Time to Get Your Tax Affairs in Order
From our February 2011 issue
This may be the best time of year to take stock of your tax affairs and engage in proactive tax planning.
Many businesses wait until tax time to start thinking about their tax obligations. Usually this leaves time for little more than a short review and completion of tax returns.
However, thinking about your tax obligations now will give you the opportunity to consult with your tax adviser and engage in proactive tax planning on a wide range of issues.
What should you do?
As tax considerations extend well beyond merely compliance obligations, you should take the time to ensure that your tax affairs are structured in the manner that best suits your needs.
The right tax structure will provide the solid foundation on which you can build the rest of your business.
Here are a few tips to get you started.
1. Evaluate your business structure
The structure in which your business is set up will depend significantly on your needs.
Each possible structure offers its own advantages and disadvantages, such as:
- Running your business through a company offers asset protection and access to the corporate tax rate. However, losses are trapped inside the company and getting earnings out of the company will require you to either pay top-up tax or put the loan on a commercial footing. Dividends and capital returns need to be paid to all shareholders equally, and any transfer of shares may attract a liability for capital gains tax. In addition, capital gains made by the company will not attract the 50% CGT discount.
- Setting your business up in a trust allows you to distribute income and capital gains to different beneficiaries in different years. However, each beneficiary will have to pay tax on his/her share of the net income of the trust at his/her marginal tax rate every year. Any losses will be trapped inside the trust.
- Running your business through a partnership will allow you to distribute income and capital gains in accordance with the partnership agreement. Losses can be passed on to individual partners who can usually offset these losses against their other assessable income. However, any changes in the composition of the partnership will usually result in inherent capital gains being realised for tax purposes. Holding assets in this structure also offers very little asset protection.
- Self-managed super funds (SMSFs) are increasingly being used as an alternate structure in which to hold passive investments. However, the activities that an SMSF can engage in are quite limited and the compliance burden associated with running an SMSF can be high.
If you think the structure in which you currently run your business may not be the best structure for you, the New Year is a good time to discuss alternative structures with your tax adviser.
Rolling your business from one structure to another will usually result in tax consequences which you may be able to defer via a rollover.
In addition, depending on your carry-forward losses and other tax attributes, it may better for you to effect a change of structure at certain times as compared to others.
2. Consider your current and future cash and financing requirements
The New Year may be a good time for you to evaluate the suitability of your current debt/equity financing balance.
The tax consequences of debt and equity financing differ significantly, and considerations of your short to medium-term business plans should also be taken into account when evaluating your financing needs.
If you are planning an expansion or contraction of your business, this is a good time to consider the appropriateness of your financing structure.
3. Consider any elections that you may be entitled to make
There are several elections under the income tax Acts that may be available to you.
Some examples are the election to consolidate, rollover elections, elections to access certain small business concessions, and TOFA elections.
The New Year is a good time for you to consider if any of these elections may be appropriate for you.
4. Succession planning – do you anticipate any changes in control or ownership?
If your business is operated by or employs various family members, this is a good time to stop and consider issues of succession planning, such as the stake that each family member has in the business, the nature of this stake (ie equity holding or employee), and the manner in which you anticipate these interests changing in the short to medium term.
Your tax adviser can assist you in negotiating issues of succession planning, including the transfer of interests and helping you to achieve your goals in the most tax-effective manner.
This information is for guidance only and is not intended as specific advice to any reader. Professional advice should be obtained before acting on any information contained herein. The publisher accepts no responsibility for loss occasioned to any person or organisation as a result of action or the refrain of action as a consequence of the contents of this publication.