Accounting News & Blog

Tax Planning and Forecasting

In the good old days of accounting in the 90s according to Chad McKnight, Rowe Partners had computers but data entry was done by hand, keying in manual bank statements, reconciling cashbooks, printed workpapers all filed in a manilla folder; nice and neat, real old school.

This generally meant that no matter how hard the team worked, they were behind the 8 Ball and struggled to get work done. It was a scramble to get the end of year work done by the 15th May each year, just in time to tell our clients how well they did 11 months ago! And how much tax they had to pay.

Meetings were frustrating for both accountants and clients because if certain actions were taken earlier, it would have created opportunities to deliver tax savings but everything was discussed in past tense. Could have, would have, should have. But it was all too late.

With the introduction of GST in the early 2000’s, came the requirement for most businesses to update and report to the ATO every quarter. For many businesses this also created a new and beneficial opportunity for their Rowe Partners accountant to review, forecast and plan. This is what is now called Tax Planning and/or Tax Forecasting.

Tax Planning and Forecasting should be done by every business, every year. Having the information to hand to just know where you are at, and where you are going, helps to plan and make informed decisions.

In 2015 Rowe Partners also made a bold business decision to start putting all clients onto Xero, starting with Rowe Partners’ own business. This move to Xero combined with greater focus on tax planning as a service, has enabled our team of Rowe Partners accountants to get on the front foot for clients and forecast both business performance and tax. Fast forward to 2021 and the benefits of this decision are paying off for clients.

So, what exactly is involved and why should you do it?

Tax Planning or Tax Forecasting offers numerous benefits. For starters, it’s proactive rather than reactive, forward thinking rather than playing catch up in the management of your business finances. As a minimum it provides business with an estimate of profit for the year and therefore how much tax is going to be paid. At its best, tax planning can provide various options to help minimise tax by making changes (and investing in the business) prior to the end of the year when it is “not too late.” It enables your accountant to help you make changes to minimise tax payable at the same time as helping you to grow your net worth (non-financial and financial assets minus liabilities).

What’s the difference between Tax Planning and Tax Forecasting?

Tax Planning and Tax Forecasting are essentially the same thing, however there are some notable differences.

Tax Forecasting involves predicting how much tax is going to be paid at the end of the year. Generally, this is once all the options to help minimise tax have already been exhausted.

Tax Planning involves firstly Tax Forecasting and then reviewing the various options available including:

  • Deferring Income

  • Prepaying Expenses

  • Ensuring lower tax thresholds are utilised.

  • Acquiring Deductible Assets

  • Restructuring

  • Farm Management Deposits

  • Maximising deductible super contributions

  • Tax minimisation with a view to greater wealth creation

  • Another opportunity to look at your business.

These options are explored and put into the Forecast to estimate the tax payable if one or all of these are done.

  • The benefits of Tax Forecasting & Tax Planning are numerous helping to:

  • Manage cashflow by knowing how much tax (if any) you need to pay.

  • Explore opportunities to minimise Tax;

  • Maximise your disposable income;

  • Provide peace of mind by just knowing where you are at;

  • Create Wealth

  • Monitor and control the timing of cashflow fluctuations both good and bad.

  • Collaborate with the banks and financiers for future needs.

Case Examples

1) Our early warning about tax payable helped to preserve funds and grow the team

The team recently had a meeting with a client after completing their December QTR BAS, using Xero. Using our own reporting tools created within Xero, we were able to review and forecast their tax, based on their Year-to-Date earnings. They were in for quite a shock. The amount of tax we were forecasting was quite significant. That forecast was a good 14 months before it would be due for payment in May 2022. With this information we were able to firstly put aside that amount within our bank account now, knowing full well that the tax is covered. We then started to go through all the other items to ensure they are doing everything possible to minimise that tax. One of the important decisions made wasn’t motivated by reducing tax, it was to employ another staff member to help buy them some time. The business could afford it and they could slow down a little still knowing that the business will be profitable. They were so relieved that they knew that they could afford to do it.

