S2 Ep25 Jane Tweedy – The good and the bad about tax | FAQ Business Podcast

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Disclaimer – we are NOT tax or financial advisors! We are providing thought leadership and general information only. So many people think tax is a bad thing and they will do all they can to avoid paying it – oh no I won’t take a pay rise because it will cross the tax bracket. Are you crazy? Paying tax is NOT a bad thing! It helps your community and it means you are making money. The reason many people hate tax is that they don’t plan for it properly, or understand how it works. Today we look at the good and the bad about tax.

Initially we cover tax in more general terms (with some Australian examples) and at the end, so our international audience can tune out, we go into some more detail on some Australian issues like Personal Services Income, GST registration, issuing invoices or tax invoices, checking ABNs and Instant Asset Write Off (IAWO).

Full disclaimer – All information provided today is general in nature. We are not providing tax or financial advice. Rather we are making you aware of things you may not know about tax and then you can look into them more and ask your trusted tax accountant! Information is correct at publication on 14 July 2022.

Listen to the episode on all good podcast services, watch on YouTube or if you prefer to read, check out the transcript below.

Disclaimer – All information provided today is general in nature. Please reach out to Jane if required for personalised advice or coaching.

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Season 2 Episode 25 FAQ Business Podcast transcription | The good and the bad about tax

Every year around tax time I hear businesses ask what can I buy to minimise tax? And individuals say, how can I get the biggest refund? Or what am I doing wrong? My mate got back $4,000 and I didn’t get back anything.

00:16 The good, the bad, and the myths about tax

So in this podcast, I want to dispel some of the myths that apply about tax and why paying tax isn’t actually that bad a thing.

So let’s just say this podcast is the good and the bad about tax but please don’t tune out. I’m sure I know what you’re thinking, oh, tax, this is going to be really boring. But there might be a number of things in here that might spark your interest and make you think, oh, that might apply to me.

00:44 General tax information not intended to replace your accountant

I’m going to talk about things like legitimate deductions, making sure tax doesn’t catch you by surprise and I’m going to cover the topic quite generically to begin with, because I know we do have overseas listeners. And then at the end, I’m going to finish with some very Australian specific nuances around tax, but the rest of it will be more generic, with just a few Australian examples chucked in.

Please note today’s podcast gives some general tax information on a thought leadership style basis and it may help you to question your accountant and review your tax return. It is not intended as a replacement for tax advice or financial advice that you should seek from your accountant.

01:31 Welcome to the FAQ Business Podcast with Jane Tweedy

Welcome to the FAQ Business Podcast for business owners, covering four pillars actionable education, inspiring leaders, businesses like you, and thought leadership, where we challenge your thinking. Hosted by myself, Jane Tweedy, I’m founder and lead trainer of FAQ Business Training, where we want to avoid you getting ripped off or ripping yourself off. We’ll feature an amazing diversity of guests with lots to educate and inspire you. Let’s jump into today’s episode of the FAQ Business Podcast.

I’m Jane Tweedy from FAQ Business Training and host of the FAQ Business Podcast. Given it is year end in Australia for many, today I’m going to talk generically about the good and bad about tax. Paying tax gets such a bad rap. But is it really deserved? I think not. First of all, of course, there’s the purpose of us paying tax.

02:32 Why should we pay taxes?

It goes to different levels of government and what does government do with this money? Sure, they fritter some of it away, let’s be honest. But it also goes onto things that we do need in society, things like hospitals and schools and roads and infrastructure, things that we can’t live without. So that’s where our taxes go towards paying.

02:53 When we are paying tax it means we are earning money

By paying taxes, you are effectively a contributing member of society and helping your local community, which is not really a bad thing. Tax also most importantly means that you are actually earning money. If you’re earning money, you pay tax. If you’re not earning any money, you won’t pay tax.

And therefore the aim of the game is not to have no tax payable. You should be aiming to pay taxes, but plan ahead for them, know what they’re going to be so you don’t get nasty surprises and then get hit with tax debts.

03:30 Make sure you choose the right accountant for you

First of all, when doing your taxes and accounting and things, choosing the right accountant is really important. Make sure the accountant is the type of accountant that you need. Do you simply want them to submit your tax return for you and gain that extra time to submit it? To suggest you the best structures for your business and for tax minimisation?

Do you want them to suggest business improvements? Or do your bookkeeping? Ask them questions like have they worked with businesses like yours before? Particularly if you’re doing something like global sales or online courses or something like that. Try and make sure that they have done that type of work before because there are a number of nuances that they may or may not have encountered yet. Make sure you check out a few different accountants before choosing the one that is right for you.

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04:20 Common myth – if I spend money I get it back

And I’ll talk a little bit about accountants again, but the common myths and this is the ones that I see and I mentioned in my intro, if I spend money on new tools or equipment, I get it back, right? Hence why you spend up large at year end. That’s why all these people have the EOFY sales. They’re giving EOFY sales to boost their year in books so their books look better.

04:45 Rebates and tax are completely different

But unless you are claiming something like a rebate, like for instance in New South Wales, we have the safe work small business rebate. A rebate in that case is actually giving you money back. During Covid we had a small business fees and charges rebate and again that was giving us money back into our account. These rebates are typically outside of the tax system. They’ve got nothing to do with tax and tax deductions and they are genuinely a rebate.

