Top 10 Tax Mistakes

Top 10 Tax Mistakes

The end of the tax year is rapidly approaching. What a year it has been. It started strong, businesses doing well and some decent tax reform on the way. Then Covid-19 hit….you know the rest!

As year end approaches it is more important than ever to be ready. Small businesses need cash right now and an easy win is unlocking any tax refunds that they may be entitled to.

To get you off to a great started I’ve summarised the top ten tax deduction issues that I’ve dealt with over the last twelve months, either with my clients or in discussions with other accountants. It is by no means an exhaustive list but if you are ticking all the relevant boxes below you are off to a great start.

 

No receipts for expenses

It is a very commonly held myth that you can substantiate deductions with bank statements alone. This myth is in part due to the messaging from the modern cloud based accounting systems which push the idea that you can easily maintain all your records from automatic bank feeds.

There is no requirement to attached copies of the receipts to the data in your accounting system but you need to have them stored somewhere for the duration of the audit period (5 years). If you claim expenses that you cannot support they will be disallowed during an audit.

 

Unsubstantiated Travel Expenses

Most of us travel for business at some stage, it’s inevitable. Sometimes we’re even lucky enough that the business travel takes us to somewhere we wanted to visit anyway. This is where the deduction problem arises. Business owners attempting to claim 100% of the costs associated with a trip that was, at least in part, personal.

Any business owner who intends to claim the costs of a business trip must ensure they keep detailed records of all expenses (see point 1) as well as a travel diary or itinerary to show what they were doing during each day and how those activities related to their business. If you are going to a conference keep a copy of the program and any other documentation they give you with your other trip records.

The most important part of the whole process is to apportion the costs between business and personal. If you travel to Queenstown for a week long conference and you stay an extra week to go skiing you have to split all the costs. Yes, that includes the flights. The argument of “I had to fly over for the conference anyway whether I had the holiday after it or not” does not work..trust me, I’ve tried it during a live audit!

 

Motor Vehicle Costs – Logbooks

To use the logbook method for claiming motor vehicle costs you must keep records of all costs and have a valid logbook in place. The logbook must run for twelve uninterrupted weeks. Once completed, the logbook will last for 5 years assuming your business use of the vehicle does not change substantially.

The ATO have clarified their position on the form a logbook must take. It’s not generally acceptable to run an excel spreadsheet. You can use a spreadsheet for your calculations but the trip information must be supported by one of the following:

  1. Data export from a tracking app;
  2. Calendar or appointment books detailing the trips you took;
  3. A physical logbook purchased from a newsagent or other document provider. If you are using a logbook check the publication date. If the date on the book is after the first date shown for the logbook period you might get a few questions from the auditor.

Note: just because you are driving a Ute for work does not exempt you from the requirement to keep a logbook. The ATO has been known to frequent popular four wheel drive locations (like Fraser Island) documenting all of the vehicles covered in business logos and other sign writing being loaded on the barges. This data is then checked against the business’s tax return to see if a private use portion of motor vehicle costs has been reported.

 

Motor Vehicle Costs – cents per KM method

This is a big one. So many business owners use the cents per kilometre travelled approach to claim some cost of operating their personal vehicle as a business expense.

You cannot just make the number up.

While you do not need to keep a full logbook you are expected to show the ATO some support for your estimate. usually this would be a calendar or diary to support the trips/dates and some sort of evidence to show the distance travelled for that trip. I usually use google maps to support the distance for my trips.

 

Home Office Costs

Business owners often claim some part of their home/personal costs against their business income when they undertake business related activities from home. With all of the Covid-19 shutdown requires this year those costs are likely to rise considerably.

The nature of the expense you wish to claim will determine the approach to use. However, there is one part of the process that is often overlooked. To work out how much of the various costs you can claim as a deduction you must be able to provide some sort of evidence that you worked from home in the first place and for how long.

The easiest option is to keep some sort of work diary, even if it’s just a digital calendar. If you’re claiming that you worked from home for 8 hours a day, 5 days a week for 50 weeks in the year you should have a diary or calendar, prepared at the time the work was performed, to prove your claim.

 

Uniform Expenses

You cannot claim a deduction for the cost of clothing purchased for business unless the items purchased fall into one of three categories:

  1. The item has your business logo permanently attached;
  2. The item is consider occupation specific clothing – e.g. a Chef’s hat; or
  3. The item is protective equipment – e.g. Steel capped boots.

