Sadly taxation is a major expense for most families and the businesses that they own. And a clear tax planning strategy is essential for anybody wanting to create an enduring legacy.
We have gone through a few strategies that we commonly use for the families, and the businesses they own, use.
Of course – there are a lot more we run through with our family business clients.
At the end of each year many financial sales people start promoting investments and the like under the guise of tax planning.
Immediately prior to the end of the financial year is a horrible time to invest. There is a frantic pressure for you to sign something straight away and you will either miss out on a cracker deal, or pay a fortune in tax, if you do not sign now.
Tax planning should be done by a person who is qualified to give tax advice and who is independent. If an investment advisor is discussing tax you should walk away. And if taxation is your primary driver to purchase an investment – the investment is a dud.
Of course – any strategy to accumulate wealth should be considered well in advance. And such a strategy should go beyond the business and consider all of the families wealth and how that impacts on each family member.
Making the most of your superannuation contributions has been a pretty simple, and effective, strategy for years. The tax benefits in this type of holding entity is incredible.
This year is more important as the government has changed the law for high balance funds.
The short answer is that superannuation is a great tax vehicle. The government are closing size of that tax opportunity in future years. So make sure you have contributed the most to take the best advantage you can.
Of course superannuation is not all about tax. And for many families superannuation is simply not on the cards. This might be because they are paying off the home mortgage or simply because the family wants a strategy using property and debt.
Whatever the driver: get independent advice. If your advisor is taking a slice of your investment it is difficult to get an answer you can trust.
A discretionary trust (family trust) is a complex legal relationship. And sadly every trust deed is different.
If you have a discretionary (or family) trust you must get the minutes completed before 30 June to make sure that the income and capital is distributed to family beneficiaries as intended. Sadly this cannot be done after 30 June.
And a yearly review of a discretionary trust is good business practice. If trust income is not distributed properly the cost to your family and your business can be 49.5% of the trust income.
Private company loan accounts
If your family has borrowed money from a private company you will have to pay it back. If you do not pay back the minimum amount the entire loan portion will become a taxable dividend to the shareholders.
Make sure you know how much your debt is to the company and how much you have to pay back before 30 June. If you do not have physical cash to put back into the company you could declare a dividend from the company and then offset the dividend against the loan account balance.
If your SMSF is paying you, or a family member, a pension you will have a minimum to pay before 30 June.
Make sure you pay it. If you are short the fund will stop it’s tax free environment and incur tax.
If you do not have enough cash talk to us. We might be able to transfer assets instead.
Know your company tax rate
Private company tax rates will fall to 27.5% if you turnover less than $10m in 2017. However if your turnover is under $25m in 2018 he company tax rate will be 27.5% (compared to the 30% now).
So the value of tax deductions is worth more now than they will in a month’s time
Think about retiring
If you are currently enjoying a transition to retirement pension from your SMSF it will be taxed from 1 July 2017. So if you are close to a full retirement it might be worthwhile to bring it forward and retire now.
We are seeing some families will generate less after tax income if they work than what they would earn if the parents continued to work.
Know your top marginal tax rate
The tax rate of 49.5% will fall to 47.5% on 1 July 2017. So the burden of taxation will fall by 4.2% next year (49.5/47.5).
So if you do want to prepay costs you will enjoy a permanent tax saving.
Pay staff superannuation
You have to pay the staff superannuation on 28 July; and it is not tax deductible until it the funds leave your bank account.
So pay all of your employees superannuation for the 2017 year on or before 30 June 2017.
Look at your turnover
If you operate your family business through a company you might become a large reporting entity. This means you have to show your accounts to the public at large.
One of the tests looks at the number of full time employees at 30 June. So careful monitoring of the staff numbers is important to know where you stand.
Value your trading stock
Many of our families who own businesses also operate a property development business. This could be either the main business or a side business for a member in the family.
Importantly – property developers (and others) have the option of valuing their development holdings at market value. And with the depressed Perth market the opportunity is to value their holdings at the market value on 30 June 2017. If the value of their development has fallen the fall in value can be claimed as a tax loss.
Commit to bonus payments
If you are paying bonuses to staff or to employee family members – make sure that the decision to pay the bonuses are firm.
If you make a resolution of directors to pay the bonus, or if your decision on the amount of the bonus is committed it becomes a tax deduction – even if it is not paid.
If you decide to pay a bonus in say, September, the bonus will be tax deductible next year.
And salaries paid to family employees who are children will be tax deductible in full to the business and assessed to the child as if they are an adult. Of course the wage will need to be commercial for the work done – but get the amount committed.
Manage capital gains
If you have generated a large capital profit you could look at other assets you hold. If some of your assets, especially shares, have lost value, you could look at selling the loss assets to reduce the capital gain you have already generated.
Manage cash flow
Cashflow is the lifeblood of your business and wealth strategy, taxation is one of the major determinants of your cash flow.
Having a clear understanding of your cash flow forecasts, including the taxation component of that forecast, is critical to managing a family owned business.
Tax planning for your family business doesn’t have to be a chore, get independent advice from our tax specialists today. Be prepared for 2017!