I call this the rabbit out of the hat solution.
John had been a client for many years, He was very entrepreneurial, and I might add often things just didn’t work out. But, as the story goes, you cannot win at anything unless you play the game. In other words have a go. He stumbled across an anti-ageing cream that had some real success stories with it. Just to paint the scene, this was before the plethora of anti-aging creams that now exist. His product was actually the first mainstream product in this area. Of course, he poured heaps of money into research and then manufacture. His original business was as a photographer and then in advertising. So he was good at marketing and how to present his product. He engaged a celebrity (at great cost) to do his TV ads. He then started a massive marketing push. His product and the studies were featured on a TV documentary called Beyond 2000. His revolutionary cream cured the signs of ageing and became a household name almost overnight. Sales went through the roof … as did profits.
You can guess what the problem would be, but a nice one. I clearly remember the conversation. In was in about March with 3 months left in the financial year. John said to me, we have made $3m in profit, if I pay $1m or more in tax, I won’t have sufficient funds for further research. He said it was likely his product would have a use by date, the competition would come in with big budgets and he needed to funds to diversify. I looked at it and thought, there is $3m in the bank the money was earned, what could I do. There was no playing with closing stock, receivables creditors etc as there weren’t any to speak of. I went away to think about this. I spent the next month at a few larger city firms to see if they had any ideas. It was a total blank. The answers were simply, you made the money you need to pay the tax. But neither John nor I were prepared to give up easily.
Then after many sleepless nights I thought of a solution. Without going into too much detail it involved using the prepayment rules in the tax act. Using the different ways the tax act allow the treatment of earned and unearned income between unrelated entities. In short we were able to reduce the tax payable for that year to something like $268,000. A great result.