Advanced Tax Planning – Sydney CBD

So you have all this retained profit in your company, now what to do with it? – Advanced Tax Planning – Sydney CBD

Robert Liu

Making a big profit at the end of the year is obviously a wonderful news for a company. However, the good news in the meantime raises a question mark to the shareholders that how should they deal with it. The contemporary low interest is definitely not an answer by depositing them in the bank. At MAS Tax Accountants Sydney CBD, we can help you to understand and manage Advanced Tax Planning. We do not only look after your tax return, but we are also specialized in tax planning.

Learn more about Advanced Tax Planning – Sydney CBD through these tips. Generally, there are four ways to dispose these retained profit.

Method 1: Pay out as dividends

The retained profit can be paid to the shareholders according to the number of shares they own. As these retained profits are the after tax profit, meaning the company has already paid 30% of the tax on them, the shareholders who received these dividends are entitled with the tax credit that has been paid by the company which is referred as franking credit. How does this work in a tax system? The shareholders treat the dividends from the company as an assessable income. The dividends are composed by franked dividend and franking credit. When the shareholders calculate their income tax, they will be able to reduce that franking credit from the tax they need to pay. Even more, the franking credit is refundable if the amount exceeds the tax and Medicare Levy payable. Through this way, the low income shareholders can enjoy the benefit of refundable franking credit due to the higher company tax rate than the individual’s. During our Sydney CBD tax return, we found this is an often way of paying out company retained profit.

Method 2: Pay the retained profit into Trust

As discussed above, the low income shareholder will be benefit from the company paying out the retained profit as franked dividend. What happens if the shareholder is already a high income earner and we don’t want the additional dividend income to push their income tax rate into a higher bracket? In this scenario, we normally suggest our client to set up a family trust and transfer the company shares into this entity. Then dividends can be distributed into the trust and likewise the low income beneficiary of the trust can treat the same way as the low income shareholders as mentioned in Method 1. Another merit of transferring the retained profit into the trust, is that trusts can use these profits for other investments, such as buying property, shares and so on. The nature of the trust gives the client’s assets better legal protection against their failure in the businesses. This is a typical strategy of the tax planning after we process your tax return.

Method 3: Invest in the business

Companies can use the retained profit to invest in the existing business or set up a new business. Beauty of starting a new business is that any tax loss of the new business which is normally the case at the beginning can be used to deduct the old business’s taxable income. This can immediately reduce the company’s income tax. Company can also transfer the joining entities’ tax loss to the head company through consolidation, which can immediately reduce the head company and group income tax. To implement this strategy of tax planning, caution need to prevent caught by Division 165 – the same ownership and control and the same business test.

Method 4: Invest in the commercial property

Negative gearing is a popular term in such a contemporary hot property market. Company can also be benefit from the negative gearing by investing in commercial property. As per ATO explanation, ‘A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.’ The taxation result of a negative geared property is that a net rental loss arises. Companies can use these losses to reduce the company taxable income and in turn reduce company income tax in your tax return.

At Mas Tax Sydney CBD Office, we are not only just dealing with your bookkeeping and tax return. We are always thinking standing in your shoes to help you save your money on tax in a legal and smart way by tailoring a tax planning specifically for your business. No matter you are new or having an existing structure in business, our experienced tax planning adviser will be here to assist you.