If you’re like most people, tax time can fill you with a sense of dread. The good news is that there are ways to make the process easier – and to get your tax planning right for 2022.
Proper tax planning isn’t just important, it is absolutely vital because it allows you to take advantage of tax breaks and deductions that can save you money. It can also help you avoid penalties and interest charges.
But tax planning is more than just preparing your tax return. It’s an ongoing process that includes understanding the tax laws, knowing what records to keep, and planning ahead for changes in both your business and personal life. By working with an accountant, and taking advantage of some key strategies, you can save yourself a lot of money on your tax bill. You’ve worked hard for your success so far – don’t let tax time derail your plans!
In this blog post, we’ll discuss some of the best strategies to ensure successful tax planning for 2022.
Allocate trust distributions
The first step in tax planning for 2022 is to review whether you can still allocate trust distributions (from your Family Trust or Discretionary Trust) to adult children or parents as a result of the newly released ATO Tax Rulings. This is vital, as it can save you a significant amount of money on your taxes. For many years, it has been common practice by many business owners and investors who use Family (Discretionary) Trusts to look to spread trust income across family member beneficiaries. Trust distributions are often made to adult children for asset protection and estate planning purposes.
Sometimes, the adult children in a family may have lower tax rates than their parents, so the overall tax rate % for the family group is lower as a result of the spread of these trust distributions. However, on 23 February 2022 the ATO issued Taxpayer Alert TA 2022/1 ”Parents benefitting from the trust entitlements of their children over 18 years of age”.
This is a game changer!
It states that the ATO believes that parents who make trust distributions to their adult children and then arrange for their children to give the distribution back to them are only doing this to reduce tax. The ATO plans to invalidate the trust distribution and tax the trustee of the trust at 47% on the amount of the distribution. Your accountant can help you to understand how these ATO tax law changes affect you, discuss new strategies that you might be able to use, and estimate your tax payable for 2022 and 2023 so you can carefully plan for it.
Working with a trusted accountant will give you peace of mind that the way you are using your Trust will satisfy the ATO and not draw audit attention to yourself.
Maximise superannuation contributions
One of the best ways to reduce your tax bill is to make sure you’re making the most of your superannuation contributions. For many people, this means contributing as much as possible into their super fund – and using carry-forward amounts from prior years if applicable to make even larger superannuation contributions.
If you’re self-employed, you may be able to deduct your super contributions from your taxable income. This can save you a significant amount of money on your tax bill. If you’re an employee, your employer is required to make compulsory super guarantee contributions on your behalf – but you can also make voluntary contributions. Voluntary contributions are deducted from your salary before tax, so they can also help to reduce your tax bill.
There are a few things to keep in mind when making super contributions, such as the contribution caps that apply. If you’re not sure how much you can contribute, or what the tax implications are, your accountant can help you. They will work with you to understand your financial situation and objectives and develop a tax plan that maximises your super contributions while minimising your tax burden.
Deferring taxable income
We know what your thinking….. why would I delay income into my business? Well, there’s a good chance your tax accountant has recommended this tax planning strategy to you and there’s a reason for it!
When you defer taxable income, you’re essentially delaying the recognition of that income until a later tax year. This can be beneficial because it allows you to spread out the taxes owed on that income over a longer period of time. By doing this, you can push the tax liability for that income into the next financial year – and potentially into a lower tax bracket if your circumstances have changed.
Of course, there are always risks associated with deferring income and while you’ll still have to eventually pay tax on what you’ve earnt, you will have the benefit of increased cash flow in the meantime.
To defer income you will need to use accrual accounting (rather than cash accounting), and it’s essential to keep an eye on both your earnings and expenses. You may benefit from using internet accounting software to help you keep track of your finances and we advise the use of an online accounting software such as Xero.
Bringing forward deductible expenses
Bringing forward any deductible expenditures is another excellent technique to decrease your tax obligation. This could include anything from business expenses to interest on investment loans. By paying these expenses before June 30, you can claim them as deductions in the current financial year – and reduce your tax bill accordingly.
Of course, this only works if you have the cash available to pay the expenses upfront. If you don’t, there are other options available that can still help you reduce your tax bill. One option is to use a tax-deductible loan, which allows you to borrow money for tax-deductible purposes and pay it back over time.
If you’re not sure what deductible expenses you can claim, or how best to structure your finances to maximise your tax deductions, your accountant can help. They will have a detailed understanding of tax law and can advise you on the best course of action to take.
Using a “bucket company”
An effective tax planning strategy to consider if you are looking for ways to cap your tax is a bucket company. A bucket company is a private company that is often used by families to hold and manage family assets. The main benefit of using a bucket company is that it can help to minimise tax. This is because income that is distributed to shareholders from a private company is taxed at a lower rate than income that is earned personally.
Another benefit of using a bucket company is that it can help to protect family assets. This is because the assets of the company are held in the name of the company, and not in the name of individual family members. This means that they are not subject to personal liabilities, such as bankruptcy or divorce.
Managing capital gains
Another way to reduce your tax bill is to manage capital gains. This means realising losses on investments that are in a losing position and deferring or avoiding capital gains on investments that are in a gaining position.
This can be a complex area, and there are a number of strategies that can be used to minimise tax. Your accountant can help you understand the tax implications of your investment portfolio, develop a strategy to minimise your tax burden and make recommendations as to how it could be structured more efficiently for tax purposes.
Work with a professional
The final but most crucial suggestion we have for you is to hire a professional. While there are a number of tax planning strategies that you can implement yourself, we always recommend seeking professional advice to ensure you are doing it correctly and minimising your tax liability. An accountant can help you with tax planning and make sure you’re claiming everything you’re entitled to. They will also be able to advise you on best practice for your business structure.
Working with a professional will protect you from making any costly mistakes and ensure you’re meeting your tax obligations. While it may seem like an unnecessary expense, in the long run, working with an accountant could save you a lot of money. So if you’re serious about reducing your tax bill, it’s worth considering hiring one.
Proper tax planning is not just a recommendation, it’s a necessity. When done correctly, it can save you money and help your business grow. By working with an accountant and taking advantage of the strategies we’ve outlined in this post, you can ensure that your business is doing everything possible to reduce its tax bill. Just imagine what you could do with your tax saved!
If you’re looking for ways to reduce your tax bill, our team can help. We’ll work with you to understand your financial situation and financial goals and develop a tax plan that minimises your tax burden. Contact us today to learn more.