Tax Planning & Minimisation
Effective Tax Planning
Effective tax planning needs to not only make financial sense and be consistent with overall business objectives, it must be also not run foul of either specific or general anti-avoidance provisions of the tax legislation.
To be really successful tax planning should be an ongoing process, preferably starting at the beginning, rather than end, of a financial year. Not only should it focus on tax strategies but also on legal structures.
Finally, it is vital that tax planning take account of new and prospective tax legislation. Throughout the years there have been a number of major changes to the law, in addition to the almost weekly minor changes as well.
Getting your structure right
Tax planning should initially concentrate on your business structure – your main options are whether you operate as a sole trader, partnership, trust or company. All of these options produce different tax results.
The choice of structure will depend on a number of factors, particularly the characteristics and size of your business, however, tax implications will also pay an important role in your decision.
Effective planning needs to deal with a range of taxes including income tax, GST and FBT as well as any recent or proposed tax reform measure that may be relevant.
We will forecast your business profitability and tax obligation of the year, prior to the end of the financial year and provide you with a number of options to effectively and legally minimize any pending tax burden.
Sole trader Partnership
Whilst it may be simple and inexpensive to set up a business and run it as a sole trader, the profits will be taxed at your personal tax rate, which may be much higher than the current company tax rate. However, if the income being derived is personal services income (PSI), it may not be possible to access the company tax rate due to potential restrictions on retention of PSI in the company. Similar restrictions may also apply to the use of a company or other entity such as a trust or partnership to split PSI with, typically, other family members.
In the long term, however, the main disadvantages of operating as a sole trader relate to the inability to split business or investment income with other family members and the lack of opportunities for appropriate retirement and succession planning. The key non-tax issue to consider is that sole traders are not offered the benefits of limited liability that can be achieved by companies and certain trusts.
Whilst it is possible to set up a business as a partnership (e.g. with a spouse) to enable you to split the income and ease the tax burden, your personal tax rates may still be higher than the company rate. Partnerships also have other problems in that they lack flexibility and, as is the case with sole traders, they do not provide limited liability.
A trust might be a suitable vehicle in certain circumstances, for example, where the business is likely to produce high profits from low overheads. This is because trust beneficiaries cannot claim deductions for any tax losses incurred by the trust. The trustee of a discretionary trust can distribute income to nominated beneficiaries and is able, therefore, to reduce the tax burden by spreading it among family members.
There is also the option, if correctly treated, to distribute to a company beneficiary and pay the company tax rate and the distributed amount.
Finally, there is the option to use a company structure. Profits are currently taxed at either 30% or 27.5% (there is a proposal to reduce the company tax rate) but this is a flat rate and thus the usual benefits associated with the tax-free threshold and the lower marginal tax rates are forgone. It is essential, therefore, that the advantages available from dividend imputation can be fully utilised. Losses incurred by a company cannot be distributed to shareholders and a company may be less flexible than a trust and more costly to set up and administer.
In practice, it appears that an appropriate combination of company and trust structures may be the best way to maximize both tax and non-tax advantages. In making your final decision you should consider the nature of the business and any pending tax changes.