The end of financial year is a great time for family business accountants and tax advisors. Families and businesses across Perth are normally calling their accounting taxation and business advisors for any last minute strategies coming up to 30 June.
Your trust distribution minute is important
Many accountants have created a discretionary trust. And these trusts will have a deed that stipulate how the trust should operate. So if you operate a discretionary trust your trust deed normally indicates that the trustee is required to determine how the profit will be allocate before the financial year ends.
If your trust distribution resolution is not done either on or before 30 June 2018 your trust will not be able to allocate the profits out of the trust.
Sadly, if the trustee does not resolve to allocate the profits out of the trust the trust will retain those profits. And the net result is that the trust will incur tax at the rate of 47%.
The Smith Trust earns $40k. And the three adult beneficiaries of the trust want the profits to be allocated evenly. As no beneficiary earns any other income no tax is payable.
Sadly the trustee of The Smith Trust makes a decision to allocate the profits of the trust on 7 July 2018. So the trust now incurs a tax liability of $18,800.
This effect will apply if you are based in Perth or regional Australia. There is no recognition for remote areas.
So the simple act of getting the trust distribution minute done on time can save your trust (even a low profits trust) a small fortune.
And yes the Tax Office have asked us to show copies of the distribution resolution when they have done an audit. And, as part of the process, we were asked if the resolution was prepared by us before or after 30 June.
Take care in getting the trust resolution correct
If you prepare a resolution we recommend you do so with advice. Importantly every trust deed is different. Different lawyers have written different version of a “standard” discretionary trust and care must be taken to ensure that the distribution of income is achieved through the distribution resolution.
Further, taxation law is always changing so the desire to simply “copy” last year is fraught with danger.
So professional advice from a Chartered Accountant is critical to ensure that the trustee resolution are properly effected.
Backdating a distribution minute
In the “good old days” the Tax Office gave everybody two months after 30 June to get their minutes tidied up and documented. This approach flew in the face of general trust law but was taken up by the advice profession so that everybody could achieve an optimal outcome.
Sadly that has changed in recent years. To be effective for taxation and trust law The 2018 trust distribution minute has to be done either on or before 30 June 2018.
Incredibly we still see some tax advisors and “half tax” advisors who still encourage getting the resolutions done after 30 June. And this approach works well until it does not work well.
Without exception every one of these “dodgy” tax advisors have taken cover when approached by the Tax Office.
Using superannuation tax effectively
The Australian superannuation system is one of the last great tax opportunities for many family businesses. And it is important to note that the Australian government has made it quite difficult to get lots of money into a superannuation fund.
The very short answer is that each person can contribute upto $25,000 to their superannuation fund and enjoy a tax deduction for it. The tax deduction can either be at the persons individual level or it can be salary sacrificed.
The long answer is that you can actually enjoy more than a $25,000 tax deduction for monies into the superannuation system but the superannuation fund will incur an additional amount of tax referred to as “Excess Concessional Contributions Tax”.
If you are considering making a last minute contribution to your super fund make sure you check how much you have paid already. Your employer contributions are part of the $25,000 limit before the excess concessional contributions tax applies.
Small business asset write off
If you qualify as a small business owner (turnover under $10m) you can enjoy an additional tax incentive on new plant purchased.
The tax concession gives you an instant write off for assets that cost your family business less than $20,000 (net of GST).
There is no limit to the number of assets you can acquire under this exemption. And it applies to both new equipment and second hand equipment.
Company tax savings
Family businesses, who operate through a company, with a turnover between $25m and $50m will enjoy a tax cut from 1 July 2018. The tax rate will fall from 30% to 27.5%.
So if your family business is going to do some tax planning the time is perfect. In effect bringing forward a tax deduction now will increase the effectiveness of the tax cut by around 9%. Likewise deferring income will also mean that you pay 9% less in tax.
Of course any attempt at deferring income or accelerating deduction needs to look at the cashflow impact. You do not want to destroy your cashflow or get your customers unhappy with a tax driven strategy.
Review your structure
The greatest opportunity in Perth to leverage taxation law to create wealth is by structuring the family business. So the end of financial year is to take a step back and talk to a professional tax advisor about wealth creation and tax planning opportunities.
Items like using a company for lower tax rates, superannuation, extended family income and smoothing effects should be considered. Of course taxation is not the only thing when contemplating your affairs. You should also think about ensuring that your structure allows for your family legacy to be transferred as intended and that you properly protect your assets from outside attach.
Prepay interest costs
An oldy but a goody. Make sure you have a commercial purpose behind the prepayment other than to enjoy a tax benefit. So contact your business banking manager – either Perth based or regional – and make sure that the prepayment also generates a benefit.
Also remember that the benefit is a one off. You will need to do the same thing next year or you will pay two lots of tax at once.
Forecast your taxation liability
Of course taxation management is not only about reducing your tax burden. Many Perth business families rightly see taxation as a (partly) controllable cost in the family business that should be actively engaged and monitored.
And part of that engagement is ensuring that you have certainty over the timing of your tax liabilities so that you can cashflow manage your affairs. In fact many tax opportunities available to engaged business families are a result of timing factors.
There are lots of other tax savings available. And quite often the massive savings we have generated to a Perth family business is the tax combination of two simple concepts in a unique and creative way. And those moments of genius are typically only available at one moment of time for one family only.
What is important is that we give time and space to allow the tax creativity to open and make an impact. So discussing your business and tax affairs with a qualified tax professional is a critical step in creating a legacy for a family in business.
At Westcourt we offer simply templates from $99 and personal advice starting from $165 (and sometimes the advice increases as value increases). However what is important is that your Perth family tax advisor gives every family price points so that the advice given can be tailored and adjusted to the needs of the family.