tax-planning

Zero to Mini Hero: The Big Picture & Tax Planning Basics (Summary)

This summary provides an overview of the key points related to tax planning and group tax summaries, including legal considerations and best practices for trustees.

1. Introduction

• This presentation focuses on tax planning basics and the importance of understanding the “big picture” when managing group tax summaries.
• Effective tax planning is essential to minimize tax liability while staying compliant with tax laws.

2. Preparing a Group Tax Summary

• A group tax summary provides an overview of the tax position for all entities within a client group.
• It consolidates tax reconciliations from individual entities to calculate the effective tax rate:
  • Effective Tax Rate = Total Tax Liability ÷ Total Taxable Income.
• The group tax summary is useful for discussions with clients during tax return preparation and tax planning.

3. What is Tax Planning?

• Tax Planning involves structuring financial affairs to minimize tax while complying with the law.
• Tax planning is legal when it aligns with the intent of the law, but tax avoidance schemes (designed purely to exploit the tax system) are unlawful.

General Anti-Avoidance Rules (Part IVA)

• Part IVA of the Income Tax Assessment Act 1936 focuses on schemes with the dominant purpose of obtaining a tax benefit.
• The ATO considers several factors, including how the scheme was carried out and its financial impact on the taxpayer and related parties.

4. Tax Planning Tools

• To effectively plan for tax, it is essential to understand the client’s personal circumstances, such as:
  • Estimated income and deductions.
  • Investments, business profits, rental income.
  • Major life changes (e.g., marriage, retirement).
  • Any planned acquisitions or sales, particularly for capital gains tax (CGT) purposes.
• Distribution Resolutions: Trustees of discretionary trusts need to make resolutions regarding the distribution of income to beneficiaries by the end of the financial year (usually June 30).

5. Tax Planning Considerations

• Ensure the trustee has considered all factors, such as trust deed provisions, eligibility of beneficiaries, and any family trust elections.
• Resolutions should clearly outline the beneficiaries’ entitlements, and any tax implications (e.g., CGT and dividend streaming) should be carefully considered.

6. Avoiding Tax Pitfalls

• Distributing income solely for tax savings can be a red flag for the ATO.
• It’s essential to check that the trust deed supports the decisions and that resolutions are made in good faith, with all beneficiaries’ interests considered.

Pro Tip:

• Avoid “rolling forward” previous year’s resolutions without reviewing the specific details and current year’s financial circumstances.

7. Conclusion

• Tax planning is a continuous process that requires attention to detail and a comprehensive understanding of the client’s financial situation.
• Building relationships with clients and asking the right questions is key to effective tax planning and compliance.

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