What is Tax Planning

Tax Planning is where the taxpayer very sensibly changes around or re-arranges their affairs so that their business and financial involvements will result in increased profitability (their primary objective) and minimise tax payable (their secondary but just as important objective).

In professional language, Tax Planning is - "the process of organising a taxpayer's affair so that as far as possible legally or commercially, the liability of the taxpayer to income tax (or any other taxes for that matter) is minimised".

Tax Planning Benefits

The benefits of any tax planning exercise are to maximise after tax income in respect of a given quantity of income. There are a number of ways that some taxpayers do this.

Good tax planning aims at the overall reduction of liability for tax.

This aim involves these 4 basic principles but not restricted to:

1. Reducing taxable income
2. Increasing allowable deductions
3. Reducing the tax rate applicable
4. Deferring or delaying the payment of tax

Some people achieve these 4 objectives in the following ways:

Businesses reducing their tax liability through tax planning can provide better returns to their owners in the short term and long term. Businesses can also spend the money otherwise payable as tax to increase working capital and thereby improve performance efficiency, or spend more on capital expansion and thereby expand market share.

Individuals applying tax planning will have more disposable income in their hands.

Very often tax planning provides individuals with money to spend for their personal benefit or enjoyment, and failure to apply tax planning may lead to such money paid as tax.

Tax planning also provides an indirect benefit of allowing a sound control over finances. It provides a valuable road map to plan finances in the most optimal manner. It allows streamlining cash outflows, making planned expenditure, and committing to an informed investment decision.

The Tax Planning Process

Tax planning is much more than simply opting for the investment or financial route that offers the maximum tax breaks. It also does not entail making unnecessary expenditure or needless investment solely for reducing taxes.

Good tax planning remains integrated and interlinked to a wider exercise that brings stability to financial goals. Apart from ensuring lower than normal tax liability, the exercise requires considering other factors such as liquidity of the investment, risk appetite and the returns from the investment after factoring in inflation.

The basic process of tax planning involves

1. Preparing financial goals
2. Estimating tax liabilities on existing income and investments, and possible liabilities on additional investments or expenditures to realise financial goals
3. Acquiring a good understanding of all available tax exemptions, deductions rebates and allowances
4. Selecting the best investment or expenditure route that provides the most tax breaks but still fulfils the stated financial goals and fits in with one’s investment tastes and attitudes