“I Love Paying Tax”, said No one Ever!
We just finished preparing a company tax return for a client group, and it came remarkably close to the forecasted outcome we had anticipated after implementing some thoughtful strategies. While the result aligned with our expectations, let’s face it—no one loves paying tax.
But for companies, particularly those with shares owned by trusts, the tax paid doesn’t just disappear. As accountants, we track all company tax paid and refunded, ensuring “franking credits” are recorded. These credits can turn tax payments into future benefits when it’s time to distribute dividends, offering opportunities to reward shareholders strategically.
Is Company Tax Bad?
It’s not a straightforward yes or no. Here’s why:
1. A Sign of Success
Company tax is a byproduct of a business’s ability to turn a profit. In many ways, it’s a KPI—a sign that your business is thriving. However, the real issue arises when cash flow struggles make it hard to pay tax. If there’s no money to cover the bill, it may reflect cash flow mismanagement rather than profitability concerns.
2. A Comparative Advantage
If the same profits were generated by a sole trader, they could be taxed at up to 45% under current tax brackets. In a company, the tax rate is a much lower 25%.
- Once tax is paid, franking credits can be attached to dividends.
- If those dividends are distributed to individuals with lower income levels, the tax credits might even be refunded.
- And here’s the kicker: franking credits don’t expire. They sit in the company’s ledger, ready to be used when the timing is right to pay dividends.
Tax as a Strategic Tool
Company tax isn’t inherently bad, but failing to manage it tactically can be. Over-focusing on reducing tax at the expense of profits and cash flow could harm your business’s valuation in the long run. Smart business owners think in terms of profit and cash flow first—tax comes after.
Lower profits may:
- Make it harder to secure favourable credit terms for financing.
- Compromise valuations if you’re planning to sell or restructure ownership.
- Reduce shareholder confidence by stalling growth opportunities.
That’s not to say you need to pay excessive tax. If we can save 25 cents in the dollar to reinvest in growth, that’s a smart move. But tax strategies must align with your broader objectives.
What Matters Most?
- Is your company focused on turning a profit or building toward a sale?
- Do your personal dreams involve a secure future, global travel, or family legacy?
Tax is inevitable, but it can be optimised to support your business’s goals. It’s about balancing profitability, cash flow, and long-term growth without sacrificing value.
Need a Hand?
Is cash flow tight? Are profits below where they should be? Or maybe you’re unsure about the direction your business is heading. Let’s have a conversation.
Get in touch today, and let’s make tax work for your business, not against it.
