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.
