What is tax planning?
Tax planning is different to tax compliance.
Tax compliance involves meeting legal requirements regarding taxes and reporting. Lodging a tax return is a common example of tax compliance.
Tax planning on the other involves assessing your unique circumstances against over 200 tax strategies and selecting the optimum 1 to 5 strategies that can be implemented to achieve maximum savings and benefits. Tax planning strategies use various legal deductions, exemptions, structures, and tax-effective investing. Each strategy has an implementation process to follow and accounting professionals skilled at tax planning know how these work.
Who can benefit from tax planning?
Many taxpayers can benefit from tax planning and the savings that are created.
Approximately 50% of Australian taxpayers use legal tax planning strategies to minimise their tax with the most popular strategies being negative gearing of residential properties (2.1 million taxpayers), and salary sacrificing super contributions (4 million taxpayers).
The most significant tax breaks in Australia are:
- Capital gains tax (CGT) discount: Individuals and trusts are eligible for a 50% discount on capital gains if they have held an asset for at least 12 months before disposing of it.
- Negative gearing property: This allows property investors to offset rental property expenses, such as interest payments on loans, against their taxable income.
- Negative gearing shares: Investors offset the interest costs against their taxable income and benefit from the franking credits (tax paid) on dividends.
- Superannuation concessions: Reduces taxable income whilst the funds invested in super are concessional taxed (often the tax is reduced to 0%).
- Fringe benefits tax (FBT) exemptions: Certain work-related items can be exempt from FBT, reducing the tax burden for both parties.
- Small business tax concessions: Includes simplified depreciation rules, immediate deductibility of certain expenses, and the option to account for GST on a cash basis.
- Research and development (R&D) tax incentive: Businesses engaged in eligible R&D activities can claim tax offsets or deductions for their R&D expenses, encouraging innovation and research in Australia.
- Dividend imputation system: This system allows Australian companies to attach franking credits to their dividends, ensuring shareholders are not double-taxed on corporate profits.
- Salary sacrifice arrangements: Employees can enter into salary sacrifice arrangements with their employers to receive cars on a pre-tax basis, reducing their taxable income.
Why should accountants provide tax planning services to their clients?
- Added Value to their clients: Tax planning goes beyond compliance and tax preparation, enabling accountants to help clients legally minimize their tax liabilities, generate significant savings, and optimise their financial positions.
- Comprehensive Financial Advice: By incorporating tax planning into their services, accountants can offer more comprehensive financial advice that considers the tax implications of various decisions. This can lead to more informed and strategic financial decision-making for clients.
- Proactive Tax Management: By analysing clients' financial situations and identifying tax-saving opportunities, accountants can help clients mitigate tax risks, optimise deductions and credits, and develop tax-efficient strategies for long-term financial success.
- Compliance and Risk Mitigation: By providing tax planning services, accountants can help ensure that clients remain compliant with tax laws and regulations. They can stay updated with tax developments, interpret them accurately, and advise clients accordingly, reducing the risk of non-compliance, penalties, and legal issues.
- Long-Term Client Relationships: By actively helping clients achieve their financial goals and optimise their tax positions, accountants become trusted advisors who are deeply invested in their client’s success. This can lead to client loyalty, referrals, and potential for continued business growth.
- Competitive Advantage: Tax planning services can give accountants a competitive edge. By offering these services, accountants differentiate themselves from competitors and attract clients seeking holistic financial solutions.
- Revenue Generation: Tax planning services can be an additional revenue source for accountants, diversifying their revenue streams and increasing profitability.
Size of the Australian tax planning market
For the year ended 30th June 2023 45,333 tax agents (RTA) and 17,000 tax (financial) advisers generated $330 million in revenue from tax planning. Tax planning accounted for 7.5% of the year's $4.4 billion tax services revenue.
Although 94% of accounting practices say they provide tax planning services, less than 10% of suburban accounting practices actually generate any revenue from the service.
Tax planning software
Tax planning software assists individuals, businesses, and professionals in optimising and managing taxes. Tax planning software typically offers:
- Tax Calculation and Projection: Tax planning software can calculate and project tax liabilities based on user-provided financial data. It considers various tax rules, rates, and thresholds to estimate the amount of tax owed or refunded, allowing users to plan their finances accordingly.
- Tax Strategy Selection/Optimization: The software identifies and suggests available deductions, exemptions, and offsets to help users maximise their tax savings.
- Tax Law Compliance: Tax planning software keeps track of tax laws and regulations, ensuring compliance with the latest requirements. It incorporates changes in tax legislation to accurately reflect the current tax environment and help users meet their obligations.
- Scenario Analysis: Users can simulate different financial scenarios within the software to evaluate their tax implications. This allows for strategic decision-making by assessing the potential impact of various financial choices on their tax positions, such as investments, retirement contributions, or business decisions.
- Data Organization and Storage: Tax planning software provides a centralised platform for organising and storing tax-related information.
- Reporting: The software generates reports that detail the tax savings generated from implementing the selected tax strategies, and the step-by-step process to legally and effectively implement each strategy.
- Integration with Accounting Systems: This enables the financial data to be seamlessly imported (this eliminates manual data entry and ensures accuracy and consistency).
Tax planning software aims to simplify tax-related tasks, optimise tax positions, and ensure compliance with tax laws and regulations. It streamlines the tax planning process, saves time, reduces errors, and helps users make informed financial decisions to minimise tax liabilities and maximise tax savings.
To date, Australia has lagged behind the US in the adoption and use of tax planning software. As a result, tax planning in Australia has generally been provided manually, on an adhoc basis, to less than 10% of taxpayers.
Over the last twenty years, every task, function and service in the average accounting practice has changed dramatically. The personal computer, and associated software, has brought enormous efficiencies in the preparation of financial statements, budgeting, and tax return preparation. Today, no accountants perform these tasks manually.