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So, it’s been a while since I wrote a blog that was somewhat technical, but some things just can’t be avoided when you are an accountant.
I want to discuss something that is dear to everyone’s heart – saving tax!
Quite often, I get clients asking how they can save tax, which is a great question (unless you’re the Tax Office). But to answer that question, a bit of a basic explanation needs to happen first.
So, what’s the difference between a tax saving, tax deferral and a cash saving?
TAX SAVING
This means, for one reason or another, the amount of tax you are paying is less than it was before – DUH!
BUT – did you know that saving tax might in fact be a bad thing!
Typically, you have to spend $$ in order to save tax. So, that means you are actually out of pocket those dollars.
Also, if you’re looking to potentially sell your business, reducing your tax payable means reducing your profit. The profitability of a business is a huge component when valuing a business, and if reduced, it would mean you might be settling for a lower sale value!
TAX DEFERRAL
This means that you are paying less tax today, but will have to pay it eventually at a later stage…DUH.
So, this is a big one for me. A lot of people out there like to say how much tax they saved, when in fact they didn’t save anything at tall. It just became future you’s problem.
This often happens with things like, delaying invoicing, utilising accelerated depreciation (the small business $20k write off is a classic here) or using what is affectionately known as a “bucket company” (I won’t explain that here for fear of the tax nerd inside of me breaking free and wreaking havoc).
Are you told by your accountant that their amazing work has saved you tax? Are you sure it has saved you tax, or has it just deferred that problem to a later time?
Strategically this might be a great plan, as a future tax rate might reduce, or the complexity of your financial affairs might reduce. But it’s a great idea to make sure this has been worked through properly.
CASH SAVING
I don’t think I even need to explain this. But I like to refer to this as the “holy grail” of tax planning.
With the first example of a tax saving, you are still out of pocket cash. With the second example of a tax deferral, you don’t save anything. But how do you actually save cash in tax planning?
Well, if I told you that then we would all be millionaires…. said no one ever!
There are often tax offsets available to businesses and individuals that don’t require spending any money.
If your accountant looks at how your affairs are structured they might be able to suggest changes (that will benefit things like asset protection and administrational flexibility) which also might result in a lowered tax result. I’m sure you have all heard of a family trust, yeah?
One of the simplest ones, is simply understanding what you can actually claim as a tax deduction based on your current spending already.
So, next time you are facing completing your tax return, make sure you ask your accountant to sit down and go into detail on whether their recommendations will result in a tax saving, a tax deferral or a cash saving…. and whilst it may cost for that advice, it will be tax deductible 😊
