Strategic Tax Planning: Why Good Tax Outcomes Start Well Before 30 June
Sally Preston
End-of-financial-year tax planning is important, but the bigger opportunities usually come from planning well before 30 June. Long-term tax planning can affect cash flow, the way profits are extracted, the structure used to hold assets, and the tax payable when a business or investment is eventually sold.
What should be reviewed during the year?
· Private company loans and Division 7A exposures
· Whether profits should be paid as salary, dividends, trust distributions or retained in the company
· Whether the current structure supports growth, asset protection and succession
· Whether assets are held in the right entity before a sale or restructure
· Eligibility for small business CGT concessions
· Whether the small business restructure roll-over could assist with a genuine restructure
· Superannuation contribution planning
· Whether international expansion, if relevant, has been planned before arrangements are put in place
Division 7A: why private company loans need early attention
Division 7A can apply where a private company makes a loan or payment to a shareholder or an associate of a shareholder, or forgives a debt. If the amount is not repaid or put under a complying loan agreement by the company’s lodgment day, it may be treated as an unfranked dividend.
In practice, the money has often already been spent by the shareholder or associate by the time the issue is identified. It is also important to remember that simply putting money back into the company before lodgment and then drawing it out again may not be effective where the repayment is not genuine.
Where a complying Division 7A loan agreement is used, the loan will usually need to be repaid over a maximum seven-year term if unsecured, with interest charged at the ATO benchmark interest rate and minimum yearly repayments made each year.
This can create a cash-flow issue. The interest is assessable income to the company and may increase the company’s tax payable. Over time, the interest also increases retained earnings that may later be paid out as dividends, potentially creating further top-up tax for the shareholder. If the original cash has already been spent, the tax cost can come as a surprise.
The better approach is to review drawings early and decide whether the amount should be repaid, treated as a dividend, refinanced externally, or properly documented as a complying loan before the relevant deadline.
What are the options?
· Repay the amount before lodgment, where genuine repayment is possible.
· Declare a dividend instead of carrying the amount as a loan, so the tax cost is known and dealt with upfront.
· Put a complying Division 7A loan agreement in place before the deadline and make sure minimum yearly repayments can actually be funded.
· Consider whether external finance would produce a better overall outcome, even if the interest rate is higher, because the Division 7A tax and cash-flow consequences may be more costly.
Business structure planning
Long-term planning is not limited to Division 7A. A business structure that worked in the early years may not work once the business has employees, valuable goodwill, property, intellectual property or external investors. The right structure can affect asset protection, access to concessions, financing, succession and the tax outcome on a future sale.
Where the restructure is genuine and ultimate economic ownership is maintained, the small business restructure roll-over may help defer income tax consequences for eligible active assets.
For individuals, longer-term planning may also involve the timing of selling inherited assets, the use of superannuation contributions where appropriate, and modelling the tax impact before a transaction is undertaken rather than after contracts are signed.
Practical annual checklist
☐ Review shareholder and associate loan accounts before 30 June
☐ Check minimum yearly repayments for existing Division 7A loans
☐ Review whether any trust distributions to corporate beneficiaries are unpaid
☐ Review whether profit extraction aligns with the owner’s cash-flow needs
☐ Consider whether the structure remains suitable for risk, growth and succession
☐ Model CGT outcomes before any sale process starts
☐ Review superannuation contribution caps and timing
☐ Document commercial reasons for any restructure
Final thoughts
Strategic tax planning is most valuable when it happens before major decisions are made. The aim is not simply to reduce tax for one year, but to make sure the structure, cash flow, documentation and tax outcomes support the owner’s longer-term commercial objectives.
Disclaimer: This article contains general information only. It should not be relied on as tax or legal advice. You should obtain advice specific to your circumstances before acting.
References / Useful links
ATO Division 7A loans: Loans by private companies | Australian Taxation Office
ATO Division 7A benchmark rate: Division 7A – benchmark interest rate | Australian Taxation Office
ATO SBRR: Small business restructure roll-over | Australian Taxation Office