Understanding Tax and the tax system is one of the essentials for every small business.
Of course the tax system is complex and it’s constantly changing which makes it very difficult to keep up-to-date with all the intricate rules. That’s why it’s critical to have a good tax advisor or accountant.
Understanding your obligations:
In the early days of starting a business the focus can be completely on getting the business up and running, acquiring new customers, taking great care of clients and customers, figuring out exactly what is the product or service offer and it’s easy to set aside the tax matters thinking “Oh, I’ll get to that one day.”
Five important obligations to focus on:
- GST obligations if registered for GST
- PAYG if the business has employees
- Ensure any expenses that are claimed are business related expenses
- Tax payments calculated on profit in the business or income if a sole trader
- Correct and accurate record keeping
GST obligations. If you are registered for GST and collecting GST on behalf of the government then it is important to sanction those funds into a separate account so that at the end of the quarter when you come to pay your GST you have the funds available. Over and over I see businesses having difficulty with cash flow because they do not sanction the GST portion of their income. When I work with a client I insist that creates a separate account specifically for sanctions GST.
PAYG is pay-as-you-go tax. This is monies withheld for any employees. Again it is good practice to set aside this money each week or fortnight when running payroll. To not set aside the amount of PAYG can lead the business to struggle with cash flow when it comes to pay the PAYG at the end of the quarter.
Ensure the expenses you’re claiming are actually business-related. For an expense to be deductible in the tax system the expense needs to be directly related running the business and leads to creating income. If you are in any doubt about whether a particular expense is deductible check with your accountant or check with the ATO. One of the interesting things to note is that different businesses may be allowed to claim different expenses based on the needs of the individual business. Be clear you understand what you are allowed to claim.
Income tax payments. When your business makes a profit a portion of that will be paid as income tax to the ATO. If you’re operating as a sole trader all the income from your business is added to your personal income for the year. The deductions are taken into account and then your income tax is calculated based on your net income. It is always a good idea to set aside funds for income tax so that when the tax bill arrives you have the money to pay.
Accurate and correct record keeping. Whether you choose to use MYOB, Xero or some other accounting package or even an Excel spreadsheet is critical to keep your records up-to-date. When I started my first part time business I used a notebook with income on one page and expenses on the other page. As the business grew I developed an excel spreadsheet and then moved into accounting software. Now my accountant does it for me.
It’s always better to start off doing things correctly. I work with a couple of Bookkeepers who specialize in accounts for small businesses. They tell me that often times when the books come to them at the end of the quarter – or even at the end of the financial year – the accounts have many already inbuilt inaccuracies that need to be unraveled. This is both costly in Time for the bookkeeper to unravel and correct the accounts and costly for the business to not have been recording their accounts correctly and do not have an accurate picture of the business’ financial performance.
Of course none of the small business owners intentionally want to be outside of the rules of the tax system but when they don’t know what they don’t know it’s very easy to make mistakes.
It’s really important as a business starts the Business journey to create the right structure for accounting, to follow their tax obligations and to ensure compliance with the tax legislation.
I’m Ingrid Thompson and thank you for reading this post.
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