the top tax bracket) delaying the derivation of income can provide a small tax saving strategy. For instance, delaying the payment of dividends to yourself or invoices issued to clients from late June to early July could be the difference between paying tax in a higher bracket one year compared to a lower bracket the next year.
5. Negative Gearing.
With the introduction of the 50% capital gains discount some years ago, negative gearing has become an effective way to minimise taxation with the most popular negatively geared investments being rental properties or shares. Negative gearing occurs when the expenses associated with an investment (normally interest) are more than the income generated. The resulting loss is tax deductible, thus reducing tax payable. Investments should never be viewed as just a tax saving as there is no point spending a dollar to get fifty cents back. The main focus of these investments should be for the capital growth as the tax saving comes when only 50% of the capital gain is taxable, whilst 100% of the losses are deductible.
The above list is not comprehensive and whether some or all of the above can be used for you will depend on your individual circumstances. Before implementing any of the above strategies or any other strategies you should ensure that you seek appropriate advice from a tax professional.
Paul Jenkin is a Partner at Adresen-McCarthy