Tax planning - making the most of a tax loss

Agribusinses Insights

If you recall a few weeks back, my colleague Jessie Johnson highlighted the importance of tax planning in her article ‘Why Tax Planning for 2021 is Essential’ where she touched briefly on a couple of opportunities to consider if your business will make a taxable loss this financial year.

In normal years, you would only hear from your accountant because you have made a significant profit and they want to assist you to reduce your tax liability.

So why would your accountant want to discuss your tax plan if you do not have tax to pay?

Well, it’s because we only get one bite at the cherry and we wouldn’t want you to miss an opportunity.


The first issue that needs to be ascertained is where the taxable loss will be made.

The first issue that needs to be ascertained is where the taxable loss will be made.

  • Will the loss be made in a partnership and distributed to individuals to offset against other personal taxable income?
  • Or, will the loss be incurred within a Company or Trust, and therefore quarantined within those entities, only available to be offset against the future taxable earnings of those same entities?

TAX-LOSS AS AN INDIVIDUAL

As an individual who receives a loss from a partnership, you can offset this loss against the withdrawal of Farm Management Deposits.

Your loss can also offset dividends from your private companies, so there is a need to discuss what this could mean for you and your business structure. Do you have any assets held in your individual names that are holding a large potential capital gain?

Maybe there is an opportunity to crystalize the gain during this year and not pay any tax, or even just reduce the amount of tax payable.
Remember, as an individual we have an $18,200 tax-free threshold each year, if we don’t use it, we lose it. So let’s make the most of it.


Tax-loss within an entity (Company and Trusts)

If the loss is quarantined within an entity (such as a company), we can apply this loss to past profits and get a refund of tax paid on prior-year incomes.

If you operate your business through a company and are running at a tax loss this year we would recommend discussing this with your accountant.

Trusts and companies can be used in a similar fashion for the next couple of tips, so look at the ability to bring forward some income, as Jessie mentioned, with your grain contracts.

Timing is everything, so look at ways to bring forward income or to defer expenses.

If the individuals associated with the business have little or no other source of income, then we might miss out on your $18,200 tax-free threshold this year.

Perhaps we could look at paying a wage from your company or trust to enable you to utilise this tax-free threshold and make sure you get a bite of that cherry.


HOW CAN RSM HELP?

With all business decisions and planning opportunities, it is about having early conversations with your trusted accountants and advisers. At RSM, we’ve been your local regional accountants for longer than you think. Make a call to your local RSM office and discuss these opportunities today.