Clothing that is essentially the same as anyone else could wear on any given day is not deductible, even if you purchased it to wear while working.

There are some small exceptions to the above rule. For example, undercover police offices can claim the costs associated with purchasing plain clothes for work even though the items would normally be excluded. This exemption does invalidate the general rule. It’s a specific exemption granted for the police force. Just because you have to wear particular clothes for work (e.g a lawyer wearing a suit) does not make it deductible.

 

Laundry Expenses

To claim a deduction for the costs associated with cleaning your work clothing you first need to satisfy the previous point. No deduction is available for cleaning clothes unless you can establish that they are eligible work related clothing in the first place.

You can then determine the amount to claim as a deduction for laundry and cleaning costs. You will need a diary or other written evidence (receipts) if you wish to claim more than $150 for laundry costs in a given year.

Where the amount claimed is less than $150 you can make a reasonable estimate of your costs using the following rates:

  • $1 per load if the load is made up only of work-related clothing
  • 50c per load if you include other laundry items

You may be asked to demonstrate how often you wore your eligible clothing (eg. evidence that you worked four days a week for 48 weeks in the year).

 

Education costs

A really common mistake that I see all the time is failing to establish an adequate link between what your business does to generate income and education that the business owner undertakes. You need to carefully consider whether or not the course is directly related to the business’s services.

For example: Assume you run an IT business installing computer systems in office locations for small businesses. It is not reasonable to claim the costs associated with the owner undertaking a degree in computer programming, even though at first glance they both appear to be related to computers. The business does not build custom software applications for its clients, it installs hardware. The business may provide software development services in the future but right now it does not and the costs associated with the field of study are not an allowable deduction.

However, courses that improve your ability to run your business effectively are fine even if they do not necessarily relate the services your business provides to the world. For example, you can claim the costs of a social media marketing course against your business income even if the business does not sell Digital marketing services. The skills derived from the course will still be actively used in the running of the business.

 

Staff Bonuses

Your staff are doing a great job? You want to reward them with a little extra money as a once off bonus? Great! Just make sure you process it through your payroll system like any other component of their salary and wages. Payments made to staff in the form of salary and wages, which have not been treated as such in the accounting records are not deductible. You cannot transfer the money to their bank account and record a bonus expense (or similar) in your records. It has to go on the employee’s payment summary.

 

Staff Parties (Christmas, End of year etc)

This is another staff benefit that goes wrong more often than you would think. If your business pays the cost of staff entertainment this can be a Fringe Benefit. You can qualify for an exemption here but only if you satisfy both of the following points:

  • The cost per person is less than $300, and
  • The benefit is infrequent (it’s not something you provide regularly).

Business owners commonly stumble at point 2. If you have Friday afternoon drinks with the team every week we can all see that the benefit is not infrequent and, therefore, does not qualify for the exemption. However, the same rule applies where the event is something you do every year, like a Christmas Party. If you hold an event about the same time each year it is no longer infrequent even though it only happens once a year.

Make sure any costs that could fall into this trap are easy for your account to find in your accounting records. Do not hide them in some general or other expense account. Make sure they are coded to an entertainment account.

 

Next Steps

What should you do next?

  • Review the list above and determine which items apply to your situation; and
    • Start getting the information together ready for year end. It is only a few weeks away.
6 Things You Can Do for Your Business While Streaming Netflix

6 Things You Can Do for Your Business While Streaming Netflix

#laptoplife is here to stay. We’ve all seen the Facebook and Instagram images of friends running their business from beside a pool or overlooking the beach. However, my Laptop Life destination of choice is actually Netflix. I love binge watching TV and i do some of my best work at home with Netflix streaming in the background. I’m watching season 4 of Grimm right now!

I know productivity experts will tell you to avoid TV until you’ve completed your work for the day. It’s your life and your business so i say do whatever suits you! Personally, i like to have my cake and eat it too! Here are a few projects you can work on while binge watching your favourite TV shows on Netflix. Lets prove the productivity experts wrong!

Create content

Things to do to help your small business while watching Netflix - Create content

In the digital age content is king. if you have the budget you can spend a fortune driving traffic to your website through various advertising platforms. For me, nothing beats organic traffic lured to your site via well written, valuable content. While your sitting on the couch with your feet up watching TV take the opportunity to plan and create content for your market. I’ve seen small business owners create a months worth of blog material during a 6 hour Netflix binge session. That’s productive!