So the safe work one is $1,000 and as long as you haven’t claimed anything within the last five years, you can claim it again. It is used to buy things like safety equipment to help your back, to stop you from slipping or tripping, all that sort of thing, moving things around. So just have a look and see what may apply to you if you are in New South Wales.

05:37 How do tax deductions work?

But as I said, most things are not getting money back. So what does it mean when you get a tax deduction? If you buy an item today or say you bought the item on the 26 June, you bought the item on the 26 June and you had it in your hot little hands, it was installed before the year end date, then that would be deducted from your tax.

06:00 Some assets can be treated as long term purchases

Now, depending on what type of thing you purchased will affect how it is treated. So some things like assets can be treated as longer term purchases. If you buy something like a laptop, it will typically be purchased today. So you spend the money today, but it might be a portion out over say, three years.

06:22 We also have instant asset write off

At the moment in Australia we have a thing called instant asset write off. And so that sort of thing can actually be written off this year. And I will talk about that again in much more detail at the end of the session on the Australian specific part of the session today.

But what happens with anything we buy in our business that is expense, the part that is expense now, is that we have the income that we’ve earned less the expenses we’ve paid, leaves us profit.

06:52 Reduces your income to be taxed at the marginal tax rate

Profit is what is taxed. Therefore, if we increase our expenses by buying more then we pay less tax, so effectively it is a tax deduction. Of course it has to be a legitimate tax deduction, something you are allowed to claim for. And there are a few things that you might be a little bit surprised about and I’ll talk about a training example in a little bit. So really what you’re getting back, if you spend a dollar, you’re not getting back a dollar, you’re spending a dollar so that you can reduce paying tax at your marginal tax rate.

And that could be any number between 18% and 50%. So it could be quite a large range there. So how much you’re saving is going to depend on your structure, how you’ve paid yourself and all that sort of thing.

07:43 For sole traders profit includes your wage

Do bear in mind for sole traders that your profit actually does include your wage because your wage is not paid as a salary throughout the year like it is for a company where you are an employee and you’ve paid PAYG withholding. So bear in mind, when you buy things to reduce your tax, you are still out of pocket all the money that you spent. And all that’s going to happen is you’re not going to pay as much tax, okay?

08:12 Don’t buy things you don’t need and check with your accountant

So it’s going to save you on your tax bill, but you are still paying that full dollar. You might be paying one dollars to get $0.25 back. So bear that in mind. Don’t buy stuff that’s stupid and that you don’t need. If it’s stuff that you do need, awesome. Because it may mean that you can increase your productivity quicker. It may mean that you might want to reduce tax this year because you know next year is going to be a harder year. There are reasons why we do this. It is something that you would run by your accountant.

08:41 Sometimes the information we are given is not always right

I did mention I was going to talk a little bit more about accountants, your accountant and even the ATO to be honest, aren’t always right, just as I’m not always right. The ATO, for instance, the other day gave bad information to a tradie and the tradie was told that there was still this $450 threshold for super, which is absolutely not true. It got removed as at 1 July. So even the ATO can give you bad information.

09:12 Recommend to validate information against the ATO website

My recommendation with anything accounting and tax related, whether it comes from your accountant, whether it comes from the ATO, whether it comes from anywhere, is then validated against the ATO website.

09:24 How do you validate it on a huge website like the ATO?

So how do you validate it? The easiest thing to do on monstrosity websites like the ATO, bear in mind there is so much content on there, it’s really hard to find something within the website. The easiest way to find it is to go to Google, google the website name for instance, ato.gov au or you can just use ATO and then put a space and just google the words you’re looking for. 

So if you’re looking for tax invoice template, google that. If you are looking for tax rates, individual tax rates, put that in there. That way you will get to the place on the ATO website and be able to find it much easier. That will help you to verify the information.

10:07 Keep a copy of the code and a copy of the page

What you can then do, at the bottom of the page on the ATO website will be a little code and it’s QC and then five numbers, up to five numbers, grab that information in case you ever need to refer back to it later. And I suggest if you have found something on the ATO website that you’re then using to base and validate what you’re doing, please grab a screenshot of it or take a print out of it so that you have that and put that with your tax records, so that way you’ve got that information to prove, yes, I’ve checked this out, it’s all good.

10:39 I was given incorrect information at an ATO workshop

So, for instance, one of the things that I encountered, I was at a workshop that the ATO were presenting and they made a comment about GST free sales to overseas and they’re saying you don’t charge GST to overseas customers, which you didn’t, which is fine.

But what they were also saying is you don’t count those sales when calculating your GST turnover and when you hit the $75,000 threshold. And I was like, um I don’t think that’s right. Found it on the ATO website, showed it to them and they’re like oh yes, sorry, we got that wrong. And you’re like, these are from the ATO and presenting this information in a workshop. So it was a little bit disturbing.

11:21 Tax deductions are not rebates or money being handed back

So that is why personally you might find that I am a little bit analytical when it comes to things like that. But I do go and validate back to source. It is so important to do it, and particularly with something like tax, where there are so many implications if you don’t get it right, okay? Tax deductions are that, they are tax deductions, they are not rebates, they are not money being handed back, okay? So please don’t do that.

