Tax Planning - Trusts

Tax planning is the process of estimating your current year's taxable income and tax payable and taking steps to minimise this

Best time to do tax planning is after you lodge your March BAS / reconcile your business transactions up to 31/03. You can do tax planning earlier if required

Tax planning involves 4 steps:

• Step 1- estimate your taxable income for the year (01/07 - 30/06)
• Step 2- calculate tax payable taking into account tax rates, offsets etc
• Step 3- strategies to minimise your tax
• Step 4- ensure you have sufficient $ set aside to pay your tax bill by the due date

Step 1- Estimate your business profit the year (01/07 - 30/06)

Firstly, we do a quick review of your profit & loss and balance sheet to ensure there are no issues OR items that need to be factored into our calculations eg new asset purchase 

We take your current year profit (July - March) and add an estimate for Q4 (April - June). The estimate is based on last year's Q4 profit and the previous 9mths profit

example

July - March $100,000 sales less $40,000 expenses = $60,000 business profit
April - June profit estimate = $60,000 / 3 = $20,000
Total business profit for the year is estimated at $60,000 + $20,000 = $80,000

We recommend you use a qualified bookkeeper & computerised bookkeeping program such as

-Xero (recommended)
-MYOB
-Quickbooks

Step 2- Calculate tax payable

Trusts normally distribute all profits to individual and company beneficiaries

Individual beneficiaries pay tax on profits at individual marginal tax rates 
Company beneficiaries pay tax on profits at company tax rates

Profits which are not distributed are taxed by the Trustee at the highest individual marginal tax rates (section 99A)

You will need to estimate tax for the whole group i.e. directors, beneficiaries and spouses as this will affect Trust decisions such as distribution resolutions

Step 3- Strategies to minimise your tax

You can legally minimise tax by

• reducing income
• increasing deductions

But beware of 'part IV A' which states the dominant purpose cannot be for tax purposes - need to tread carefully and work within the rules

Small business entities (SBE's) have concessions which are favourable to businesses which earn under $10m

Before deciding how to reduce your business income / increase your deductions you first need to determine whether your business is on the 'accrual' or 'cash' basis for income tax

Most businesses are on an accrual basis for income tax and on a cash basis for GST

Accrual basis
You are taxed on income when invoiced / you claim a deduction when invoiced i.e. invoice date

Reduce Business Income

• Invoice your customer after 30/06 rather than before 30/06

Increase Business Deductions

• Ask your supplier to invoice you pre 30/06 rather than after 30/06
• Make additional concessional super contributions (limits apply)
  • Your fund MUST receive the funds by 30 June
• Pay June quarter super in Mid June as apposed to Mid July
• Pay bills up to 12mths in advance eg rent (SBE only)
• Update tools which are going to help you do your job better / faster
  • Items under the instant asset write-off limit are immediately written off when paid & installed (the 2024-25 limit is $20,000)
  • Items over the instant asset write-off limit are depreciated at 15% in yr1 then 30% in yr 2 onwards

Cash basis
You are taxed on income when received / you claim a deduction when paid

Reduce Business Income

• Ask your customer to hold off paying you until after 30/06

Increase Business Deductions

• Pay bills pre 30/06 rather than after 30/06
• Make additional concessional super contributions (limits apply)
  • Your fund MUST receive the funds by 30 June
• Pay bills up to 12mths in advance eg rent (SBE only)
• Update tools which are going to help you do your job better / faster
  • Items under the instant asset write-off limit are immediately written off when paid & installed (the 2024-25 limit is $20,000)
  • I​​​​​​items over the instant asset write-off limit are depreciated at 15% in yr1 then 30% in yr 2 onwards

Owner Wages

If the business is running at a loss consider reducing your wages

Before adjusting your wages and business profits consider how it will affect the following, if applicable

Business

• Profits
• Cash flow
• Work cover insurance premiums
• Superannuation guarantee
• Payroll tax
• Director (Div 7A) Loans
• Business finance applications
• Valuing your business
• Selling your business

Individual

• Taxable Income
• Adjusted Taxable Income – including reportable super & reportable fringe benefits
• Income tax rates including the tax-free threshold
• Tax return offsets
• Government benefits such as Child Care Benefit & Family Tax Benefit Part A & B
• Study and training loan repayment thresholds and rates eg HECS
• Medicare levy
• Medicare levy surcharge
• Leave entitlements
• Income protection insurance claims
• Work cover insurance claims
• Concessional superannuation contribution limits
• Government super co-contribution
• Div 293 tax
• Personal finance applications - banks will use your latest notice of assessment and will also want to see the business is profitable after adding back items such as depreciation
• Child support

​​​​​​​Step 4- Ensure you have sufficient $ set aside to pay your tax bill by the due date

Set aside funds regularly eg weekly to cover BAS, Super, Work Cover, Payroll Tax and Income Tax, if applicable

Don't put your head in the sand - once you are behind it can be very difficult to catch up

If you do fall behind and you are unable to pay your tax when due we recommend you enter into a payment plan with the ATO

But note all future debts must be lodged and paid on time or the payment plan will default. The more you default the harder it will be to negotiate a new payment plan

The ATO can garnish wages and bank accounts if you are not effectively engaging with the ATO to manage the debt. They can also report large debts to Australian credit bureaus