The end of financial year has rolled around again and it’s the perfect opportunity to reflect on the past year and to look ahead to your practice’s future. But this year, new Australian Taxation Office guidelines might be affecting you as well. Cathryn McLauchlan reports
Has the Australian Taxation Office (ATO) made any changes I should be aware of?
New professional practice guidelines will have a direct impact on you if you are using a trust structure for your dental business. Announced last September, this financial year marks the first year the draft guidelines are in place. The ATO’s intention for the new guidelines is to show professionals how they can assess tax risks in their business structures. “The draft guidelines set out what we consider to be low risk arrangements and what we consider to be high risk arrangements that might attract our attention,” Michael Cranston, ATO deputy commissioner, said in the announcement last year.
Head of the Prosperity Health division at Prosperity Advisers, Stephen Guthrie, says dentists utilising trusts or companies need to be aware of the change. “There are some key aspects that any dentist who is operating through a structure really needs to be considering when looking at how to distribute the income from their practice structure, which they probably haven’t had to think about in previous years,” he says.
Senior manager at RSM Bird Cameron, James Campbell, explains the three criteria the ATO has put in place to assess your risk category. “You’re in a low-risk category if you meet one of the following—first, the appropriate amount of income is reflected in the individual professional practitioners (IPP) income tax returns. Second, 50 per cent or more of the income is being assessed by the IPP, which can be an issue when splitting income via family trusts. And third, the effective rate of tax of the IPP is not less than 30 per cent.”
Guthrie advises all his dental clients to attempt to minimise their taxation footprint in this area. “You really want to avoid becoming a test case for the tax office, which is going to revisit this over the coming years and issue further guidelines in 2017.”
How can I avoid making mistakes with my taxes?
We all have the potential to miss or forget something at the end of financial year (EOFY) but some prior consideration could save you from these hassles. Campbell says one of the biggest issues dentists face is choosing to buy or build on their practice at the wrong time. “A dentist might decide to do some repairs to their office on, for example, July 15,” Campbell explains. “But if that was put in the May-June period then they could bring forward the benefit in that year.”
Another common mistake, Guthrie explains, is to leave your superannuation to the last minute. “The contributions have to be received and banked by the superfund before the 30th of June,” he says. “If it’s left until the 30th of June, it potentially won’t be received in time so it won’t be tax deductible.”
Campbell says finding the time to contact your accountant before the end of financial year can really help you avoid making any of these tax mistakes. “Catch up with them, have a look at where your results are, and put some tax planning in process with them, because by the time 1 July comes around, it’s too late.”
How can I make my EOFY more manageable?
Tax time can be a daunting time for you and your business, but new tools such as cloud accounting software and downloadable checklists from the big banks and financial services can help break the process down into manageable pieces. “People are looking at moving online to get access to more real time data because they want more time to spend with their families,” Campbell explains. “From automatic bank feeds to standard business reporting… it’s exciting times for business owners.”
The other important part of managing tax time more efficiently is to simply plan ahead. Guthrie says planning should begin on 1 July. “Realistically, tax planning is not something that just happens in the last couple of months,” he explains. “And the big contributors to effective tax planning fall into three categories: making sure your business structure provides maximum tax efficiency, maximising tax-deductible debt and ensuring you’re in a position to avail yourself of all the tax-deductible opportunities that exist.”
Campbell says that he encourages clients to begin tax planning for the following year in May, but he also says it’s a good time to ensure you are on track for the upcoming end of financial year. “It gives you enough time to have a discussion about some of your tax obligations that you have coming up in the next few months and it gives you a chance to take action on opportunities such as superannuation if any is required,” he says. “It’s also enough of a time frame to set your budgets, KPI [key performance indicator] and realistic targets based on what the top performers in the industry are doing.”
What else should I be doing for my practice at this time of year?
You might want to use this time to consider whether you’re on the path to a stable retirement. Guthrie says, for example, if you have excess income, utilise it as an investment for your future. “Contribute the maximum amount to superannuation and balance paying off personal debt with implementing a long-term savings strategy.”
Campbell says contributing that maximum amount will also help to minimise tax. “There are always opportunities to offset that excess income with other costs,” he says. “In terms of minimising tax, we can do that with your super or bringing forward costs, but sometimes you have to pay it and it’s good to plan for that.”
As you prepare for the end of financial year, don’t just consider the year that was, but look ahead and re-evaluate your goals. “Ask yourself if you can utilise the hygienists to take on more tasks and therefore take on more work yourself,” Campbell explains. “Review your structures. Have you looked at using service trust models? Have you looked at retirement plans? Is there someone in the office you can train for succession planning?” Keep your business’s future and your own future in mind, but don’t rush through the review of this financial year. Learn lessons from it and, as Campbell says, “Be proactive with your advisers.”