Benjamin Franklin once wrote “In this world nothing can be said to be certain, except death and taxes.” While fatalistic that statement is especially true of life in business. You will spend far more time than you would like planning for and paying your tax.
I understand that for most people, talking about tax is about as exciting as watching paint dry but the truth is if you ignore it, it will eventually be the death of your business. Sadly it also tends to ripple outward to affect other aspects of your life through the stress it can cause. To eliminate that stress we’ve built a great calendar for you, it includes all of the relevant tax and business deadlines throughout the year.
So we’ve put together this comprehensive plan you master your tax obligations, it will reduce both your stress and your tax burden by giving you effective and actionable steps you can take. It’s also jam-packed with useful insights from our 3 generations (perhaps some things are genetic) of family experience helping Aussies get their tax right.
If you aren’t based in Australia, some of the particulars may vary but the principles will still help you.
Mindset Matters – How successful entrepreneurs think about tax
When it comes to tax, many people spend far too much time and effort trying to avoid paying their tax that they get in the way of their own success. The reality of being in business today is that the Tax Office has tremendous reach for data collection. Here in Australia they currently collect information from: Banks, Residential Tenancy Authority, Department of Transport, ASIC, Australian Securities Exchange, Child Support, Centrelink and the Family Assistance Office.
What does that mean? It means that if you buy, sell or rent a house, buy or sell a car, buy or sell shares, own a bank account account or deal with a government body than the ATO has access to that information. It’s getting impossible to hide from your tax obligations.
Why do I raise this? Simply to point out the inevitable fact that if you make money you are going to pay tax on it. Instead of spending all your effort trying to avoid paying tax the right attitude is to:
Ensure that you are paying the minimum possible marginal rate of tax.
Devote your time, efforts and resources to growing your income as much as possible.
What is a marginal tax rate?
Your marginal rate of tax is the average percentage of your income you pay in tax. In another post we will soon explore in greater detail how to reduce your marginal rate of tax (we don’t want to get too off topic here). The reality is there is a very practical minimum that you can reach (this is a % and not a fixed $ amount).
Once you reach this point, you are effectively as ‘low as you can go’ so rather than focusing all your efforts on trying to shave a few more dollars off, you are far better off growing your income.
The example I often use is:
Would you rather have 100% of $18,000 or 55% of $1,000,000?
The only way you can pay no tax is to earn less than the tax free threshold of $18,000. At the other end of the spectrum if you were to earn $1,000,000 and pay the highest rate of tax you would still have $550,000 left to live on. Needless to say, most people prefer the $550,000 to the $18,000.
This being the case, shouldn’t we shift our focus to earning more, so that we retain more?
I’m aware the numbers in the above example are rounded it is the principle I want you to focus on. First reduce your tax %. Once you hit the minimum percentage, stop worrying about reducing it further, start to scale up your income.
Dealing with the ATO as a Business Owner
There are two strategies you can employ here. One is far more effective than the other.
The first, is get an effective accountant and work with them to ensure your obligations are lodged on time.
You may ignore them for a while, but eventually they will catch up with you and you will have accrued some horrendous fines and penalties along the way. These fines and penalties can often be far worse than your original tax debt.
For a complete guide on your Business Tax Obligations, you can get our handy calendar here. Don’t wait for your accountant to remind you.
If you have used the ‘bury your head in the sand’ strategy previously this can be fixed. We’ve included our five steps for bringing your tax up to date below.
How to bring your tax up to date – tax debts and payment plans
We understand that sometimes your tax can get away from you. Maybe you had a busy year or experienced some health challenges. It happens to everyone. What matters most is how you deal with it now.
This can be a particularly common challenge for business owners. Particularly when your business begins to grow. If you do not plan for the tax on your growing business it can knock you about. Dealing with tax and revenue authorities can be particularly stressful.
Here is our simple guide for getting your ‘ducks in a row’ when it comes to tax time.
1) Make sure you have a competent adviser. The right accountant should be helping you predict and prepare for your tax before the period ends. You need proactive not reactive advice. If you see your accountant once a year (or worse yet, just get a letter) seldom talk on the phone and don’t have an active tax strategy, you are punishing yourself. You can and should do better. There are thousands of accountants out there, but they vary wildly in quality and effectiveness. Remember you do get what you pay for, so look for an adviser who is proactive and charges appropriately for their time.
2) Get your outstanding lodgements up to date ASAP. The tax office becomes a lot easier to deal with when you don’t have outstanding obligations. This includes both tax returns and your Business Activity Statements (BAS) / Installment Activity Statements (IAS).
These outstanding forms can also generate fines and penalties, which are needless expenses. Your money is far better spent growing your business than paying interest and penalties.
3) If you have outstanding debts, organise a payment plan for them. Budget an amount that you can afford each week or month and begin making inroads.
The ATO will often remit interest when the debt is paid. Ensure your adviser/accountant applies for a remission of these. The first instances are almost always remitted. Continued failure to lodge on time will make it harder to get interest and penalties remitted (returned to you) in the future.
4) Budget for your next tax obligation. You need to get in the habit of setting aside money for your tax bill out of each period’s cash flow.
The trap most people fall into is paying last year’s tax out of this year’s cash flow. The moment you have a bad year your problems compound and it often results in the business going bankrupt or going into extensive debt.
Something most people don’t realise, is that when you simply add your next quarter’s tax debt to your existing debt, the ATO sees this as continual non-compliance. This is why we put the old debt on a payment plan and budget for the next period so that we can meet it in full when it is due and payable. This way the ATO doesn’t continue to apply fines and penalties for period after period.
5) Once you have your obligations up to date and future tax budgeted for, all the stress disappears. All that is left is to actively pursue effective advice to ensure your tax is minimized (not avoided, that is a crime, unsurprisingly), then grow your business and your bottom line.
If you missed our article on starting a new business in Australia you can find it here.
If you have any questions let us know down below!
CPA, Tax Agent
P.S. In case you missed it. You can grab our Business Tax Calendar for free here.