 

Scheduling your social media content

Things to do to help your small business while watching Netflix - Schedule Content

Writing great content is only part of the battle. You need to share it with the world in order to engage with your audience. Remembering to share your content at the appropriate times during the week can be difficult. Thankfully tools like <a href=”https://buffer.com/”>Buffer</a> can make sharing your content at the right time a whole lot easier! Simply load up your content for the week/month and let Buffer post to your social media platforms for you. – Note, this is not a sales post for Buffer, there are loads of competitors on the market!

 

Improve your Product and Sales pages

Lets be honest here – a lot of small business owners built their website because everyone said “your business must have a website”. In the Google age i’m certainly not disagreeing with that advice but simply having a website isn’t enough. If your domain name leads would-be customers to a glorified online brochure it’s time to review and adjust. If a page on your site is intended to sell a product or service it needs to ‘sell’ rather than merely ‘describe’? A good product page needs more than one or two lines of copy and a photo. It should drill down into the real benefits the product is offering to your ideal customers.

 

Update your About page

Your business is constantly evolving and every day you acquire new skills, knowledge and experience your customers should know about. When was the last time you updated your ‘About’ page to reflect these changes? Do it now, while Kevin Spacey is scheming his way into the White House on House of Cards in the background. if your About page doesn’t sell you and everything you’re capable of you’re doing your business a disservice.

 

Review your pricing

Things to do to help your small business while watching Netflix - Review Prices

Pricing is a complex process and i’m not suggesting you should change all of our prices on a whim while watching TV. However, take the opportunity to review what your competitors are charging for similar products and services. Time spent researching your competitors is never a waste, its a crucial element of understanding your market. Large supermarket chains send employees to physically walk the isles of their local competitors and price match particular items.

 

Check your inventory health

If you run an inventory based business reviewing the rate at which your stock is moving and/or accumulating is absolutely crucial. Shifting redundant stock before you end up getting stuck with it can mean the difference between success and failure. While you’re relaxing on the couch take a moment to review your stock levels and the rate at which each item is selling  Most inventory systems will have a report you can generate to show this information. If you sell through Amazon (FBA) they have a report specially designed to help sellers monitor stock movement.

 

Do you have other productive, business related things you complete while watching Netflix? let us know!

Lets Get O.C.D About Pricing

Lets Get O.C.D About Pricing

Client’s often ask how I determine the prices for my services. Usually this is done in the hope of learning a new pricing method they can apply in their own businesses. Until now I had never really ‘written it down’ or considered displaying it in any sort of structured way.

Recently I read an article that was able to effectively summarise the general approach I take to pricing. It just didn’t sound like ‘me’.

So here it is – My Objectives, Considerations and Decisions (O.C.D) approach to pricing any good or service.

Objectives

When pricing a product or service it’s important to be clear on what your pricing objectives are. Usually a business has two clear objectives when determining price:

1. To offer their customers a price at which they perceive the good or service to be great ‘value for money’ – we want them to buy it!; and

2. Deliver as much Profit as possible to the business.

The right price for your product or service is usually the sweet spot between those two Objectives. The point at which the business receives an acceptable profit level while ensuring that enough customers see value and make the purchase.

Undoubted the relative importance of each object will vary from time to time. On some occasions your profit-making objective will take the lead and the resulting pricing will be higher – even at the risk of the customer saying No. Other times your desire to win the work will take over and you may reduce the price to guarantee the win. While I don’t necessary advocate ‘discounting’ as a pricing strategy sometimes you want to build a relationship with a business owner and winning their work could be the starting point for a larger plan.

Considerations

Once you are clear on your pricing objectives its time to gather some data. What should you consider when determining your price?

1. Costs

It’s important examine the costs associated with delivering the product of service. Raw materials, labour inputs, transportation etc. You can’t determine your profit margin until you fully understand your costs.

As part of this process it’s also important to consider capacity. If you need 100 labour hours to complete the job and you only have 50 available can you deliver? Will you need to engage higher priced labour services for the shortfall?

2. Value

Value, as with beauty, is in the eye of the beholder. You need to get in the head of the customer and understand how important your product or service is to them. If you product is highly important to them they are likely to be far less price sensitive which, in turn, means you can charge more.

3. Competition

The internet has made to easier than ever for your customers to quickly research your competitors and the prices they charge. I’m not suggesting you price match your competitors. Small businesses trying to race each other to the lowest price are all heading for failure. However, understanding who your competitors are, what they offer and how much they charge will help to ensure your pricing is realistic. If your competitors sell widgets for $25 each and you charge $200 each for identical widgets you better have a great sales strategy to demonstrate why you and your business still represent good value at that higher price!

