How creative can you be with your taxable profits?

With the financial year finished, you may be looking at your end of year position. Hopefully it is a nice healthy profit, in which case you may be thinking about the best way to manage those profits for tax purposes. Everyone will agree that the less tax you have to pay the better.

For most businesses, your entity structure will determine how profits are applied for tax purposes. If you are a sole trader then it is all you. Partnerships and companies are going to flow with equity holdings. Discretionary trusts give you some scope for planning, although you should have determined how the profits were going to be distributed by June 30.

So is there any room to move?

Other than the flexibility provided by a discretionary trust, the answer for most other entities is that there is no real opportunity after the end of the financial year to divert income away from the proportional equity holders.

There have been some strategies employed in the past by some people but, generally, they will not stack up. Here are a couple to be careful about.

With partnerships there can be an attempt to alter the proportional entitlement to income by applying a salary to one partner out of profits, with the residual profit then being distributed according the equity entitlements.