Advivo explains the most effective strategies to approach tax planning.
Effective tax planning minimises tax payable meaning you’re not paying more tax than you should be. Understanding the principles of tax planning and tax structuring is crucial for both individuals and businesses. First, let’s delve into the question: What exactly is tax planning?
What is Tax Planning?
Tax Planning is the process of reviewing and organising the dealings of a taxpayer or a group of taxpayers. The purpose is to minimise the tax amount to pay while being legally and commercially possible. Having the right tax planning strategy for your situation can be the difference between a good year and a bad year, so it’s important to consult your trusted business advisor and accountant to get yours right.
Why do we need it?
Business is all about being prepared and planning for the future, and this includes your taxes and tax structuring. Whether the outcome is good, bad or ugly you need to be informed on how to manage it the best way possible. It is also a great time for reflection, where you should discuss your current position and goals for the next 12 months with your accountant or business advisor.
When do we need to do it?
Tax planning is primarily done towards the end of the financial year. However – no matter the time of year – before making large purchases or business decisions, you should first discuss any tax implications with your business advisor or accountant. Some of the best tax planning will be built into your structure and fit in with your longer-term goals. This is why we always say that it’s important to get your structure right at the start.
Four Tax Planning Strategies
Now that you know why it is so important, keep reading to learn five strategies to ensure that you effectively plan and structure your tax. These strategies can be implemented at any point, as they are also good business practices.
1. Review Debtors — Collect What You Can and Write Off Bad Debts
Managing and reviewing your debtors will allow you to be paid quicker and help minimise bad debts. Creating a recurring schedule for collecting debtors will also help maintain a stable cash flow. You should also send regular reminders and ensure you have the wording right. These can often be set up to automatically send from your accounting software. If a debtor owes you money and it becomes unlikely, they will pay, you can write that amount off as a bad debt. This removes that amount from the outstanding debtor balance and expenses it appropriately.
2. Consider If There Are Any Benefits to Paying Dividends
Dividends are a distribution of company profits to shareholders. There could be pros and cons associated with a company paying dividends depending on the circumstances. If your company pays a set dividend each year, it could be beneficial to review your dividend strategy considering both the company situation, as well as the tax position of the shareholders or ultimate beneficiary receiving the dividend. Understand that a company may not always have visibility over the tax position of its shareholders, so it makes sense to consider this as part of an overall tax strategy.
3. Review Depreciation Schedules
Depreciation involves spreading the cost of your long-term assets over their useful life, to match the expenses with the revenue they generate. Depreciation schedules break down the depreciation of an entity’s plant and equipment, and fixed assets. They allow entities to keep track of their assets and evaluate their value over time. Importantly, an entity may be able to use different rates of depreciation for tax deduction purposes than they do for tracking the asset values in their books. Regularly reviewing an entity’s tax depreciation schedule will help ensure the maximum deductions are being claimed.
Stocktakes should be performed routinely and ideally at least at the end of each financial year. Importantly, stocktakes can help identify margin creep, discrepancies in records or processes, fraud, old and obsolete stock which may need to be written off, and ensure the stock on hand figure is accurate. By confirming the stock on hand figure, you are also helping to ensure you’re not paying too much tax. If you find stock on the books that no longer exists, it’s possible that the stock should be expensed which can reduce tax. If discrepancies are identified it’s important to understand the reason for these and implement an appropriate solution so that they don’t continue to occur.
Get Good Advice
Talk with your business advisor or accountant about your tax structuring and planning! Not everybody is a numbers person, but be rest assured knowing that you are speaking with an expert in the industry. While it may be easier to ask a friend for advice, speaking to an expert, who understands the tax rules and all the latest changes, could save you time and money.
Having the right tax planning strategy for your situation can be the difference between a good year and a bad year so it’s important to get yours right – so speak to the experts at Advivo today!