Tax. The three-letter word that is not incredibly exciting and probably creates a sense of dread above everything else. Unfortunately, as one renowned politician once said, tax and death are the only things in life that remain constant.
Starting a new business can be exciting and exhilarating both on a professional and personal level. While it’s a new milestone in your life, challenges do exist and one of the most common problem faced by business owners, is the proper setup, administration and ongoing management of your finances and business accounts.
Building a business is hard work. Successfully maintaining it’s growth is another challenge altogether. As a business owner, running a business is incredibly overwhelming especially when you’re expected to be competent across all areas of operations.
Operating a small business can be a challenge, but one of the biggest difficulties is making the most out of your valuable resources: time, skills and knowledge. As experienced professionals in small business consulting, we often see business owners working harder and longer, but still failing to achieve their business goals and objectives.
GST and Income Tax Law don’t always follow suit, so be careful not to assume too much when doing your coding/reconciling your books – logic doesn’t always prevail, and there are always exceptions to the rules. Here are the most common areas in which we find errors:
Get your chart of accounts (code list) right. You can save 99% of errors if you get a qualified bookkeeper or accountant to review your setup. They can help you get all the default tax codes right…so all you have to do is allocate the income or expense to the right code, and it will all fall into place for you.
Loans are complicated. Generally speaking, if you take out a loan, the receipt of the loan doesn’t have any GST in it…nor do the repayments that you make on the loan. So when receiving or paying off a loan, there is no GST. The item that you have bought with the loan funds may have GST on it (and you can claim that) but anything to do with the loan itself will not. This applies to bank loans, Hire Purchase and Chattel Mortgages. It also includes insurance premium funding. The GST on the insurance premium is deductible, but the loan repayment on the insurance funding is not. The exception to the rule is a lease. In this case, you don’t own the asset, you are hiring it from the loan provider…which means there will be GST on the payments. When in doubt, call your bookkeeper or accountant.
As a general rule, you can’t claim GST on anything that is private in nature: Food, Clothing, House Rent, Home Repayments, Directors Fees etc.
Most Government departments are not registered for GST, so there won’t be GST on some items, eg: Motor Vehicle Registrations, Rates, Water, ASIC fees etc.
Other tricky items are Bank Charges, Paypal fees, Google Adwords, interest, Goods or services purchased overseas. No GST on any of this stuff.
Not all Sales have GST on them either. Basic human services like medical and health care, water, fruit, raw meat, bread etc don’t have GST in them.
Don’t forget to include trade-ins of business vehicles and plant when you buy a new one. There is GST on both sides of that transaction.
Don’t mix up your wages with the other business expenses. Wages, PAYG tax and superannuation don’t have GST on them, they are reported separately on your BAS…if you mix them up with the other expenses in G10 or G11, you may inadvertently claim GST on them. Wages appear at W1 and the PAYG tax deducted from your employees’ wages appears at W2.
Above all, read the invoice. Make sure there is GST on it – sometimes you will be dealing with small businesses that are not registered.
When in doubt, consult your bookkeeper or accountant.
Large employers have had to comply with this new reporting regime since July last year. However, the regime is extended to cover ALL employers from 1st July 2019. The bill passed the Senate in December 2018, but it is being bounced back and forth in the parliament while they consider some amendments (which have nothing to do with the payroll part of it). So, we are stuck with it from 1st July, whether we like it or not. If you are using a cloud-based accounting program (like Xero) you don’t have to do anything, the software already handles it. However, if you are using an older desktop version of MYOB, Agrimaster etc, you will need to upgrade the payroll side of things.
Basically, Single Touch Payroll means that the employer sends their employees’ tax and super information to the ATO each time they run their payroll and pay their employees. The information is sent via the payroll software, direct to the ATO and that also includes superannuation. Previously, the ATO had to wait until you got your group certificates done, and reconciled everything, and if you’ve stuffed something up…it was almost too late (or too big) for you to handle. Now that the workforce is more mobile, things need to be done more quickly – and the new software being designed can handle it. So the ATO thought, why not?
Following on from our “Half Time” coach’s Pep-Talk in our December blog, here are some suggestions for you to make the most of January 2019:
Over the holiday break – or as soon as you get back to work with your team, ask yourself these four simple questions:
What worked well over the last six months?
What didn’t work so well over the last six months?
What have we learned?
What is the focus?
