Most tax planning strategies fall into one of the following three main categories:
1) Timing differences
Manipulating the period in which you report taxable income or allowable deductions. These strategies generally involve 'preventing the inevitable' and shift your tax liability from one period to another. They can be useful however to ease cash flow and in years when you have higher than normal income. A common example of a timing strategy involves purchasing additional stock before the 30 June year end. This allows for a greater tax deduction and reduces your taxable income in year 1 though results in less purchases (and higher income and tax payable) in year 2.
2) Permanent savings
Involves actions that result in income being taxed at a lower rate than it would otherwise normally be taxed. These strategies are often more complex than timing strategies, can require excess cash flow and should be thought through properly to ensure that they do not create a future financial disadvantage. A common permanent tax saving strategy is to make personal concessional superannuation contributions, where income which would normally be taxed at 30% (or more) is taxed at a capped rate of 15%.
3) Allocating income
This final strategy involves taking steps which allow income to be reported by more than one person. Under our bracket based tax system, tax payable on income reported by one person only will usually be higher than the combined tax payable of several people, each earning a share of the same amount of income. Not all structures allow for the allocation of income and there are many specific rules which limit the ability to successfully allocate income. You should also consider to whom you consider making an allocation of taxable income. An allocation of income 'on paper' often comes with the implication that this money will need to be actually paid to the individual at some point.
At Level One we assess your personal circumstances and design a strategy perfect for you. Contact us to see how much tax you could save.