2) We helped save a client $15k!

After completing a clients March Quarterly BAS and Management Reports we estimated a $30,000 tax bill for them at the end of the year. Currently the Government allow for the immediate deduction for an Asset Acquired before 30 June. After reviewing the clients’ assets and discussing with them their needs it was identified that they were looking to purchase a new vehicle worth $50,000 later in the year. By bringing forward the purchase by 6 months they are saving around $15,000 in tax, effectively halving their tax bill.

3) Restructuring and improved decision making.

Tax Forecasting helps with making decisions about restructuring. A quite common scenario is where a person will start up their business as a sole trader to just give something a go and to see what happens, cheap and easy. However sometimes they go very well and just outgrow that structure and the risks outweigh the benefits of simplicity.

A client of ours recently had this experience. Their profit had grown significantly and the work was getting too much for one person to handle. So again, after reviewing their figures and assessing the risks vs the benefits we rolled over to a company effectively allowing him to now employ himself and another staff member. The benefits are that he is now covered for Workcover, he is now making contributions into his Super to provide for retirement, and any profits he doesn’t take out as a wage, will be taxed at the company’s tax rate of 26%(25% for the 21/22 year) rather than at his 39%. It also now provides some separation between his own personal assets and the business assets, allowing him some protection from creditors should things not work out in the future.

Wrapping Up

Not all scenarios result in tax savings. In some case, it simply allows for greater flexibility and improved decision making. For clients where we have been doing tax planning and forecasting for many years, this process is all about just knowing where they are at and that everything that can be done is getting done. It’s simply good, strategic business practice.

The ideal time to get on board with tax planning and forecasting is asap after we’ve completed your end of year work. Make sure you talk to your Rowe Partners accountant before 30 June so we can continue to make an even greater contribution to the future of your business.

There is so much to understand about Cryptocurrency. Even financial industry experts like us here at Rowe Partners can find it challenging. It’s so complex when compared to the simplicity of cash. Now before you read on, let’s give this warning right from the outset. Prior to investing in any digital assets, be sure to seek specialist advice and trade only through a reputable currency exchange. We can certainly help you work out the tax implications of your investment decisions but the decision to invest in Cryptocurrency in the first place, must be entirely yours and based on a thorough examination of the risks and opportunities.

So, what is Cryptocurrency? Cryptocurrency is a virtual currency that exists only in digital form (digital asset) distributed across many computers, secured by a type of encryption or coding known as cryptography. This process protects the currency, making it almost impossible to counterfeit. This combined with limited releases enables it to hold value. There are several types, the most common being Bitcoin. There are only 21 million Bitcoins in existence. As of February 24, 2021, there were only 2.363 million to be circulated. At the time of writing, 1 Bitcoin is valued at $65,253.98 AUD! Some are tipping that by 2030, one Bitcoin could be worth as much as $500,000. A M A Z I N G! Other cryptocurrencies include Bitcoin Cash, Litecoin, Ethereum, Ripple, Stellar, NEO and Cardano.

Cryptocurrency sits outside traditional, centralised financial authorities which theoretically protects this type of currency from interference or manipulation by governments. To go into more detail than this here would not be useful. We’re not providing financial advice through our blogs, simply discussing interesting subjects and current affairs. Investment decisions must be fully considered and based on specialist, tailored advice. If you’re actively investing or seeking to invest in cryptocurrency, you’re probably already (or should be) across more of the detail.

