As an accountant, we wear many hats when dealing with clients. Sometimes we’re accountants, sometimes advisors, sometimes a confidante, and sometimes we’re just another parent of a kid on your child’s soccer team.
Regardless of which hat we’re sporting on a particular day, one of the main functions of our job is to help you save as much on your tax bill as possible.
So, a question we always like to ask a client is whether their company, in its current state, is structured to save the most amount of tax. Often times, they think the answer is yes, but in reality, it’s not.
For me personally, restructuring is one of my favourite parts of the job because it allows me to take something that already exists and modify it in a way that greatly benefits my clients’ bottom line and family wealth immediately, and going forward.
There are various vehicles we can use in restructuring your business to save taxes. And when you look at what taxes you pay you should be focusing on your “effective tax rate” (total tax payable/taxable income). I have often heard from people “I pay too much in tax” so I ask them “what was your effective tax rate?” and most cannot answer. So if you tell me you paid $100,000 but your taxable income was $500,000 then that’s 20% effective tax rate, awesome! But if you said your taxable income was $200,000 (50% effective tax rate) then I would say, we need to talk!
Depending on your personal circumstances, restructuring your company by creating companies or family trusts as off-shoots of your operating company, and potentially a self-managed superannuation fund can create thousands of dollars in annual tax savings.
By restructuring, excess cash can be kept within your corporate structure in order to defer paying personal income tax on income earned in the business. Excess cash is defined as monies earned by your business after paying corporate taxes that is over-and-above what you need to cover your personal and living expenses.
If excess cash or other inactive assets, such as portfolio investments, are kept in the company, its shares may not qualify for the enhanced capital gains exemption on an eventual sale. Simply paying this excess cash to yourself can attract a large personal tax bill. However, with some planning we will protect you from that same bill and enable us to manage your overall effective tax rate.
Your company can flow excess cash to an investment entity while still deferring the payment of personal income taxes. The investment entity can also be used to purchase real estate investment properties, and because of the tax savings created, more funds are available for down payments on these properties.
You are also going to want to consider income splitting with your spouse and adult children. When structured properly, and as long as your spouse or adult child have no other source of income, dividends up to nearly $21,000 in 2018 can be paid out to them with no tax payable.
Depending on your circumstances, family trusts may need to be considered as part of your overall corporate structure as they can be used to further assist in income-splitting and growth sharing among family members, and can help to better protect your assets from the potential breakdown of a child’s marriage. They have become ever more popular given that they are the ultimate tool for overall flexibility in tax and estate planning.
Potential tax savings are not the only reason to consider revamping your corporate structure. It can also limit your business’s liability. Cash held within the corporation is open to that corporation’s creditors, as well as the company’s inherent liability attached to its regular and ongoing operations. Regularly moving the excess cash and inactive assets to an investment entity can protect your hard-earned money. The investment entity can always loan back funds to the operating company on a secured basis. As with any tax planning, a corporate reorganisation requires careful design and consideration. You should meet with your tax professional to discuss the options available to you. The team at SMART would be happy to discuss your company and its current structure.
If you have any further questions regarding your business structure please contact SMART Business Solutions on 03 5911 7000 or firstname.lastname@example.org for a complimentary initial meeting.
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