Tax strategy - Why it matters and when it should start
-Kemp Munnik.
Chances are, you’ve heard of a tax strategy, but you don’t know where to start? Just thinking about taxes might even make you nervous. Tax strategies have one over-riding objective: to increase your wealth.
Wealth is intricate and it requires a comprehensive strategy to optimise it but you cannot do it without being aware of the tax impact of your decisions.
As a business owner or investor, your focus is on growth. Your work is your passion, and no one is as invested in your growth as you. You want to become wealthy, secure, and financially independent.
Taxes aren’t at the top of your mind unless it’s time to pay them. If you’re like most business owners and investors, you sometimes feel like taxes are beyond your control. This makes you worry that you’re doing the wrong thing, trusting the wrong person or wasting a lot of money.
Taxes are an integral part of your overall wealth and business strategy.
Why You Need A Tax Strategy
Additional savings in Income and/or Capital Gains Tax in the current or future years through an effective tax strategy will result in:
Reduction in eventual estate taxes and administration cost, for example executors fees
Funds available to build capital more quickly and maximise your investments
Better control over the money you make and on what you spend it
Reducing the cost of education for your children as these costs are normally paid out of after tax money
A business context resulting in more profits and better cashflow
The value being added to your business if transactions are done cost effectively
Identifying tax risks and put measures in place to mitigate such risks
Transferring wealth from one generation to the next in a cost-effective manner
A well-designed tax strategy that not only deals with ways to reduce taxes but also deals with tax risks and how to mitigate such risks, will go a long way to enhance corporate governance in businesses.
What is Tax Strategy?
A tax strategy is a plan of action for reducing taxes and mitigating risks, regardless of your business or investment situation. It is more than just wishing you could pay fewer taxes. It is a strategy crafted to ethically and morally ensure you pay the least amount of tax allowable by law.
Tax strategy optimises the way your business income and personal spending are structured. It includes an analysis of how your business structure affects your payroll and income taxes, which of your expenses are deductible, and how you can most efficiently support the people and causes important to you. It will detail how you can reduce your taxes based on current tax law by maximising your deductions base or shift income from high tax rates to lower tax rates.
Best Time to Implement a Tax Strategy?
If you do not have a tax strategy yet, you should do it immediately. Every year by the end of the tax year the strategic plan should be reviewed. It’s a great time to look at the data from the preceding year to accurately evaluate outcomes that will affect the plan for the following year. Executing a plan as early as possible in the year will allow the implementation of actions which in turn will allow sufficient time to realise any benefits.
A tax strategy is a long-term vision for your financial and business future. That’s why your tax strategy should be designed for years, if not decades, ahead.
A word of caution, however. Considering designing and implementing a tax strategy comes with a cost in the form of organisational structures that might have to be set up or changed, cost of advisors and management time.
The saying “Don’t let the Tax Tail wag the Dog“ still rings true!
Conclusion
Tax strategy is a master wealth skill for individuals and businesses alike and if not taken seriously, a vast sum of family and business wealth may be lost to legitimately avoidable taxation.
Tax laws are meant to be used and not to be feared. Using it lawfully requires quality advisors which is not cheap, but it could be the best investment you can make!
Published: 02 August 2021