Hi I'm Ben Walker, I'm an accountant from accounting firm Inspire CA and I am SUPER passionate about helping business owners not pay more tax than they need to!
Why? Because if you're paying more than your fair share, it is at the cost of your cash flow, profit and wealth to your business and family. So, here are my top 12 strategies business owners can use to reduce their tax bill. These very strategies have saved our clients (who we call our 'Inspire Family') significant dollars in tax, and they are the exact ones we as a business are using right now.
The first strategy to save you tax is choosing whether to set up your business structure as a Sole Trader, Company, or Trust.
When assessing if you're in the right structure, there are three main considerations:
1. What is the percentage of tax that each entity pays?
2. Can the entity distribute profits?
3. How much protection of your assets does it provide?
Here's how the three business structures stack up, against each other:
● Sole Trader
A sole trader will pay up to 49% tax and that makes me sick! Where possible, we never ever want a client to pay that high a percentage in tax.
A sole trader cannot distribute any income to other entities, like a spouse who may pay tax at a lower rate than you - very, very limited.
Finally, as a sole trader you have NO protection of your personal assets. At INSPIRE CA we NEVER recommend anyone go into business as a Sole Trader. It's the danger zone and we've seen so many war stories of businesses who have been sued and lost their family home and savings in the bank.
It may be cheaper in the short term, but it exposes your personal assets to the risks of your business. Things like your family home, investment properties, cash, shares are all exposed to the business.
Setting up as a company or a trust can avoid this risk.
Companies are the most common structure for business because your personal assets are not at risk and they pay a flat rate of tax: If your turnover is UNDER $2M your rate is 28.5% If your turnover is MORE than $2M your rate is 30% Unfortunately, you cannot distribute income to another entity with a company, but it does provide you with asset protection.
This is my favourite entity for the businesses it suits, and that's trading through a trust. A trust doesn't pay tax itself, it can only distribute income to other people or entities (we'll go through the 10 options for you in the next section). And if a trust is set up correctly, it can protect your assets too!
Strategies 2-11 to dramatically reduce your tax bill: 10 people and entities you can distribute profit to in a Trust set-up.
Before we get into these 10 distributions, I want to reinforce that if you're paying NO tax, then you're probably making no money either. So our goal at INSPIRE is NOT to pay no tax, it's to only pay your fair share.
1. Spouse - Let's say your partner is a stay-at-home mum or dad; their tax rate would be low, so you could distribute some of the income to them.
2. Children - You can also give money to your children. If they're under 18 you can distribute up to $416 per child annually (which would save you $180 tax).
3. Retired Parents - My dad retired in December, so he is on my hit list to distribute income to!
4. The Parents In-Law (or is it the Outlaws?!)
5. Grandparents - They need to be tax residents of Australia.
6. Brother or Sister - If you've got a brother or sister who is under 18 and on a lower income (perhaps they're studying at university), they're a great option to distribute income to.
7. Church or Charity - Not only will you not pay tax on a distribution to a registered church or charity, but neither will they.
8. Super Fund – Super funds pay tax at 15% and you can distribute $30,000 - $35,000 per year depending on your age. This is a fantastic strategy to get your personal tax down.
9. A Second Business Making a Loss - If you have 2 businesses A & B - A is making great profit, B is making a loss. You can, for example, distribute $50,000 from business A to business B and pay no tax on that amount.
10. Distribute to a Company - Remember that companies have a set tax rate of 28.5% or 30% (depending on if you're turning over more or less than $2,000,000). So compared to paying up to 49% tax in your own name, distributing to a company and paying tax at the company rate can be a huge tax saving.
And finally, strategy number 12: using a self-managed super fund (SMSF) to pay ZERO tax on growth in your investments.
This final strategy is a bit of a long term strategy that we use in our business, and it's perfect for the type of business who operates out of bricks and mortar premises - like an office or a restaurant. Let's say you're a dentist and you wanted to buy the building you are in. You can use a SMSF to purchase a building and have your company pay a commercial lease to the SMSF. Let's say the building costs $500,000. You might have $200,000 in super and you borrow the rest, $300,000 from the bank. In 30 years' time, you retire from dentistry and sell the building for $2,500,000. You've made a $2,000,000 capital gain. If you sell it in super, when you are drawing a pension, you pay NO TAX on that gain. Let's contrast that: if you bought and sold the same property, but as a sole trader, you would pay $490,000 tax. This can be a highly effective tax saving strategy.
A final thought - Tax Evasion vs Tax Effectiveness.
It's Not About Tax Evasion
It's wise to acknowledge that paying tax means that you're making money. And paying tax provides money for the government to keep the country running (whether we agree with the method or not…). Being very clear, this isn't a strategy article where you'll find out how to earn a million dollars and pay zero tax. While there are outright illegitimate "tax planning" schemes and promoters, there are very clear ways you can plan for tax and make the most of what is available, to reduce the amount of tax you pay.
It's About Tax Effectiveness
Over the years, we've seen many people grow their businesses, to the point where they are paying hundreds of thousands in tax each year. As we mentioned earlier, this can be a great thing (because they are making a lot of money!), as long as we've planned very carefully to avoid unnecessary amounts of tax.
Ben Walker is the Founder of Inspire CA, a Brisbane-based Chartered Accounting firm. Ben started Inspire CA to head in the opposite direction to the traditional 'old way' of the accounting industry. Forget timesheets; forget charging by the hour; forget difficult-to-use software and eyes glazing over in conversations with your accountant. Inspire CA is for the business owner who wants to understand what drives their business, while partnering with an accounting firm who takes care of the rest.
Ben Walker, Accountant