As I said, remember, you could be spending a dollar to reduce your tax bill by $0.20 or $0.50. It doesn’t make sense a lot of the time, unless those things are actually helping you. Now, there is something that should be coming up that will hopefully benefit my customers soon, that there is a training tax break that got announced.

12:06 Training tax break will benefit my customers

So there was a small business technology investment boost of 120%. Instead of 100% of what you spent, you could actually 120% of what you spent. The reason why that applies to me is because they also did a small business skills and training boost. Supposedly, that’s going to be to 2024 and it started on March this year.

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12:28 Keep your records of training expenses until the details are finalised

Now, they’re still finalising details about this. You think they would have done it by now, given people should be claiming it in their tax, but no, they haven’t. Bear in mind, the stuff up to 30 June, you’re only going to claim 100%, but you may need to claim an additional 20% in this financial year. So just keep an eye on that and keep records of training expenditure after the 29 March. So, just a little heads up there.

12:54 But my mate got $4k why am I not getting $4k?

What about in a situation of the individual situation where you go, but my mate got $4k, why am I not getting $4k back, what am I doing wrong? The mate may be getting money back because they have crossed a tax threshold.

So, for instance, you might be earning, say, for argument’s sake in Australia, you might be earning, say, $15,000. You’re only working part time or something, you earned $15,000. But every now and then, say, during the school holidays, you work overtime, you work penalty rates and things. So for that week or two in the school holidays, your pay goes up a lot.

13:33 You might have paid a lot of tax but not earnt a lot in the tax year

Those few weeks when it goes up a lot, the calculation can say that you actually have to pay tax, but your overall tax for the year may still have been, say, under AU$18,000, in which case you don’t have to pay any tax at all. So therefore, any tax that you did pay is actually going to be refunded to you. And some people think this is a good thing because it’s like getting a nice little windfall at the end.

In Australia, they actually changed the rules. And I know this used to apply in New Zealand too, that when you had a second job, you had to put secondary, like you had to label it as a second job. So it got taxed at a much higher tax rate.

14:13 In Australia you can now claim the tax-free threshold for more than one job

In Australia, they’ve actually changed the rules. So you now can if you know that you’re going to have multiple jobs under the AU$18,000 tax-free threshold, you can actually put all of them under as claiming the tax-free threshold, okay? Whereas before you had to only do it on the one main job and then the others were taxed higher, which again meant it was like a compulsory saving.

At the end of the period, you would actually get this money back. So it’s kind of a cool thing because then you could, like go, cool, I’ve got money for a holiday or something. Because the reality is, right, most of us, when we get money in our account each week, a small amount say an extra $20 or something, are going to spend it. Whereas if it’s put away and put away and we get it at the end of the year, then we’ve actually got money that we could do something with. Another reason why people can be getting money back in you’re or not is because they potentially have a questionable accountant.

15:06 They might get more return than you because they have a questionable accountant

One of my clients faced this issue about five years ago. She was really mortified at the time. So what basically happened is this accountant was making deductions and claims for things, except that they weren’t things he could actually claim for, for all his clients.

So, for instance, it might be something as simple as uniform. He might have been claiming that you had a uniform and that you were washing your uniform when in reality you didn’t even have a uniform. So you shouldn’t have been entitled to claim that. So there were things like that, that he was doing dodgy.

15:40 Accountant’s client was audited, this led to the entire accountant’s books being audited

So what happened obviously is one of his clients got audited, probably told the ATO, well, that’s what the accountant said, what’s the issue? And then they’ve realised it’s come from the accountant. They went to the accountant, they audited another couple of clients found the same issues, and of course, they went and audited the entire accountant’s books.

So then she got caught up in it because she, unfortunately, was one of his clients. She was by no means trying to do anything dodgy. She’s very straight-laced, but he was doing dodgy things and she saw the ramifications of that. That became a massive tax audit and they went back for years and it was an absolute nightmare for her. It was horrible.

16:25 You are responsible for your tax return – you sign it off even if the accountant prepares it

So just want to flag this. You are responsible for your tax return. Nobody else doesn’t matter where you are in the world, you are the person responsible for your tax return. Just because you get your accountant to help you with it does not mean the accountant owns the return. It is your name that signs off at the bottom, okay? So please make sure that you understand that, that you own it. It is a red flag.

16:52 Ask the accountant for a copy to check and question things

If your accountant says to you, oh, we’ve completed your tax return, come in and sign it. Where’s the copy for me to check before I come in and sign it? Please make sure you’re checking it. And if you don’t know enough about it, you’ve got to educate yourself.

Hopefully your accountant is the person that you can ask questions of and say, look, I don’t understand what this is, can you just explain to me what this is? And you go, yeah, cool, I’m happy with that. Or, no, that doesn’t apply to me maybe we should take that out.

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17:22 The small return is not worth the huge fees and costs you could potentially have

So be very careful about what you claim because although you might get these nice little returns back in the short term, you might have to pay back a lot of money in the long term, including potentially penalty fees and things like that to the ATO, which is not good. The other cost that happens with these is that the audit fee from your accountant to go back and look at five years worth of returns can be exorbitant.

