Don’t pay dearly for trying to minimise your tax
AS IT’S nearing the end of the financial year, it seems timely to look at tax planning.
All countries have their own business tax and regulatory systems, as well as a unique business culture. One thing which all have in common is a desire to minimise tax. However, in Australia this desire borders on obsession and can lead to some perverse decision making.
While all good business managers around the world manage their tax expense as best they can with the help of skilled advisers, in most cases there is only a marginal benefit to be gained and tax is acknowledged as being what it is – a cost of doing business. But, I hear you say, we operate in a high tax environment and why pay the government a dollar if you don’t have to?
Well, firstly, that is not strictly true. Australia’s business, and even personal, tax regimes are by no means the highest among the OECD economies: We currently rank fifth lowest on a measure of tax-to-GDP. That’s not to say tax shouldn’t be minimised, but sometimes businesses can destroy value or add risk by being overly focused on tax minimisation.
My teenage daughter recently sent me a text marked urgent from a shopping trip to the Gold Coast where she was shopping for her mother’s birthday present. It read something like: “Daddy, this sale is so awesome. I found the scarf for mum and if I buy a second one today, I get a third free! Should I get it?” No guesses what my reply was. I think most of us understand that spending money to save money is flawed logic. So, why, when it comes to financial year end do so many businesses do it?
Okay, so if you have had a cracking year and are sitting on a pile of surplus cash with a big tax bill looming, bringing forward some expenditure or delaying revenue can make sense. Before you spend a dollar to save 30 cents, however, ask yourself the following questions:
> How will it impact my cash flow for the first quarter?
> Have I completed my budget and revenue forecast for next year?
> Will next year’s revenue be even better?
> What are my working capital needs for next year?
> Do I have a cash buffer for unexpected turbulence?
> Does the expenditure make business sense, ignoring the tax effect?
> Is there a more optimal use of the cash, such as for superannuation or personal income?
Tax is a business expense like any other and should be managed as part of your overall business or investment planning.
It is often the least manageable item in your profit and loss statement, so allocate time and effort accordingly.