Rowe Partners recommendation is always that investors should have a thorough understanding of any investment product; it’s risks and potential rewards as well as it’s capacity to deliver on their financial objectives before parting with any of their hard-earned! The wild, daily fluctuations in price of cryptocurrencies should be enough to put all but the most mega rich adrenaline seeking and tech savvy investors off. It’s volatile, high risk and often attracts dodgy fraudsters and scammers. It’s also known to be commonly traded through the dark web by computer hackers, money launderers, terrorist groups and other criminals. Cryptocurrency exchanges are also prone to hacks. The stories of investors scammed and burned are many and increasing. The ACCC warns that Australians are losing more and more money to Ponzi Schemes using Cryptocurrency. Read more here;

Another consideration is the protection of digital assets. Safe storage of digital assets is challenging but its portability and difficulty to trace also makes it easy for those inclined, to steal it or hide money from government agencies. Ultimately, cryptocurrency’s value as a long-term asset will depend on perceived scarcity, safety and wide scale adoption by ordinary people.

Despite the risks, over the last few years, investing in cryptocurrency has been gaining traction with ordinary people seeing it as an investment opportunity with the potential to make fast money i.e., as an investment. More and more businesses now also accepting Bitcoin as a form of payment for Goods and Services. It's circulating.

Tesla’s Elon Musk recently purchased $1.5 Billion (US) of Bitcoin and now plans to allow people to buy their products using it. This decision caused a bit of a buying frenzy and a temporary surge in value. It’s worth noting the company’s stock price dropped 30% soon after and he’s tipped to make a significant loss. Musk has attracted flack for this decision too with many seeing the purchase as a gamble. Bottom line is that he is a high roller and can personally afford to play at the table. However, Tesla shareholders might not like the fact that he’s been playing with their money.

Interestingly too, a share investing service that Chad McKnight has followed for 7 Years recently invested some of their own money in it. On the surface of it, cryptocurrency seems to be gaining legitimacy in investment circles so Chad’s wondering if it’s time he changed his view on Bitcoin. So far though, he’s not been prepared to take the risk.

Tax Implications

In the last few weeks, Chad has had 2 clients ask about Bitcoin and about the tax implications on the sale. The bottom line is that if you make a capital gain on the sale of a Bitcoin or other cryptocurrency investment, the Australian Government requires you to pay Capital Gains Tax (CGT) on it.

Bitcoin is like any other investment and any gains you make on it will be taxable. If you’re a business buying and selling goods in Bitcoin well you will just pay tax on it as ordinary income just like you would if you were trading in cash. If you are buying it and holding it to sell at some future point in time you will have a capital gain and capital gains tax maybe payable. CGT is quite complex and even more so when dealing with cryptocurrency so it's best do your homework and talk to your accountant and financial advisor prior to investing.

A quick search on the ATO’s website outlines under what circumstances a CGT event occurs when dealing with cryptocurrency. A disposal can occur when you:

  • sell or gift Cryptocurrency.

  • trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)

  • convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or

  • use cryptocurrency to obtain goods or services.

As with any capital assets the rules are quite complex and sometimes the timing of when you trigger a capital gain can be important. Delaying a sale by as little as 1 day could reduce the CGT by half.

View the ATO website information here

If you do have Cryptocurrency and are unsure about the taxation consequences, call one of our accountants today on 1800 04 7693.

So, you’ve been put off SMSF? True, there have been some horror stories in the past and as an investment strategy SMSFs are certainly not for everyone but we think it’s worth revisiting for a few reasons - the laws pertaining to financial planning advice are much tighter and more controlled now than ever, for many investors SMSF can provide excellent benefits compared to APRA regulated Superannuation Funds and new research shows that cost is likely to be less than you think.

Prior to the changes in government regulations for SMSF Advisors, accountants at Rowe Partners Accountants & Business Advisors helped many clients set up their own SMSF assisting with paperwork and fund administration to ensure they remained compliant with the ATO and looked after their retirement savings. Today, our Rowe Partners Financial Planning business takes on much of that work.

The key with SMSF and for any investment strategy for that matter, is to ensure you get comprehensive advice and consider the pros and cons before making a move. Rowe Partners can help you determine likely costs, assess your level of financial expertise as required to self-manage your investments and assess if you’ve got the time required to build and manage your portfolio so that it's profitable and will deliver on expectations. So, speaking with your accountant at Rowe Partners Accountants & Business Advisors is the perfect starting point. In the meantime, let's answer a couple of general queries you may have.

