By Kym Arnold

Picture this – you start up your own business and make a $90K profit in your first year. What a fantastic result! Then after a visit to your accountant reality hits.

It is a situation that we see frequently - people get a shock to find out they have a tax bill owing that may be due in just a matter of weeks. There is then the burden of “double tax”, this is when you have to pay your tax bill and also start paying instalments to go towards next year’s tax.

So what can be done about this?

For us here at Lincolns this time of the year is “Tax Planning Season”. This is the time of the year our clients plan their cashflow in preparation for all of their upcoming expenses including tax.

We can do this for you by firstly analysing your financial information so far for the year. We then use your forecast of income and expenses for the rest of the financial year. This will give us an estimated net profit.

The next step is to discuss what your plans are for the rest of the financial year and for next year. Some of the common questions we ask are:

Are there any large amounts of income to come in?
Are there any “big ticket” expenses to be purchased? Such as a new asset?
Have you made a superannuation contribution this year or do you plan to?
What is next year looking like? Do you expect your income to increase or decrease?

The answers to these questions as well as any changes to tax legislation will help us to devise tax strategies to reduce your tax liability. Some strategies could include:

Could you defer some of your income from this financial year to next year?
Are there any asset/s under $20,000 you could purchase prior to the end of the financial year? Note: Small businesses are currently able to write off any assets purchased for less than $20,000. However, this is to be reduced to just $1,000 on 1 July 2018 due to legislation changes.

Once we have your strategies in place we arrive at an adjusted net profit. By then considering how the income will be distributed, we can give you your estimated tax position for the year.

Let’s give you a little bit of context

Here is an example for you:

No Tax Planning

In July 2016 Rob started his own business as a sole trader electrician. He had a stellar first year and made a net profit of $68,000. He has no other income.

When he gets his tax done in September 2017 he is told he has a tax bill of $12,646 that will be due in March 2018. He is also advised that once he lodges his return he will need to start paying instalments of approximately $3,015 quarterly.

With Tax Planning

Rob comes to see us in February 2017 and we work out that he is going to be making an estimated $70,000 this year. We run through the current tax position and then start speaking to him about his plans.

From this we find out the following:

He has a $20,000 contract that will come to an end in June and will be paid out then; and
He plans to go to Europe for three months in August 2017.

Knowing this, we come up with two options:

Option One (Tax Deferral): is to delay the completion of the contract until July so it will fall under next year’s income. This is tax deferral as he may pay the same amount of tax but this will give him more time to pay it. He may also save some money if he falls into a lower tax bracket next year; or
Option Two (Tax Savings): he could use some of his income to make a super contribution which could reduce his tax liability. This is a tax saving as he will still pay tax in his superfund but at a lower rate.

For cashflow reasons, he makes the choice to delay the $20,000 of income until July reducing his net profit to $48,000. His estimated tax liability is now only $6,146. We also discuss delaying lodgement of his return until his due date on 31 March 2018 so he will not start paying instalments until June 2018. His new instalments will be approximately $2,110 per quarter.

It's not just about tax

While we call this process tax planning, it's not just about tax. What we should really call it is income planning where we try to meet certain thresholds. These considerations include:

the aged pension;
youth allowance;
family tax benefits; and
possible capital gains.

This is not a science. It is about understanding legislation, understanding our client and their particular circumstances and offering options that will suit their situation. As you can see there can be a significant benefit to tax planning. While the situation above is about a startup business, these strategies and the legislation apply to established businesses as well.

If you would like any further information, please feel free to call us on (08) 9841 1200 or send an email to info@lincolns.com.au.

Lincolns donates $1000 to the Albany Community Foundation

By Emmalee Crispin

From time to time, we can all find ourselves in a situation that seems impossible. While most of us are fortunate enough to be able to wade through these times and make it through to the other side, many people within our community struggle to get back on their feet or make ends meet. Whether it be through a loss of a loved one, employment struggles, mental health battles or medical conditions, the Albany Community Foundation (ACF) endeavours to help those in need recover from their lowest.

Since forming in 2014, the ACF has been instrumental in providing care and support to members of the community that have fallen on hardship in the way of services, grants, donations and sponsorship. The ACF is led by a group of dedicated individuals each of whom bring their skills and services to the table to provide a unique outlook and perspective.

During the year spent organising and planning the logistics of running such a foundation, the team behind the ACF were shocked to see the amount of funds received that typically go towards administration and operating costs. With this on their minds, their board members commit to providing their time and services free of charge to ensure that the funds raised go directly to people that need it most.

Lincolns was proud to be able to assist in the work ACF does for our local community by making a donation of $1,000 at the recent ACCI Women’s Leadership Forum on behalf of all attendees. To give you an idea of how this money would have been used, the foundation has recently granted the following requests:

Single mum with 3 children (all under the age of 7, one with autism) had her car tyres vandalised.The ACF assisted with replacement of 4 tyres.
A 48 year old single woman had to move from the private rental market to Department of Housing accommodation after a series of medical conditions including a heart bypass, surgery on her breast bone, a knee replacement and snapping her Achilles tendon. This lead to an inability to work and maintain a consistent income. The ACF assisted with moving costs.
A man suffering mental health issues after a string of family bereavements including the death of an infant grandchild in an extreme domestic violence situation is currently homeless and living in his vehicle. The ACF assisted with vehicle repairs.

The ACF relies on contributions from its board members and memberships. These contributions, as well as fundraising, provide the money that the foundation uses in their grants and to fund local community events. The ACF is always looking for new members who would like to play a part in the foundation’s values and decision making to help those in need across the community.

For more information on the ACF visit http://www.acfwa.com.au/

Don’t get caught out by the “Tax Monster”