17:48 I know people who have paid $5,000 for the audit even though they did nothing wrong

So I know people have paid things like $5,000 to provide that information to the ATO. So even though the ATO didn’t end up charging them anything or doing anything to them, they incurred a AU$5,000 cost to do the audit. That is something you’ve got to take into account. There is actually audit insurance if you want it, but hopefully if you keep really good records, you really shouldn’t need that. You should be able to get that yourself.

18:13 Be careful of hiring subcontractors when they should actually be employees

There was an example in a tradie situation where the ATO came and audited tax returns and things to check for subcontractor payments going back five years to make sure that they were legitimately subcontractors and shouldn’t have been deemed employees and getting super.

It came back that literally there were two issues. One, that was on and off and on and off person and more, what we would associate with someone that could flag as someone that is an employee. But the other one was pretty unreal because the person had only worked for them for three days as a contractor, and the ATO deemed them to be an employee. So please be very careful about hiring contractors versus employees. Make sure that you know what you’re doing.

And in particular industries like construction, you have to do what’s called a TPAR report, which is a payments report. So you report all the money you pay to other contractors, and it’s a way for them to cross check, allow them to say, okay, you said you paid this person. Did they acknowledge receipt of that money in their return? So there’s a lot of that going on as well.

19:22 It could be a straight-up error and this happened to me with my tax return

Another reason why somebody might get a lot more money back than you is a straight error. And I’ve encountered this with my own return. I had the accountant prepare it, and there were some things in there I didn’t like that made up some numbers. And I was like, no, can you please put the actuals in I gave you not these fictitious numbers. And what they then did, though, is there was still like, something that didn’t add up.

I’m like, look, can you just change those numbers? And then I’ll look at it again because I just can’t work out where this number comes from. And I told them which number it was and you think that might have made them look at it, but no. So they sent me the return again, and lo and behold, that number was exactly the same.

20:02 The error could have been lodged and might not have been noticed

And yet other numbers that should have contributed to it had moved. And I was like, whoa, wait a minute here. So I said, okay, if this number is this, my calculated number, then it balances. And sure enough, they had hard coded somebody else’s number into my tax return, which was really poor form, but something that, again, it could have gone through and potentially wouldn’t have been noticed. So please make sure again, that you own your tax return, that you have control of it.

20:34 Did your accountant tell you about JobKeeper and JobSaver in Australia?

So remember, accountants can be your trusted advisors, but sometimes they’re not. And honestly, during Covid, it really sorted out the great accountants from the average accountants, from the ones that were shockingly bad. And unfortunately, there were so many in that bottom camp. So, for instance, did your accountant tell you about JobKeeper and JobSaver? Did they actively send you some information about it generically and let you know things were happening in Australia, obviously.

And what I found at the time, though, I ended up becoming the JobKeeper guru, which sucked because it was not fun. But I got so frustrated with people not looking at the material properly, not going back to source, as I mentioned earlier, validating things.

21:23 Some accountants didn’t keep up with the latest information

In this case, I was validating against the rulings that had actually been legislated, so I knew what was coming and not coming, whereas a lot of the accountants were just going, oh, this is the information today, that’s it. But you know that it’s going to change. They’ve told you it’s going to change.

21:38 Some accountants were telling people they weren’t eligible when they were

So they were telling people they weren’t eligible. When they were eligible, the conditions just hadn’t come out. It was very frustrating. And honestly, the amount of people that were told by their accountant point blank they were not eligible when they were was heartbreaking. And thankfully, some of them came across me, came across some lives that I did at the time, and they could actually go in and go, actually, no. And again, go back to source and go, no, here’s the information that says blah, blah, blah.

Then of course things would change and they’ll put out new information and that made it 100% clear that, yes, 100%, they could claim it was definitely legitimate and so they could, but some people actually didn’t claim because they thought they couldn’t. The accountant said no. So trusted advisor says no. That means no. So again, please go with your gut instinct a bit and check out these things because it was a very unfortunate situation.

22:39 Don’t forget to allow for tax when you are receiving payments

The other thing that came up with things like the JobKeeper and JobSaver in Australia, and I’m sure would have happened overseas as well, be really careful when you’re getting that type of money in, the ad hoc money in, how it’s treated for tax purposes, because in Australia 2020 JobKeeper 2021 JobSaver, they were actually treated differently. The first one was treated as you had to pay tax on it. The second one, they wised up and went, not such a great idea. How about we give you an after tax amount so it’s effectively taxed at source, so you don’t have to worry about the tax.

23:14 Some people ended up with a tax bill

Because what happened to a lot of people in 2021, right at the time when we went back into lockdown again, was that they had a tax bill because they’ve done their return for 2021 and realised, oh, I owe money because of the JobKeeper money that came in. Oh, what do I do with that? So that was a bit hard on some people because they hadn’t realised that they would actually be owing money on the tax.

If you were a company, it wasn’t so bad because you were paying your employees, so the PAYG would have picked it up. But for a sole trader, you had to get taxed at the end of the year. And it wasn’t getting picked up people owing it like I kept telling people, beware put it aside, and some people certainly didn’t.

24:03 Make sure you know what items have GST or VAT

In Australia, we have goods and services tax, GST, as does New Zealand and other countries have things like VAT, value added tax (VAT). Make sure wherever you’re based that you are correctly accounting for whatever your country requires you to do.

