Case Study: LAFHA Saves $20,130 Tax

This is a real client of a Queensland practice subscribed to the TaxFitness programme. This shows the impact of just 1 strategy.

Background: 

Thomas is a contract plumber who lives in Newcastle and gets contract work in Sydney.

Facts:

• Thomas has been offered a 12-month contract in Sydney at $133,000 pa. He typically works on a contract basis. (In the tax year he acquires standard work deductions of $3000).
• Thomas is responsible for his own accommodation and meals in Sydney.
• Thomas receives regular communication from his accountant about tax saving opportunities (newsletter) and this has  helped ‘educate’ Thomas to be tax savvy and have an interest in his tax affairs. He therefore asks his accountant before accepting the job for advice.

Accountant’s Tax Planning Advice:

• Establish a PSI entity to contract with his employer.
• Have the PSI entity pay Thomas a $50,000 pa living away from home allowance to cover his Sydney accommodation and meal costs. This is deductible to the PSI entity and non assessable to Thomas.

Savings for the client	Option 1 Only compliance service (tax return)	Option 2 With tax planning service (applying LFHA strategy)
Taxable income	$130,000	$80,000 ($133,000 – $3000 – $50,000)
Tax paid	$39,367	$39,367
Tax expense	$38,197	$18,067
Tax Refund	$1,170	$21,300

 

• A compliance accountant achieves savings of $1,170 under Option 1.
• A tax planning accountant under Option 2 achieves savings of $21,300 – i.e. an extra $20,130 (21,300 – 1,170) more than the compliance accountant. The client will be much happier with this.
• Client satisfaction will be much higher with Option 2, along with client retention and referrals for new business from those happier clients.

 

Service fees for the practice	Option 1 Only compliance service (tax return)	Option 2 With tax planning service (applying LFHA strategy)
Tax Return	$130	$130
Tax Plan	$0	$500
Profit – company set-up	$0	$500
Current	$130	$130
Projected ongoing
Tax Return	$0-$130	$130
Financials & company tax return	$0	$800-$1,000
Future	$0-130	$930-$1,130
	$0 if client leaves and no longer remains loyal – e.g. moves to myTax, seeks more proactive services elsewhere. Compliance services are widely available so the client can opt to change.	Higher client retention rate as services provided add significant value and savings and therefore greater loyalty. Tax planning services are not widely available thus removing the ‘shop-around’ mentality.