Article by Jack Hayes
I know what you’re thinking – what an absurd comment for a tax accountant to make?
But what are the long term implications of paying too little tax?
Firstly, overly aggressive tax planning can result in cashflow constraints for the business and poor business decisions.
Furthermore, farmers are generally eligible for primary production income averaging, meaning income tax rates are based on the average of the individual's last five years of income. While it can be challenging to predict future years profits, it is important to consider if average tax rates are likely to increase in the future due to:
If there is a likelihood that income tax rates will increase in the future, it is important to consider if this year is potentially a “better year” to pay tax compared to future years. Paying too little tax in lower production years could lead to tax being paid at a higher rate in future years.
We have seen countless instances, when new clients come on board, where opportunities to pay “reasonable” levels of tax (25-30%) have been forgone. Large backloads of profits have been built up (e.g. large grain deferrals, expenses brought forward, untaxed FMD’s).
When the day of reckoning inevitably comes for these businesses, tax is paid at extremely high rates (as high as 47%!).
While taxation deferral methods (such as grain deferrals and prebuying expenses) are important options to even out the cyclical nature of farming, it is important to focus on long term tax saving options such as concessional (tax-deductible) superannuation contributions and the (well managed) use of company beneficiaries.
Unfortunately, tax is a “necessary evil” for a profitable business and is ultimately required to achieve debt reduction and therefore, business growth.
When harvest on cereals commences and yields are more certain, it is an opportune time to prepare a harvest tax estimate. This will give you an idea of your tax position and allows you to make more informed grain marketing decisions.
In summary, it is important to take a long-term approach to tax planning. Aiming to pay zero or very little tax may not be the best long-term strategy for a profitable business.
How are Byfields different to other accountants? We have the best planning tools at our disposal to work with you proactively to achieve the best outcome for your business.
Contact a Byfields Accountant at any of our offices to discuss further.