Make sure you record all your information correctly and note the items that are GST or VAT exempt and the ones that aren’t. So, for instance, some food items don’t incur GST. Some do things like swimming classes. Do they include GST or not? Make sure you know that stuff.

Make sure you’re getting this right, because if you get it wrong, it can make a big mess. When you are recording these bills, make sure that you note if it’s a business thing and you’re potentially going to be able to claim the GST as a credit. Make sure that you know whether there was GST or not.

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24:56 For example my receipt made no mention of GST

For instance, I had attended some networking events with a particular group and I was like, wait a minute here, this receipt makes no mention of GST. And I’m like, but I’m sure they earn over AU$75000. Where’s this going? So I said, okay, right, something’s not right here. So I actually contacted them and said, your receipt doesn’t mention GST, doesn’t mention an ABN or anything, the Australian Business Number which is required on Australian business information. And I was like, what is going on here?

25:30 There was another receipt which I didn’t get  

So anyway, I queried it. Turned out the ABN was a very convoluted trust structure. I had to even confirm what the ABN was and therefore whether or not there was GST or not. And I had to ask them to provide a receipt. And then they were like, oh, we do have another receipt, but you just didn’t get it.  

I’m like, well, how many other people didn’t get it? So it was really bad. So make sure that you have the right information because otherwise you can’t make the right deductions. You won’t know whether GST applies or not.

25:59 Make sure you claim all legitimate expenses to reduce tax and can justify it

And it is appropriate to reduce your tax through legitimate tax minimization strategies, that’s fine. So like I said, you can’t claim false things, like that your accountant made up, but things that you use for your business, including things that you use for personal use as well, you can claim the business component.

So for instance if you use internet at home, let’s face it, many of us did for working from home or many of us do work from home, you can claim a portion of the internet cost for your business so you can weigh it up and do it. Now you should have some way of proving that if you got questions.

So for instance in my case you can see I’ve sent emails at 2am and things kind of obvious I’m working at crazy hours. So the thing is I have got some records and things that I could refer to if I needed to to prove that yes, this is what my business uses versus my personal use.

26:52 Be careful of claiming some things that can lead to capital gains tax (CGT)

Be careful of claiming some things. Some things can lead to like in Australia things like capital gains tax. So if you claimed a deduction for your mortgage payments then you could be required to incur capital gains tax later when you sold your property for a percentage of the house that was used for your business. So just be mindful of stuff like that. Definitely speak to your accountant about things like that because you don’t want to set yourself up to fail.

27:21 You might think you can claim things that you actually can’t

There are some things that you might think are claimable that actually aren’t. So for instance, training is something that you can claim but only training that helps you to earn your current income. Say for instance you are a chef and you decided I’m going to become a real estate agent and you sign up to do a real estate training course. That real estate course unfortunately is not currently covered.

There is some talk going on at the moment about whether retraining and reskilling should be something people can actually claim. But I suppose part of the reason they do it is because people do train in different areas and then don’t go actually and earn money in that area. So that’s why they do it. It must help you earn a living now, if it’s a retraining then I’m sorry, it actually doesn’t apply.

28:11 Recommend putting all the withholding taxes, super, etc into a separate bank account to avoid a tax debt

So after all the deductions that you’ve made, legitimate ones of course, you may be entitled to a refund. When we pay our employees salary direct to them, we also incur their PAYG, the pay as you go withholding and the super cost at least we do here in Australia.

Typically though we incur those on the day we make the salary payment but we don’t actually have to pay those amounts of money to typically the end of the quarter or actually the month after the end of the quarter. This is where people stuff up tax and this is where most people end up in their tax debts. It’s because they haven’t allowed for this tax to be paid.

So apart from the employee type things that you’ve got, so PAYG withholding, and also the super payments, you’ve also got your GST that you’re going to be paying as well. And potentially your income tax you’re going to pay on your profit. So all of that, ideally, should be put into a separate bank account.

29:20 I suggest two bank accounts for every business that you own

My recommendation is that you have at least two bank accounts for every business that you own. One is just your everyday banking account for your business and the second one is the one that you put your things that are already spent, the money is already gone, it’s just you haven’t physically paid it out yet. Put that in a separate account.

29:43 If you are a sole trader keep your business account separate

Now, things are a little bit different when you’re a sole trader, but still do that, still have these business accounts and then draw money to your personal account. I’ve seen people doing groceries and movie tickets and stuff out of their business. It is not right. Please don’t do that. Your business should be your business, and in a company situation, it has to be separate. But in a sole trader situation, I still strongly suggest it should be separate.

30:09 Keep the GST and taxes aside so you can pay your BAS

Okay? Segregate every single time you receive money from an invoice, put GST aside. If you are paying GST or VAT or whatever it is, put it aside in the second account. And also when you pay your payroll, put that money aside as well. That way, when you get to the end of the period, the money is sitting there and you don’t go ‘Oh, my gosh, I’ve got my BAS bill’.

BAS in Australia stands for Business Activity Statement, which typically for small business, is done quarterly. Bigger businesses, it might be done monthly. So it’s not until you do that square up that you go, oh, no, I owe all this money. And I’ve seen this too many times, particularly with tradies. Sorry to pick on tradies, but this is where you see it so much.

