How to reduce tax using business profits
We come across a lot of clients who operate a business, things are going well, they’re working with an accountant to make sure they’re paying the right amount of tax - things are great.
So you might be wondering what else we can do to help? Well, one of the things we look at for our clients is making sure that any profits they’re drawing from their business are coming out in the most optimal way for them to pay the least amount of tax.
Often people run their business and out of whatever profits they make, they take some out as wages - they pay a bit of tax, pay PAYG, pay some super - and that’s it. That might be alright, but there’s more than one way to take profits or wages from your business and reasons why some approaches are better than others. Here are a few we suggest:
Wages
One strategy is to pay different wages to different parties. If your spouse is also drawing an income from the business, perhaps they’re paid slightly more or slightly less depending on what we’re trying to achieve in terms of tax outcomes or which tax bracket you’d like them in.
Dividends
Paying dividends is another way to draw profits out, if this applies to your business structure. Dividends can come with a range of benefits like franking credits, which might allow you to essentially withdraw money tax free depending on your tax bracket, so these strategies can be really useful if applied correctly.
Trust distributions
Another similar option might be to take a directors fee or loan which can allow you to use tax thresholds to your advantage when set up the right way. You end up with the same amount of money in your pocket, but it’s reported differently from an accounting and tax perspective.
When drawing profits out of your business it’s important to be smart and ensure you’re withdrawing it the right way to achieve your goals. You might need a certain amount to live off, so our goal is to help you get that money out in the most tax effective manner.
Though it’s not always the first thing that comes to mind, there are creative ways we can help save you a lot of tax and set you up to use the wealth we’ve saved to make other investments for the future. Check out the rest of our business series on our Blog or Facebook page and get in touch today if you would like to discuss tax minimisation for your business.