Why should I care what happens to my super?

If you’re a homeowner, besides your house, your super is likely the most valuable financial asset you own. If you’ve been in the workforce for some time but don’t own a property, it’s quite possibly the only significant asset you own. At some point in your life, you will need to rely on these savings to support you in retirement. It’s important to protect it! It’s also important to leverage it to improve your financial position over time so that when you need it, you have significant accumulated financial resources to draw on. This can be done in many ways such as shares, property, resources, managed employer superannuation funds, even investing in precious gems and metals but today we’re talking about SMSF.

Is SMSF risky?

Any investment strategy presents risk. The key is to be aware of the risks and manage for them. Today, SMSF is safer than ever due to increased scrutiny by regulators. We’ve always adopted a professional and ethical approach to SMSF advice but in the pre-regulation environment, it was not uncommon for investors to lose money at the hands of unscrupulous, unqualified operators encouraging people to use SMSF as a way (illegally) to access secured superannuation funds and invest in property they themselves had personal interest in. Values and returns were frequently overstated and, in some cases, properties never even existed. People were being duped out of valuable retirement savings and so it was necessary for the Government to step in and tighten things up.

Can I set up my own SMSF?

The short answer is yes. The better answer is unless you’re very financially astute, you probably shouldn’t. There are many legal requirements on SMSF Directors for the fund to be compliant and remain so. Failure to comply attracts significant penalties and not investing adequate time and effort to research, plan and implement your investment strategy could potentially lead to administrative oversights, poor investment choices and even lower returns. Let us help you get it right.

How much money do you need to start an SMSF?

This is a question that we are asked very often. New research has been released showing the true costs of running an SMSF. It has been shown to be less than first thought. For several years regulators maintained that the minimum amount needed to set up a viable SMSF is $200,000. Under the right circumstances, it’s possible to set up an SMSF quite early and with funds enough cover initial setup costs. The research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000.

The findings of the research allow SMSF trustees and potential SMSF trustees to compare appropriate estimates of fees for differing SMSF balances with institutional superannuation funds (commonly referred to as APRA regulated funds). This helps significantly to guide decision making and in determining both the viability and likely performance of an SMSF. The costs include establishment, annual compliance costs, statutory fees and some investment management fees. Direct investment fees have been excluded.

What does the research tell us?

  • SMSFs with $100,000 to $150,000 are competitive with APRA regulated funds (SMSFs of this size can be competitive provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves).

  • SMSFs with $200,000 to $500,000s are competitive with APRA regulated funds even for full administration. (SMSFs above $250,000 become a competitive alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services).

  • SMSFs with $500,000 or more are generally the cheapest alternative regardless of the administrative options taken. (For SMSFs with only accumulation accounts, the fees at all complexity levels are lower than the lowest fees of APRA regulated funds).

This research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000. This is a significant departure from what many had believed to be the case. For simple funds, $200,000 is a point where SMSFs can become cost-competitive with APRA regulated funds or even cheaper if a low-cost admin provider is used. With the proposed expansion to six-member SMSFs, we may see many more take up this option at this threshold.

Comparing 2 member funds

From a cost perspective, the real benefit of an SMSF is when it achieves scale in balance and this can occur when members pool their superannuation savings. The below comparison can be used to grasp the ranges you might fall into.

Always remember, cost is not the only consideration.

When determining whether an SMSF is right for you, your analysis must go further than just a simple comparison of the costs versus APRA Regulated Funds. It should also factor in your retirement and income goals and whether you have the desire, time, and expertise to take on the role of an SMSF trustee. It’s also worth factoring in SMSF members may not receive the same level of protection in the event of theft or fraud that members in APRA regulated funds do.

How can we help?

If you would like to discuss whether an SMSF is right for you, please feel free to give Chad, Patrick or Robert a call on 1800 04 7693. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.