They see all of this money sitting in their one account and they think, yes, I’ve got money. I’m going to go buy a new ute. I’m going to go buy a new computer or some new piece of equipment. But they don’t have the money. The money has already been earmarked to go away and pay something else.

31:16 GST is the Government’s money so please make sure you charge it

With GST in Australia, GST credits you can offset against the GST that you pay. So the GST that you collect on the Government’s behalf and remember that you are collecting GST on the Government’s behalf, it’s got nothing to do with you. So please do not absorb GST when you start charging it into your rate. No, don’t absorb it. Charge it fully to the customer because it’s not your fault, it’s a government charge that’s imposed upon you.

So when you do that, you can put the GST through, put it in a separate account. What you can also do then, if there was a sizeable amount that you were paying in GST for a particular item. You could also offset that credit because you’re going to get a credit back for that GST. But what I tend to do, is I say, don’t do that, leave the credit for the end of the period when you do your BAS, your business activity statement, then do you square up and go right, we actually got $500 worth of GST credits back.

Put that into your everyday bank account because now you know, that was actually kind of profit. It was actually money extra that you earned. And again, because that becomes kind of profit, you might want to put aside some of that for the normal tax that you would pay on your profit. If you’re using something like the Profit First method, you would actually have way more bank accounts than two.

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32:39 Keep your personal account separate – makes it much easier to reconcile

But my recommendation is always having at least two business accounts and a separate personal account makes it so much easier to reconcile. Say for instance, you bought something from Aldi but you don’t know whether it’s from supermarket expenditure or a best buy that you actually bought for 100% for business use. You won’t know that so much easier to put it separately through your own accounts.

33:03 Your profit will be a lot smaller if you are paying yourself as an employee

The other thing to remember is that your profit at the end of the year, your income less expenses for a company will typically be a lot smaller unless you’re keeping a lot of money aside for whatever reason. But the reason I say it’s smaller is because many of you will be paying yourself as an employee. So you actually pay yourself like I do. I pay myself as an employee. So I have PAYG withholding, I have super and that’s all taken care of.

33:30 Sole trader is different and is reconciled at the end of the year

If however, I am a sole trader, as a sole trader, I pay that money only at the end of the year. So the sole trader is on the entire sole traders wage as well as any profit in the business. So that is going to be a much bigger tax bill. Now, typically after you pay it the first time around, the ATO will actually start sending you a bill to do a withholding payment regularly just so that you don’t end up with a big need to pay one lot at the end of the year and not have any idea what it is. They will forecast that for you.

34:06 You could use the holding account for cashflow issues – then have a debt at the end of the financial year

Now, you could use that money that you’re putting into separate accounts, into the holding account if you had some cash flow issues. For instance, if you deal with certain bigger businesses, government businesses, quite often they are really slow at paying.

They pay, they always pay, but they pay slow. Therefore you might have a cash flow issue. Maybe you need to pay your business insurance and you’ve got money sitting in that holding account but you don’t have the money to pay the business insurance, right? So what you could do is lend your holding account money into your business account money.

That kind of works except for when you get to the end of the year, the end of the financial year, then it actually becomes that you potentially got a debt that you owe. So you’re not in the profit situation, you’re actually in a negative situation.

What would happen then in Australia? You could potentially be in what’s called a Division 7A loan situation which you must document. You must do things like pay off a certain amount each year and it’s all benchmark interest rate. So please make sure that if you get yourself in that situation that you speak to your accountant. Really important that you do that.

35:23 Paying tax means we are earning money and supporting our community

I want to reiterate now remember, the purpose of paying tax is that it is going to go to different levels of government and it helps us support our community. Things that we use, things our children use, our parents use, it helps all of that. So hospital, roads, infrastructure, schools, all of that stuff it contributes to. So please make sure that you are a contributing member of society.

As I said earlier, also paying tax means that we’re earning money. It is not sustainable to be negative all the time with your taxes. Have those separate accounts to avoid those nasty surprises.

36:03 From here on is directed at the Australian audience

Now I’m just going to go into a bit more detail on a couple of those Australian things I mentioned. So if you are in from our international audience, particularly America, please feel free to tune out now and I look forward to seeing you next time on the FAQ Business Podcast.

But if you’re in Australia, stick around for a little bit longer and we’re just going to talk about a few things including GST, instant asset write offs and checking ABNs, maybe a few other things.

36:29 When sales hit AU$75,000 you must register for GST

Australian GST when your sales hit $75,000, as I mentioned earlier, that also includes overseas sales and it’s on a rolling twelve months basis. So people think that this is like on a financial year or something. No, it’s not it’s actually rolling twelve months.

In fact, if you know that you’ve got a massive income of money coming next month and that’s going to tip you over $75,000, you actually need to be registering now. Bear in mind the issuing of invoices around this time can be difficult. So if it’s the same entity, then suddenly you’re going to have to do the GST from that set date.  

Okay? So if you say it’s from 1 August, 1 August it is. Everything after that has to have the GST on it. Therefore be careful of issuing invoices and quotes and things around the time that you know that you’re potentially going to change. So tell people that these quotes only apply for payment up to this date and then after that they may incur a GST charge.

