The 2023 financial year will soon draw to a close, meaning it is time you start thinking about your tax planning strategies and end of financial year position.
Why is investing time in tax planning strategies important?
Tax Planning helps to bring confidence that you have mitigated your tax obligations effectively and in doing so, maximised your after-tax wealth position, leaving you with more resources to help you achieve your financial success. This is even more relevant with cost of living and borrowing expenses dramatically increasing over the previous 12 months with every personal & business dollar becoming more valuable.
Is tax planning relevant to you?
Regardless of the type of income you earn, if you lodge a tax return and receive a tax assessment, tax planning is something you should consider.
The Australian Taxation Office has moved its focus to the considerable small business ATO debt that accrued throughout the COVID-19 period, understanding your future tax timeline of what taxes are to be paid, when and by whom is critical to your personal and business cashflows and if unchecked can be a cause of significant financial distress.
What does tax planning involve?
The starting position is to understand the year to date performance and forecasting this out for the remainder of the year to estimate what profits/taxable income levels you are working with. This may be for an individual, a single entity, a family group structure or a large corporate entity. The concepts and the importance are the same for all.
We identify any one-off or unusual events that have taken place during the year that can have a taxation impact and factor these into your forecast position. Such events could include the disposal or purchase of a property, changes in trading conditions or structures, new business opportunities as well as planning for personal events such as retirement and building of superannuation.
Then the fun starts! Once we have the forecast position established, we work with you to consider what options are available to reduce, mitigate or defer tax commitments. We consider the tax impacts of the various strategies and then forecast a revised and improved tax position to work through scenarios to help you identify what you would like to implement.
Strategies we consider include:
- Ensuring superannuation contributions are paid by year end
- Consider further super contributions subject to caps and in line with wealth creation plans
- Write off bad debts before year end
- Consider scrapping stock and plan and equipment of nil value before year end
- Consider eligibility to immediate asset write off concessions
- Maximise prepayments subject to the prepayment rules
We also ensure you are structuring your asset ownership and managing your flow of funds and transactions throughout your structure effectively.
Based on your decisions we then provide you with an action plan to implement prior to 30 June and we work with you to ensure everything is ticked off and you finish the year calm and in control.
Are there other reasons to consider tax planning?
Some key issues that should be focused on in the 2023 financial year when working through tax planning strategies before 30 June are:
Temporary Full Expensing
The temporary full expensing concession that has been available to eligible businesses for the last two financial years (instant asset write off before that) is proposed to come to an end at 30 June 2023.
This concession provides businesses with an immediate deduction for the business portion of the cost of an asset acquired during the financial year that is first used or installed ready for use by the end of the financial year.
For information on how this concession works and what the eligibility criteria are, refer to our article What is the Immediate Asset Write Off?
It is possible that more onerous depreciation rules will be implemented from 1 July 2023 onwards so looking to maximise this concession whilst it is available maybe beneficial to your business this tax year.
Division 7A
If you operate a company, there are very specific rules with regard to how you extract your profits and cash from your structure. The application of the Division 7A debit loan rules can have serious adverse taxation impacts with the rules also extending to trust structures where there are company beneficiaries involved.
Reviewing and forecasting your profit drawings as well as quantifying your inter-entity loans between structures is an important step in quantifying your Division 7A exposure each financial year. Also, ensuring that you meet your minimum P&I repayments on existing loans prior to year end will reduce the risk of your loans becoming non-compliant which would lead to some nasty taxation implications.
Trusts
If your structure includes a Trust entity you will likely know that the trustee must now determine in writing how to treat the income of the trust prior to 30 June. Failing to do so can trigger the default beneficiary clauses being triggered resulting in your profits having to be distributed not where you intend or worse case, the trustee could be assessed on the entire assessable income of the Trust at the highest marginal tax rate. Neither of these scenarios would result in an ideal outcome.
Part of the work we do in our tax planning engagements is to assist with completion of your distribution minutes and resolutions, working with you to achieve the most effective distribution strategy and tax outcomes for your family group.
Superannuation
Another common discussion topic at this time of year is superannuation contribution strategies. Careful consideration of how superannuation applies to your overall wealth position and retirement targets will influence your pre 30 June contributions having consideration for concessional and non-concessional contributions and the optimal dollar value of contributions.
It’s important to take note the concessional contribution cap for the 2023 financial year is $27,500 but unused concessional contributions that have been carry forward may be able to be utilised if an individual meets the relevant eligibility requirements. This can be powerful tool to help build wealth within your superfund and reduce your tax income for the financial year as the concessional contribution can used as a deduction.
What should you do now?
The above is a guide to only a few of the key themes, issues and actions we discuss and work with our clients in the final quarter of the financial year. It is often the time we have the most valuable impact to our clients financial and taxation affairs. Every client and their financial circumstances are unique and often each year is different to the one before (as well as ATO rules and interpretations).
The important message to take from this information is that optimal year end positions can only be achieved by implementing strategies PRIOR to 30 June 2023. After 30 June is too late!
This article was written by Director Kylie McEwan and updated by Manager Troy Nolan.
For assistance in getting your 2023 tax planning underway, call your Davidsons team member or contact us at info@davidsons.com.au for more information.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.