I get asked a lot by clients about how they can minimise tax and save for their retirement at the same time.
If you are running your business through a company structure, one of the best ways to achieve both of these aims is to pay yourself a salary up to the inflection point where the individual marginal tax rate is less than the company tax rate (currently 25% for base rate entities) and leave any surplus profits in the company until you retire. If you are disciplined to maintain this strategy over the period you are in business, you can then access the remaining profits in the company via a dividend and attached franking credit when you retire.
A franking account records the amount of tax that a company can pass on to shareholders as a franking credit.
Accessing surplus franking credits is an ideal strategy for taxpayers who meet two criteria:
They conducted their business through a company with a franking account surplus (generally as a result of profits accumulated within the business and the company having paid tax on those profits).
The taxpayer (shareholder in the company) has nil or low taxable incomes (generally due to retirement or receiving a tax-free pension) at the time they pay themselves a dividend.
This strategy could produce an annual refund of approximately $19,800 per year for a couple.
For example, if a husband and wife had nil taxable incomes (perhaps because they were receiving a tax-free pension), they could pay themselves a dividend of $23,100 each (with $9,900 franking credits attached). Assuming both taxpayers were entitled to the Senior Tax Offset, the ATO would refund each of them $9,900 of the franking credits.
If you would like to know more about how our tax planning services and how Symmetry Accounting & Tax can help you, book an appointment know.
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