37:31 You can register for GST early if you know you are going to hit $75,000

You can register early for GST so you don’t have to wait until your turnover hits AU$75,000. You might decide instead to go early. The reason you’d go early is because you want to create the appearance that you’re bigger than what you are. So some people would do that to start off with. Another reason for doing it though is that you have some big expenditure that you’re going to have to make that has GST in it. The GST credits come back to you if you are GST registered.

So that can be something do bear in mind though again this whole issue that if you don’t have that happening, the actual GST coming back and offsetting the GST you’re paying, you will still be able to can claim the deduction. It will still have a flow through effect onto your tax as well as a tax deduction. If you are doing a registration early for GST you can opt to do annual GST payments instead of monthly or quarterly BAS return ones. So just think about that it can make it easier to handle.

38:34 You might be asked for ABN number so they don’t have to collect GST

If you are buying from overseas, sometimes you will be asked to provide your ABN number and that means they don’t have to collect GST from you. You might go but why are they collecting GST? Because they’re not in Australia but they have an arm in Australia or whatever. So things like Google or SiteGround or whatever your web host, they may ask you for that type of information. So just follow the instructions and do what you’re told to do. And obviously that’s going to affect whether or not you have GST to claim or not on the actual receipt.

39:06 GST registered – issue tax invoice

In Australia if you are GST registered you issue a tax invoice to your customers. If you are not GST registered you cannot issue a tax invoice. You can only issue an invoice or a receipt, not a tax invoice and receipt, okay, there is a nuance there. So GST Registration – Tax Invoice.

39:28 Make it clear on the receipt if you don’t do GST

So a lot of people don’t know that and they start out and they think oh I’ve got to do tax invoices. But it’s like no, not a tax invoice. Also make it crystal clear if you don’t do GST, say on there that you don’t. So just say GST not registered, no GST applicable, just make that really clear and that way anyone dealing with you doesn’t have to make guesses and assumptions about whether or not it does apply.

39:53 Check if people are registered on the abr.business.gov.au website

You should be regularly checking and the easiest place to check it is the abr.business.gov.au. Check to see whether people are GST registered because people do change their GST registrations at times and check that the ABN is still valid. That one’s even more important because GST is only 10%. If they do not have a valid ABN, an Australian Business Number, you have to actually deduct the full marginal tax rate from the payments. So it’s around 46.5% that you have to deduct, so that’s a big number. So make sure that you check that every now and then maybe set it up in your system to check it every quarter or every six months or so just to make sure that they are still registered.

40:38 ABN sometimes gets cancelled accidentally

And I will warn you now, sometimes sole traders, particularly who are not GST registered, find that their ABN gets cancelled accidentally even though they’re lodging tax returns and things. Somehow it just doesn’t quite connect and they basically end up with a cancelled ABN. I had a person I met with and I said to her do you know that your ABN was cancelled like 18 months ago? No. And she had no idea?

No idea. She’d just been trading oblivious all that time. So please make sure you check that with people that you are paying funds to because if you pay them GST when they weren’t eligible to receive GST, it can be just a case of tough luck. You just pay that 10% and it’s wasted money, bye bye, you can’t claim it because it never went anywhere. And then on the other side, like I said, if you pay and they don’t have a valid ABN, then you can have to deduct a large amount of money.

41:40 Statement by Supplier for a hobby business

There is a Statement by Supplier thing that people can fill out if they are like a hobby business but basically there’s very few exemptions to that rule.

41:50 You might be under the Personal Services Income rules  

Another thing I wanted to mention for Australian listeners is Personal Services Income. And again, this is one thing that gets really, really overlooked. In fact, I was at a Business Connect session and I mentioned this and then I was asked to come and talk to the advisors on this topic because most of them were actually under the Personal Services Income rules and had no idea what they were.

So basically when you earn income purely from your labour or a very high proportion comes from your labour, then you might be subject to Personal Service Income rules.

cleaning-business-preparing-for-holidays-tax

42:27 Personal Services Income (PSI) or Personal Services Business (PSB)?

Now what that means is this is where you hear that 80% rule bandied about and people think that it’s contracted deemed employee. It’s not, it’s actually PSI or personal services income. It’s one of the tests. So if you earn more than 80% of your money from one particular payer, then it’s more likely to be that you are actually incurring personal services income and you are not a personal services business. There are differences.

The differences basically mean when you’re a personal services business you can claim all the deductions a business would be entitled to. If however that income is personal services income, you can only claim what an employee can claim. There is less than you could claim if you were a business.

So please make sure you have run these tests through to see whether you are a personal services business or if you are earning personal services income. It does affect the deductions you can do.

43:26 Please check with your accountant as it’s often overlooked

Again, please speak to your accountant. Again, this is one of the things that if you hadn’t heard this you potentially wouldn’t think to ask. So please do that. It’s often overlooked, and even things like trades, people sort of don’t get that, but it can apply to things like trades if they’re mainly doing things like repair and maintenance rather than say, installing.

Because installing they’re obviously going to have a large product cost as well. But if they’re just repairing, they might not have very much product at all. It might just be really their time.

43:58 A Division 7A loan applies if you are in a negative situation

The second last thing I want to mention, which I did cover a little bit earlier, but I did mention there’s something called a Division 7A loan, and it applies in a company situation where you actually effectively have gone negative. It’s where you have taken too much money out of the business. You actually owe the business money.

