This isn't the glamorous side of entrepreneurship and success, but it is one of the most important. With the accumulation of zeroes in your bank account comes the inevitable grind to comply with financial regulations. Rather than doing the bare minimum to keep the taxman happy, wising up to the intricacies of the rules can result in more money in your pocket. Your side hustle or fresh startup is where every dollar matters, so it pays to arm yourself with some intel when it comes to tax time.
Mark Chapman, Director of Tax Communications at H&R Block has given us the inside scoop on how to approach tax as a fledgling entrepreneur. The company prepares almost 800,000 tax returns per year from 470 offices around the country, so Mark certainly knows the ins and outs. He's provided us with some stellar tax tips, which you can read in full below:
1. Declare Your Income
"If you’re running a business, all the income you earn from your business will be taxable. So, every sale you make will count towards your taxable turnover and will need to be declared on your income tax return. If you get paid in cash, don’t forget to declare it. The ATO traps many businesses that – deliberately or otherwise – don’t record cash sales.
In addition, if your turnover exceeds $75,000 – or even if it looks like it might exceed $75,000 in the near future – you’ll need to register for GST. This 10% tax is added on to all your taxable sales and then needs to be paid across to the ATO every quarter. You can offset the GST you pay on your purchases and expenses against the GST you owe; only the net figure is paid to the government.
Keeping track of your income is essential so that means you need to keep good records. There are lots of accounting software packages out there that will help you keep on top of your figures but if you’re not a numbers person, consider getting a professional bookkeeper to do the job for you. Sure, it’s an extra cost but it’s one less stressful task to worry about."
We use Xero at Luxity Media (publisher of Boss Hunting), and swear by it, but there are plenty of other easy to use options as well.
2. Claim Your Deductions
"Every dollar you spend on purchases and expenses that relate to your business can be deducted from your profits. You then pay tax on the difference between your income and deductions.
So, make sure you claim all your business expenses, whether that’s the cost of buying stock, heating your office, marketing your brand or traveling to meet customers (or any of the numerous other expenses you might incur).
When it comes to deductions, the key rules to remember are:
- Your business must have incurred the expense
- The expense must relate to your business and can’t be private or domestic in nature (so you can’t claim for the cost of your weekly groceries or your household bills)
- Any expenses that are partly business related and partly private or domestic need to be apportioned (which can be crucial if, for instance, you run your business from home and can claim home office costs)
- Make sure you can prove your business spent the money. An invoice or receipt is ideal, but a bank or credit card statement can also be used as proof in many cases."
3. Get Your Structure Right
"If you’re starting up a new business, do you want to be a sole trader, or do you want to run the business through a company or trust? You might not have given it any thought but this is an important question and if you make the wrong choice, you may have to live with that choice for many years.
One of the deciding factors can be tax – companies often pay tax at a lower rate than individuals – but there are lots of other factors to take into account. If you set up as a sole trader and you’re in a business with a high risk of litigation – a surgeon perhaps – you could find all your personal assets, like your home, at risk if you get sued. Setting up as a company will therefore protect your personal assets. Trusts can be useful for asset protection purposes too, as well as giving you the opportunity to stream some of the rewards of the business to family members.
My key tip on business structuring is to get professional advice before you do anything. Good advice now could save tax down the line as well as making it easier to sleep at night."
4. Take Advantage of the Tax Breaks
"Tax isn’t all bad news. There are incentives in the tax system that can be invaluable for new businesses if you know how to use them.
First of all, if you need to buy any capital equipment for your business – such as a car, a van, computer equipment, office furniture or plant to manufacture a product – you can claim an immediate deduction for the full cost of each capital item that costs less than $25,000 (as opposed to writing off the cost over several years, which is how these assets are normally treated). This special incentive is set to end on 30 June 2020 so it pays to take advantage whilst it lasts.
In addition, whilst you’re still assessing the feasibility of your new business, you might be able to claim deductions for expenses you incur, even though the business hasn’t started yet (and indeed may never start if your research shows the business isn’t feasible). Deductible costs can include professional advice on structuring your business, researching the viability of the business and developing a business plan."
5. Set Money Aside For Your Taxes
"This might seem obvious but unfortunately failing to set money aside to pay tax is one of the most common pitfalls that new businesses fall into. Particularly if you’re coming out of a paid job, you’re probably used to getting your taxes deducted straight from your pay packet by your employer. But now you’re in business on your own account, nobody is going to be deducting anything so you need to proactively manage your cash flow to set money aside for future tax bills.
Remember, with small businesses, cash flow is king. Even if you seem to be trading profitably, if your customers aren’t actually paying your invoices, you’ll struggle to pay your debts and one organisation you definitely don’t want to end up in debt to is the ATO."