Decisions

Now that you have clear objectives and you have the relevant data available you can look at putting a dollar value on the product or services. When setting the price you will usually have to make 3 decisions:

The Structure

In a service-based business will you charge by the hours or a fixed fee? Will you bill in stages or on completion? For businesses delivering physical goods will your sell the individual items or packages containing multiple/assorted items?

There is no perfect pricing structure. Usually it will depend heavily on customer preferences and the relative bargaining power between the parties.

The Level

The amount (level) of your pricing within the chosen structure. If you are going to bill by the hour will it be “$50 per hour” or “$500 per hour”? If you are selling individual products then it is “$1,000 per unit”.

The Pitch

This is your system for presenting and discussing prices with your customers. Will you present them with multiple pricing options? Will you list the prices publicly (menu pricing) or make the customer contact you to have the price customised to them? How will you articulate the value of your goods / services so that the customer has the right context with which to consider your price?

For me personally I use fixed priced, 12-month service packages in my business. The package price is billed monthly and clients always have 3 different pricing options when entering into a new service period. After much trial and error, I’ve found that approach best suits most of the clients I work with. Do you want to see how the packages are designed and presented? Why not contact us for a quote on your Accounting, Tax and Profit First needs?..See what i did there?

It’s not an exact science

You will have heard the saying ‘pricing is an art and a science’. For hundreds of years pricing consultants have tried to deliver exact formulas with which business owners can price their products. Ultimately, there are just too may moving part to look at pricing that way. Getting it right takes all the relevant data you can gather, a lot of experimenting and sometimes a little bit of luck!

Just remember to be O.C.D about your pricing. At the end of the day it means the difference between success and failure…

How Discretionary Trusts Work With Profit First

How Discretionary Trusts Work With Profit First

In this weeks article I wanted to continue the business structuring discussions. To following on from the previous articles that focused on Profit First in Sole Trader and Company structures, this week I’m looking at my favourite business structure option of all…Discretionary Trusts.

While many Australian business owners are somewhat familiar with how a company works they are far less comfortable with Discretionary Trusts (often called Family Trusts). This results in many businesses being run inside companies purely because the business owner doesn’t understand the benefits the trust could offer.

What the heck is a Trust?

Trust law is complex and trust administration should always be left to professionals. Having said that, a very simple example of establishing and operating a Trust is below:

I give my wife (Jaine) $1,000 and ask her to look after it. To invest it in accordance with a list of rules i have written down and to ensure any profits generated go to our daughter (Melody).

We have just set up a very basic Trust. The members of my little family are playing the following roles:

  • Settlor – myself
  • Trustee – Jaine
  • Beneficiary – Melody
  • Trust Property/Asset – $1,000
  • The Trust Deed – My list of ‘rules’

If you currently have a trust you might find a $10 note stapled to the front of the Trust deed. That’s your original Trust asset. Don’t lose it!

Why do I love them so much?

One word…Flexibility! Trusts allow your accountant to get creative at tax time and look for ways to better manage taxable income across your family group. They help to prevent situations in which most of the business income is taxed in the hands of one person. There are limits to what the trust can do and the rules are complex, but your accountant will be across it all.

Profit First and Discretionary Trusts

If you are operating your Australian business through a Trust (or considering it) what should you consider when implementing Profit First?

Trusts and Owners Pay

Unlike a company structure the trust can ‘give’ it’s profits to the business owner(s) without the need to put the payments through the payroll system and treat them as a salary or wage. You can process the business owners as salary employees if you wish, but you don’t have to. Furthermore, people can be beneficiaries of the trust even if they don’t actively work in the business.

As I mentioned earlier this increased flexibility allows your accountant to get creative, but you need to work closely with them through-out the year to ensure the profits are flowing to people who qualify as beneficiaries and in appropriate quantities.

Trusts and Superannuation

The superannuation system is a great ‘forced saving’ mechanism. Funds accumulate in your superannuation fund because the law says that if you are an employee you must have contributions made.

A trust structure allows us to distribute profits without compulsory superannuation contributions. This can be great in cases where you want to pay off personal debt or build investment wealth outside of superannuation but it’s not right for everyone. I always recommend a financial planner is involved in those discussions.

