What is tax planning?
Tax planning is arranging your financial affairs to keep your taxes to a minimum whilst still following the current laws.
As for how to reduce taxable income, a tax accountant will analyse your financial situation, both now and for the future. By taking into account the specifics of your situation and tax considerations, it is possible to create a tax-efficient plan that minimises how much tax you are obliged to pay.
These considerations can include the amount and timing of income within the financial year, the sources of income and the use of different types of assets, planning for expenditures, and saving for retirement.
Tax planning is an essential part of any wealth management or investment strategy. It is entirely legal when conducted within the intent of the law. Illegal steps taken to minimise tax are not tax planning, but tax avoidance.
At the end of the day, tax planning isn’t about trying to trick the government out of its tax revenue, but about individuals and organisations making use of the tax laws as they exist.
The ATO has many tax concessions to help the Australian businesses that are the engine of our economy, but many of these are hidden without the help of a tax advisor.
Why is tax accounting important?
Tax accounting is the preparation, payment and return of taxes for individuals and organisations.
Tax accountants make sure that the financial affairs are in compliance with ATO regulations. Effective tax management is necessary to handle the complicated taxes of large businesses or individuals of high net worth to make sure they are legally compliant.
As well as tax preparation and compliance, tax accountants can also create a tax efficiency strategy for how to reduce taxable income.
Tax laws are complex and constantly changing meaning that taxpayers need to rely on the expertise of professional tax accountants to make full use of their tax concessions. Tax advisors are an essential part of any wealth management or investment strategy.
How can I reduce taxable income?
The key for how to reduce tax is the structure of your investments or business ventures. This could be as an Individual, a Partnership, in a Company, a Trust or through a Self-Managed Super Fund.
Different entities have different tax rates as well as different regulations governing them. A tax advisor will be able to guide you on which makes the most sense for your financial situation.
As well as the overarching structure, the timing of investments makes all the difference. All income earned and expenses incurred will be counted during the financial year which runs from 1st July to 30th June.
Planning the timing of when money comes in and out can impact your tax obligations. For example, if you had a high-earning year, and can defer income to after the 30th of June, so that it falls in the year that is likely to have a lower tax rate. Another tactic is to hold onto assets for at least 12 months before selling them so as to benefit from the 50% CGT concession.
Keep in mind that the sale of a property is dated to when the contract is signed and not the settlement day.
Make sure to try and make full use of tax concessions. For example, a tax advisor can guide you around salary sacrificing, or redirecting part of salary or wages into your superannuation fund which will be taxed at a lower rate than your income tax bracket.
