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.