Do this To Legally Pay LESS TAXES in Australia

Summary

In this informative video, David Mack, a tax advisor with over 17 years of experience, explains how tax deductions, business structures, and tax rates work for small businesses in Australia. He covers the progressive tax system, how tax deductions reduce taxable income, and the impact of business structures like sole traders, partnerships, companies, and trusts on taxes. David clarifies the difference between tax planning (legal) and tax evasion (illegal), emphasizing the importance of strategic tax management while staying within the law. The video is a valuable resource for small business owners seeking to optimize their tax positions.

Takeaways

• 😀 The tax system in Australia is progressive, meaning the tax rate increases as your income rises, but it's marginal, so only the income within a specific bracket is taxed at the higher rate.
• 😀 Tax deductions reduce your taxable income, not your total expense. For example, spending $25,000 on a work vehicle doesn't mean you'll get $25,000 back; it only reduces the amount of income taxed.
• 😀 You can claim tax deductions on both operating expenses (like business travel, rent, and insurance) and capital expenses (such as equipment), but capital expenses are spread over a longer period.
• 😀 A company pays a flat tax rate regardless of how much income it earns, typically 25% for small to medium-sized businesses and 30% for larger businesses.
• 😀 Deductions will reduce the amount of tax you owe, but they don't reimburse you for the full cost of the expense. For example, a $10,000 deduction at a 25% tax rate saves you $2,500 in tax.
• 😀 Your business structure (e.g., sole trader, company, partnership, or trust) affects how your income is taxed and how tax deductions apply.
• 😀 Sole traders report their business income on their personal tax return and pay tax at individual tax rates, while companies pay tax at a flat rate as a separate legal entity.
• 😀 Partnerships distribute income and deductions among partners, with each partner paying taxes based on their share of the income, while trusts allocate income and deductions to beneficiaries.
• 😀 The larger your business profit, the more tax savings you can potentially achieve by choosing a business structure with a lower tax rate. A company, for example, could save you a significant amount in taxes compared to a sole trader if profits are high.
• 😀 Tax planning is legal and involves arranging your financial affairs to minimize tax within the law, while tax evasion (misreporting income or hiding money) is illegal and carries severe penalties.
• 😀 It is important to stay within the spirit of the law when structuring your business and claiming deductions. If you're unsure, always seek professional advice from a registered tax agent or accountant.

Q & A

What is a progressive tax system?

A progressive tax system means that the tax rate increases as your income increases. You pay a higher rate only on the portion of income that falls into a higher tax bracket.

How are tax deductions applied to a business's taxable income?

Tax deductions reduce the business's taxable income, meaning the business only gets a portion of the expense back, based on the tax rate. For example, a $10,000 deduction at a 25% tax rate would save the business $2,500 in taxes.

What is the difference between a soul trader and a company in terms of tax rates?

A soul trader's income is taxed at individual tax rates, which can be as high as 45% for earnings over $180,000. In contrast, a company pays a flat tax rate of 25% for small to medium businesses, regardless of how much income it generates.

Why is it not advisable to buy things just for the sake of tax deductions?

Buying things just to claim tax deductions is not a good strategy because while you may save on taxes, you are still out of pocket for the majority of that expense. Tax deductions only reduce your taxable income, not the full cost of the item.

What is the difference between tax planning and tax evasion?

Tax planning is the legitimate arrangement of financial affairs to minimize taxes within the law, while tax evasion is the illegal act of misreporting income, claiming false deductions, or hiding money from the tax authorities.

How does a business structure affect tax deductions?

Different business structures—like soul traders, companies, and trusts—are taxed differently, which affects how deductions apply. For example, a soul trader is taxed at individual tax rates, while a company pays a flat tax rate, which could result in different tax savings.

What is the ATO's view on tax schemes that seem too good to be true?

The ATO is cautious about tax schemes that seem too good to be true. These schemes may be considered tax avoidance, and if the ATO determines that a scheme's dominant purpose is to obtain a tax benefit, they can pursue legal action.

Can you choose your business structure just to maximize tax deductions?

While choosing a business structure with the goal of maximizing tax deductions can be beneficial, it should not be the sole reason for selecting a structure. Other factors, such as liability, management, and growth potential, should also be considered.

What role do trusts play in tax planning?

Trusts are more complex and may offer tax planning opportunities by distributing profits and deductions to beneficiaries with lower tax rates. This allows businesses to potentially minimize taxes, depending on the beneficiaries' tax positions.

How can you ensure that your tax planning is legitimate?

To ensure your tax planning is legitimate, always stay within the law and the spirit of the law. Avoid tax schemes that could be considered tax avoidance and always consult a registered tax agent or professional for advice.