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How to Pay Fewer Taxes for Small Business Owners in 2023. [Must Read].

Article by WealthSafe.

Date Published: 22 Feb 2023

how to pay less taxes for small business

My job is to help people pay less tax. And I was made aware of just how badly the system rorts the individuals and small businesses of this country when I was the one doing it.

Yes, that’s right. Every time you grumbled or complained about the “blankety blanks” at the ATO, that was me.

At least, for a time.

It was then that I realized that I could help a small business pay fewer taxes with some simple, no-nonsense advice that hardly anybody was doing. And as you can see in this article by ABC, I do everything I legally can to help you minimize your tax bill.

I say hardly anybody because there are a few ultra-wealthy people in this country who have learned how to minimize their tax bill to nothing. Yes, nothing. As in, people who earned over $2 million a year had legally claimed a zero tax bill. One article in the Sydney Morning Herald pointed out that there were at least 50 individuals who had that big goose egg in their reported income, even though they had made an average of $2.36 million each!

What I’m saying is that it is possible to legally slash your tax bill and learn how to pay fewer taxes as a small business or investor. It ultimately comes down to implementing the best tax structure for small businesses that will work for your business and save you tax dollars.

Let’s look at some ways you can do it.

1 – The Family Discretionary Trust To Pay Fewer Taxes On Your Business

To start, let’s look at your small business and we’ll set it up in such a way that you can avoid paying a steep tax bill.

And why do you want to do that? Because if you’re doing pretty well with your business, making over $180,000 a year, you’re going to slap with a 45% tax bill, You read that right.

That means that for every dollar you earn with your hard work over $180,000, almost half of it is going to the tax guys in Canberra.

Does that seem right? It sure doesn’t to me.

The first way to limit your taxes is by setting up what’s called a family trust. A family trust is an ingenious device that allows you to distribute the income you make how you see fit. And the income you distribute is pre-tax!

So, let’s imagine that you have a business making $200,000 in income. With a family trust, you can distribute that $200,000 between yourself, your partner, your kids, or maybe a charity. You would set up the family trust with yourself and anyone you choose as a beneficiary. And the taxes don’t apply until after you’ve distributed the money.

So, when the ATO looks at your income, they don’t see $200,000 in your bank account. They see $120,000 to you, $40,000 to your wife, $10,000 each to your three kids, and $10,000 to a charity. Nothing hits that $180,000 threshold where they slap you with a ridiculous 45% rate.

The best part is that a family trust like this is very easy and cheap to set up when compared to the savings you get. There are virtually no compliance costs and hardly any upkeep costs. In fact, it’s less work for your accountant year after year. And all the expenses to maintain the trust come out of the pre-tax income, a nice little benefit for your bottom line.

And as you’ve seen, it’s up to the discretion of the trustee to decide how to distribute your income to pay fewer taxes as a small business.

A family trust is also very hard for the courts to penetrate. Meaning that if your small business gets sued, it’s the trust that incurs the lawsuit, not the trust’s beneficiaries. Your family discretionary trust doesn’t hold assets (and I’ll explain why in a minute), so you aren’t in danger of losing your house or cash to a frivolous lawsuit or fraudulent claim.

The only problem with a family trust as a small business tax structure is that you can’t hold on to income, or at least, you shouldn’t. Any income that isn’t distributed attracts a very steep tax rate, making it counterproductive to do so. But as long as you’re distributing your income properly, you shouldn’t ever come to that.

2 – Using A Company to Pay Fewer Taxes On Your Business

Should you be in a situation where you have to split the income of your small business, the family trust is going to be the first structure that I advise you to consider.

But if you can’t distribute the income, if you’re going to use your business to accrue assets, or if you have a business partnership, you might want to set up a company. A bucket company is particularly effective for people who want to accumulate assets for investment while minimizing their tax bill and saving capital gains tax.

Let me show you how this works.

Remember how you can’t use a family trust to hold on to your assets? That defeats the purpose of lowering your small business’ tax bill or protecting your assets from lawsuits. The simple solution around that is to have what’s called a bucket company. This type of company exists to hold on to assets while only attracting a 27.5% tax bill.

The best part of the bucket company is that you have it as a beneficiary from your family trust, using it to hold on to any money you don’t want to pull out right away without getting a shock come tax time.

In practice, it works like this. Let’s say that you have an internet business, some sort of e-commerce. Business is good and you’re making $500,000 a year. If you set up your small business to pay less taxes using a family trust, you can pay yourself a healthy $180,000 every year without crossing that 45% tax rate. If you don’t want to pull out any more money, you can distribute the remaining $320,000 into a bucket company.

You’ll save an enormous amount of tax money doing that, and you still have the protection afforded by the company laws.

Disclaimer: a company doesn’t have access to the 50% capital gains tax discount, so you don’t want your bucket company to own the investments that you plan to sell. This is why the bucket company must work in conjunction with a family discretionary trust.

One profession that does very well with the bucket company structure is medical practice. Doctors who contract out to several clinics may want to keep their taxes at 27.5%, so they use a company to hold onto their money. Since you can’t sell anything when you give up being a doctor, you don’t have to worry about capital gains taxes. The company works very well in that case.

The Box Creative Solutions to Protect Your Small Business From Paying High Taxes

best tax structure for small business

Going back to the internet e-commerce business in our previous example, there are even more options for you, especially if your income is coming from international sources. You might want to consider offshore tax structures. If you’ve had enough of Australia’s crushing tax laws, you might want to pick up your bat and ball and leave the country.

Wealth Safe can advise on becoming an offshore resident for tax purposes to help you protect your overseas income. We’ll help you work through the very strict criteria of the residency test established by the Bywaters Investments High Court case so that you can keep more of your money offshore and legally sheltered from Australian tax laws.

Alternatively, and I don’t want to get into it much here, you can use a Self-Managed Super Fund (SMSF) to lower your tax bill as a small business to just 15%. Wealth Safe is not licensed with ASIC so we can’t offer advice on how to set up an SMSF. But just know that the option is there.

If you want to learn how to pay fewer taxes as a small business or figure out the best tax structure for your small business, the best advice is to seek advice. Wealth Safe can offer you a tailored solution according to your situation. Have a chat with us to talk about your tax structures, family trusts, companies, and even offshore residency to legally slash your tax bill. After all, why wouldn’t you want to keep more of your own money?

Contact us today to learn more.

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Wealth Safe

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