When is the right time for tax planning? As tax agents we often get taxpayers contacting us between July and the normal due date of 15 May the following year. Income is established and tax calculated when the tax payer askes the question ‘how can I reduce my tax bill’? Realistically the answer is not that much. The opportunity for any tax reduction strategies has mainly passed at the end of the tax year.
So the question is – when is the best time to do tax planning? Some may say in June, before the end of the tax year. Well this is a better option than after June but still not the best time. The ones who get the best outcomes are the people that do their tax planning on an ongoing basis.
Take the relatively simple case of a wage and salary earner. A popular strategy, particularly for higher earners, is to salary sacrifice into their superannuation fund. Salary sacrificing can only be done before the salary is paid so the best way to achieve the right amount to be contributed is evenly over the twelve months – so this would need to start in the previous July. If you wanted to do 15%, for example, if you wait till June you will already have been paid 91% of your annual wage – so 15% is no longer possible.
Staying with individuals who may have a rental property there are some strategies like prepaying interest, or bringing forward repairs. If you wait till close to the end of June you may find that you run out of time – possibly because your repairer is already booked up doing jobs for others who planned ahead and got in before you! Or the bank comes back to you in July when you needed to prepay in June – banks are known for their inefficiency!
If you are running a business the opportunities for effective tax planning are much more plentiful. A well run business will have a business plan and budget in place before the new financial year even starts. In tax planning timing is everything and good decisions are not made without forethought. Moreover, implementation is not instantaneous, so these need to be scheduled earlier rather than later. Some doing last minute panic strategies will spend money they otherwise wouldn’t just to save tax, rather than timing expenses that are necessary and using these opportunities. It is a foolish person who spends money purely to save tax as, with maximum tax rates being 47%, at best you are spending a dollar to save 47 cents!!
So, if you haven’t started thinking of tax planning, or even considering when is the right time for tax planning, then now is a good time to start – for this year and next!
Also read: Tax Structuring