The 3rd quarter (January to March) is very important from a business-owners perspective because you will have a number of issues to deal with, namely:
Post-holiday lag – where everybody takes a while to settle back in and you may unconsciously slow down and under-achieve;
This post-holiday lag includes your customers – so you may be struggling for orders from them as well – which may adversely affect your cash flow;
Big Tax bills coming up in February and April (the December BAS isn’t due till the end of February…and the 2018 income tax bill is due in April, along with the 2019 PAYG quarterly tax in advance is also due in April, plus if you are paying your employee tax monthly…you’ll have one due in January, and March too;
On top of all that, you may have spent big over Christmas, and taken the family on holiday.
All of this will come home to roost in February, and you may still be struggling with the cash flow hit when the April tax bills come along.
The only antidote to this post-holiday lag is FOCUS.
Concentrate on doing what you did well in the six months prior – maximise your efforts in this area
Fix whatever isn’t working well – or put a plan in place to fix it asap
Use what you have learned, to plan ahead and not repeat the same mistakes next year
Focus on the most important things first, such as:
Finishing any work in progress (so you can invoice it)
Chasing up quotes (so you can invoice them)
Hitting up new leads – and planning the workflow for the coming six months (so you can onboard the clients and invoice them)
Working out how much tax you have to pay…and when it is due
Shoring up the cash flow
That last point is a doozy. We try to get as many tax returns done as possible by Christmas time, so you know what tax bills you have coming up (both the 2018 tax bill and the likely PAYG due in February and April). If you haven’t had your tax returns done yet, hurry up – so you can put the money away…or talk to the bank to get some help. Prior planning always helps you get the loan. Don’t leave it until the problem lands on your lap to call the bank.
Utilise your team to help you with the first 3 points, you may need some help from your accountant to work out the tax and cash flow planning side of things. Get into it early…you will give yourself a much better chance of success.
Don’t slow down and under-achieve, just because it is quiet at the moment.
You will be surprised to know that it doesn’t matter whether you are self-employed, work for wages or running a not-for-profit organisation when it comes to being selected for investigation by the ATO.
Occasionally, the ATO will target a specific group, but only if they find out that there is something dodgy about a particular segment – like FIFO workers claiming taxis to the airport or business owners not declaring cash etc. But on the whole, the ATO doesn’t bother anybody unless they look like they are doing something unusual. What is unusual? Well:
Lodging your returns late all the time. This is a big indicator that you’re not well organised, and you don’t mind flouting the law…so you’ll be on the top of their list.
Paying your tax late is nowhere near as bad as not lodging to start with. The ATO is usually quite happy to do a payment arrangement, provided you lodge on time, and YOU call THEM to put a payment arrangement in place BEFORE the due date. Capeesh???
Having said that, the ATO doesn’t like to be used as a bank. So asking for payment arrangement after payment arrangement wears a bit thin. It shows that you aren’t putting the tax money away (and let’s face it…it isn’t your money) so don’t use it for other stuff.
The ATO takes the view that most of the tax agents and the population at large are “doing the right thing”. They know this because they have years of historical data that they can look back on to compare to what you are lodging…and as long as you are “within cooee” of what everybody else in your industry is doing…then you are pretty safe.
Lodge on time, every time
Pay on time, but if you can’t…advise the ATO early (or through your tax agent) so you can put a payment arrangement in place.
Most of all, put the tax money away so you aren’t tempted to spend it. Talk to your own tax agent – I use this simple rule-of-thumb: If you are a partnership or sole-trader, with no employees…and registered for GST…you should be putting at least 25% of what you bank away to cover your GST and income tax. If your business has employees, you need to put at least 35% of what you bank away – to cover GST, your tax…and your employees’ tax. Note – I’m talking about what hits the bank…not the ex-GST invoice total. Don’t forget about superannuation on top of this too.
The 10% GST is not your money…and the PAYG deducted from your employees’ wages is not your money. Superannuation is a pay-rise that was diverted to super instead…so it is also not your money. Don’t mess with it. Get it as far away from you as possible, then you won’t be tempted.
Operate your financial affairs according to accepted norms. If you come across a friend or a tax agent that is promising something that sounds almost too good to be true – it usually is. There is no such thing as a free ride these days, so don’t get sucked in by somebody that tells you they have a scheme that results in you paying really low levels of tax. These people are usually nowhere to be seen if you get “pinged” by the ATO.