Strategic Planning for Business Owners and Individuals – Navigating the Stage 3 Tax Cut

Apologies for my absence over the past couple of weeks! After a much-needed break, I am now back, refreshed, and ready to dive back into the grind.

As July 1st approaches, the upcoming Stage 3 Tax Cut is nearly here. While we’re still awaiting the official budget, let’s work with the pre-budget version for planning purposes.

So, let’s talk about what we should consider to benefit both individuals and savvy business owners like yourself.

For individuals, paying less tax is obviously a win. But for business owners, there’s an additional layer of opportunity: optimizing your family group’s financial strategy.

This tax cut presents an excellent opportunity to revisit your distribution plan. By optimizing how you extract money from your business, you can enjoy more disposable income for personal use. Whether it’s investing outside of your business, paying down your home loan, or treating yourself to a well-deserved holiday, the possibilities are endless.

For smart business owners and accountants, this is the game we play annually: finding the sweet spot of maximizing withdrawals from the business while minimizing tax liabilities. After all, the more money (being the profit extracted from the business) you have outside of the business, the more options you have at your fingertips.

Let’s break it down a bit further. Depending on your personal circumstances, your average corporate tax rate can range from 25% to 30%. The goal is to ensure you’re not paying more tax personally than your corresponding corporate rate.

For example, in the 2024 financial year, if your taxable income is $105,000, your tax including Medicare levy will be around $26,692, roughly 25%. But if your income bumps up to $160,000, your tax jumps to $47,467, approximately 30%. Shifting your income accordingly can help you optimize your family group’s tax position.

Looking ahead to the 2025 financial year, based on pre-budget figures and the anticipated Stage 3 Tax Cut, aiming for a 25% average rate would mean aiming for a personal taxable income of around $130,000. For a 30% average rate, target around $200,000.

One thing to keep in mind when increasing your income is the Division 293 tax threshold. Currently set at $250,000 adjusted income, exceeding this threshold results in an extra 15% tax on super contributions. So, if you have a spouse, it’s wise to strategize to ensure only one spouse bears this tax burden if possible.

Obviously, this is a very simple example of a small family group, the more entities you have, the more room you get to play with, but also comes with added complexity.

In conclusion, the upcoming tax cut offers a prime opportunity for both individuals and business owners to optimize their financial strategies. By planning ahead and working with your accountant, you can make the most of these changes and set yourself up for success.

If you happen to need someone to review your family group, optimize your business structure, or assist with tax planning, don’t hesitate to reach out to me.

Here’s to smart planning, maximizing opportunities, and a prosperous financial future!