Preparing for the end of financial year
As we wind up another calendar year it’s time we in the accounting profession start to look forward to the end of financial year in June. With many accommodation business operators (particularly in the leisure sector) enjoying improved returns from the increased activity, it’s important not to lose sight of the tax implications of creating those extra profits.
In one sense paying a lot of tax is a good thing; it means you have made a lot of profit, but paying more tax than you are absolutely legally required to is crazy. Most taxpayers accept that paying tax provides community benefits and they tend to meet their tax obligations voluntarily. In meeting this obligation, you also have the right to arrange your financial affairs to keep your tax to a minimum – this is often referred to as tax planning or ‘tax-effective investing’.
Small business operators who may be faced with a significant tax bill, perhaps for the first time can be tempted to undertake aggressive tax planning that may ultimately cost them far more than the amount of tax they were seeking to avoid.
Tax planning is legitimate when you do it within the letter and the spirit of the law. However, a small percentage of taxpayers plan their tax affairs in a manner that is considered too aggressive towards the tax system. These arrangements can attract ATO scrutiny to determine whether or not they are within the law. Actions to deliberately evade tax obligations or fraudulently use the system to obtain an improper financial benefit constitute tax crime. This includes identity crime, secret offshore dealings, credit and refund fraud.
There are ways to minimise tax, as long as it’s done lawfully. If you’re not sure of a tax investment offered to you by anyone, make sure you get advice. To help make a more informed decision get a second opinion or third if you remain unsure.
Does the arrangement have a product disclosure statement or prospectus? Does it have the certainty that comes with being covered by a tax office product ruling? Has the ATO issued a taxpayer alert about it or a similar arrangement? Does the promoter have a valid Australian financial services licence issued by the Australian Securities & Investments Commission? Maybe you should consider a private ruling from the ATO. Make sure you get independent advice from a trusted advisor.
Tax avoidance schemes aren’t always limited to the ‘too good to be true’ types. They can be more sophisticated than many people realise. Watch out for complex structures and unusual financing arrangements, such as round robin financing and non-recourse loans; ‘no-risk’ guarantees; and encouragement to keep the arrangement secret and not obtain independent advice.
Not only can involvement in a scheme risk your original investment, you could also have to pay back any missing tax – with interest – and penalties. If you think you are involved in a tax avoidance scheme your accountant can help you. Taxpayers who voluntarily advise the ATO about their involvement before the ATO starts to investigate may be eligible for a reduction in any penalties that arise.
Using your money to try to make more money or gain assets is called investing. Understanding how tax works in relation to your investment helps ensure you don’t pay more tax than you need to.
Each year a significant number of tax avoidance schemes are promoted to individual and business taxpayers and to self-managed super funds. These contrived arrangements have little or no economic substance and are created predominantly to obtain a tax benefit not intended by the law. In all likelihood you will be presented with one such scheme between now and the end of the financial year.
Before you consider investing or participate in an arrangement, check with the ATO and the Australian Securities Investment Commission to determine whether they have concerns about the arrangement or whether the arrangement may be a tax avoidance scheme. In our experience, promoters are always on the lookout to develop new schemes, so be wary of arrangements that promise significant tax benefits and a quick fix to a looming tax liability.
There are a range of ways you can legitimately minimise your tax obligations. Importantly you should start planning early and well before the end of the financial year. Work with your advisor to determine what your tax liability is likely to be well before the end of the financial year and ask them for a list of recommendations to minimise tax without taking a risk of being penalised by the ATO. Planning early will provide you with the opportunity to consider all the available options and minimise the risk of making a knee jerk decision to enter into an inappropriate arrangement.
As always superannuation is a very tax friendly structure and making concessional contributions into your superannuation fund can save substantial tax and create an investment that should be there to support you in your retirement years. Combined with other legal tax minimisation strategies you may well find you can substantially reduce your tax liability without the need to take a risk.