That is a problem if you haven’t got Division 7A records in place and that you haven’t allowed for making payments and things. So again, raise this with your accountant, particularly if you are in a negative situation and effectively the company has paid you more than it should have.

44:34 Instant Asset Write Off (IAWO) or depreciation

The last one I want to mention is Instant Asset Write Off (IAWO). And honestly, this is largely a timing thing. If I spend $4,500 say on a new laptop, then in a normal year that you don’t have Instant Asset Write Off, then the $4,500 would be typically spread out with depreciation over three years.

So I’d claim $1,500 in expenses this year in the return, $1,500 next year, and $1,500 a year after that. With Instant Asset Write Off, we claim the whole $4,500 in this current year. All that it really does though is just moves your dates, your tax around, because now it’s a full expense of $4,500 which means that next year we won’t have any expense.

So we won’t pay tax this year on the profit because we’ve deducted that $4,500, but next year we won’t be deducting money, so we’ll be paying more tax next year. Okay? So all it’s done is shifted the tax further out. So it really is a timing thing. It’s not really doing anything other than that. People think that this amazing thing, but it really isn’t. It’s just a timing thing.

45:51 Remember only buy what you actually need  

So as I said earlier, when you’re buying things for your business, please only buy what you actually need. Don’t buy something because you think you’re getting a deal for it. You’re not, like, I said, you’re paying a dollar to get a better marginal tax rate. Don’t do that it’s not a good idea.

However, if you’re buying things and you buy them earlier because you can deduct the money this year and therefore pay less tax this year, but now you’ve actually got a much better income generating assets or whatever, that can be a good thing. So look at what it will do, will it increase your productivity? Will it improve your income potential? Those things aren’t bad, so those are things to look after.

46:32 I’m not a tax adviser but just giving bits of information so you can check for yourself

So I’m sorry, today was a bit of a long episode. There was a lot to cover in this episode. And as I said at the start, I am not a tax advisor. I’m not giving you tax advice. All I’m doing is planting seeds. And I’ve given you only really rough bits of some of these, but I’m really just planting seeds so that you can look these things up on the ATO website or overseas, look them up on Internal Revenue Service (IRS) website, whatever. Find the information that you need for your scenario and then question your accountant about it.

Say, look, there’s this thing, personal services income didn’t know about that before, does that apply to me? And that way you can go through the tests and you can see, oh, yes, no, it’s all good I’m a personal services business and that’s all cool, or no, I’m actually not, I’m going to have an issue here I am actually under personal services income. So some of the things I thought I could claim in my business, I actually can’t.

47:29 Speak to your account – a good accountant

So as I said, speak to your accountant, your good accountant. If you don’t have a good accountant, follow the suggestions I mentioned earlier about finding a good accountant.

They are definitely out there. There’s some amazing accountants out there that really care and are really passionate about it. And we certainly do refer our clients to people that we consider to be good in that space. So let us know if you need anything. But as I said, we’re not tax advisors, we’re not financial planners or anything.

So this is not tax and financial advice. It is generic information just to make you aware of things that you need to look into and know about to run your business effectively.

48:09 Thanks for listening in with me today

So thanks for tuning in, I’m Jane Tweedy and I am the founder of FAQ Business Training and the host of FAQ Business Podcast.

48:23 Please subscribe to the FAQ Business Podcast

Thank you for listening to today’s episode of the FAQ Business Podcast, available on all good podcast services. You can subscribe today via FAQBusinessPodcast.com.au or directly on Apple iTunes, iHeartRadio or Spotify. Subscribe, follow, share, and where able review our podcast or leave us a comment on either YouTube or our blog page.

Thanks for helping us to help you, the small to medium businesses who are growing and want to make a difference. Look forward to connecting with you again on the next episode of the FAQ Business Podcast.

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Today’s podcast episode featured our host Jane Tweedy. Her details are as follows:

Jane is a Professional Certified Coach with International Coaching Federation (PCC with ICF), business advisor and trainer. She loves working with growing small to medium business owners who are doing the right thing, to help them do it right! Currently, Jane offers at least 50 live sessions a year to train small business owners.

Jane offers a variety of services to clients and her online school and membership site went live late 2021. Jane’s focus for 2022 is building the membership and online school out further, and offering implementable small group training – something she finds is often the missing link.

If you are interested in training, speaking, or anything else Jane has to offer, please connect via training@faqbusiness.com.au or via the contact forms on our websites.

faqbusinesstraining.com.au – our main site with a great blog

faqbusinesstraining.com – our new online school

faqbusinesspodcast.com.au – our podcast site

And on the socials …

Facebook https://facebook.com/faqbusinesstraining

LinkedIn https://linkedin.com/in/janetweedy https://linkedin.com/company/faqbusinesstraining

Instagram https://instagram.com/faqbusiness

About FAQ Business Training

If this is the first time you’ve come across us you may want to know who we are! FAQ Business Training has a mission to educate and empower small business owners to learn enough to do it yourself (DIY) or outsource with confidence. We do this via face to face training in Western Sydney (currently all training is provided online), speaking at conferences, events and networking groups and we have launched our online school and membership, offering online courses and webinars to appeal to a global (English speaking) audience. Connect with us on Facebook or LinkedIn.

 

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