If you’d like to make contributions from your dstributions you can, but you’ll need to set aside the appropriate amounts from your Owner’s pay account and transfer them to your superfund.

If you accumulate the funds outside of superannuation and hold them until the end of the financial year then you can make the choice when you are doing tax planning.

Trusts and the Profit Account

The same principles apply to your quarterly profit from the Profit Account. In a trust we don’t have to put this through as a wage and pay superannuation on it. However, you should consider this part of your total ‘drawings’ from the trust for the year when discussing the topic with your accountant.

In Summary

My message for all business owners who use a Discretionary Trust is this: In my opinion you have the best structure available for Profit First. While the system functions exactly as described in the book in any structure, the trust allows the maximum tax reduction potential for businesses that have outgrown the sole trader option. While they can be complex your accountant or Profit First Professional can guide you through every step.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Using Profit First with Australian Company Structures

Using Profit First with Australian Company Structures

Following on from the previous article that focused on Profit First in Sole Trader businesses I thought I’d write something similar for those operating through a company structure.

An Australian Proprietary Limited Company is a considerably more complex business structure than a sole trader. As such, there are a few additional considerations that are unique to a company.

I usually like to keep my articles easy to read and, for the most part, free of references to specific tax laws. However, the issues you will run into with a company are founded in quite complex tax legislation, so this article is a bit heavier than usual!

Lets explore the points one by one:

1. Company Structures, Owner’s Pay and Division 7A

Anyone running their business through a company will have discussed Division 7A with their accountant at some point. However, for the benefit of those that are not familiar with this piece of tax legislation lets take a high level look at it.

What is Division 7A

A company is a separate legal entity under Australian law. It earns income, pays expenses and ultimately generates a profit in its own right. The company then pays tax on this profit at a rate specific to companies. Currently, most small companies are paying tax at a rate of 27.5%. This tax rate is usually lower than the owner(s) of the business would pay if all the profit was being taxed in their hands.

Now, back in the 1990’s (and prior) wealthy business owners used to abuse this company tax rate. Their businesses, which were earning 100’s of millions of dollars, would be operated through a private company. By paying tax at the company rate they would save themselves millions of dollars in tax every year.

The company would then use these profits to:

  • Buy houses, luxury cars, large boats and other items. All of which were used by the owner’s of the business/company personally, for free; and
  • Lend millions of dollars to the business owner(s) directly, interest free!

It was an incredible tax loophole while it lasted. However, in the late 90’s Division 7A was introduced to stop company structures being abused for tax savings. Now, if you owe money to your private company or you use company owned assets you must compensate the company for this (eg pay interest) or pay tax on the amounts personally.

Division 7A and Profit First

Why is all of that relevant to Profit First? Due to Division 7A accountants need to work with their clients to plan the movement of cash and profit in and out of private companies.

Businesses using Profit First set aside Owner’s Pay and a portion of their Profit Account specifically for the owner(s) of the business. However, if you just take all this cash out of the company and spend it you may inadvertently spend far more income than your accountant wants to put in your tax return for the year.

This results in a tax problem that we only really has two viable methods to resolve:

  1. Put all the income in your tax return and take the tax hit from the higher margin rates; or
  2. Enter into a loan agreement and pay the money back to the company, with interest.

If you are operating through a company and your business is highly profitable (as all Profit First businesses aim to be!) reach out to your accountant. Ask them what your maximum, after tax salary from the business should be to avoid creating a tax headache at year end. This is something they should be able to work through with you quite easily based on your goals and their plans for your business’ tax work each year.

2. What do we do with capital raised through a share issue

As a company grows there may come a point in time at which a large injection of capital is required to take it to the next level. You could borrow the funds from a bank but that requires security and interest payments.

An alternative is to sell shares to investors, this is called a ‘Share Issue’. The investors purchase partial ownership of the company and, in return, inject working capital into the business.

Share Issues and Profit First

The funds received from the investors are not ordinary income to be split between your normal Profit First accounts. Profit First companies that are planning a Share Issue must open another account specifically for this purpose. The account should be held at Bank 2 and all amounts received from the investors must be transferred to this account directly

In Summary

My message for all business owners who use a company is this: Don’t let the above information freak you out! The Profit First system will work exactly as described in the book. The items discussed here are merely Australian specific issues to keep in mind. Your accountant or Profit First Professional can guide you through all of this. In particular, Division 7A is something your accountant should have already been proactively managing. Even if its in the background without your knowledge.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Want some professional help getting Profit First running in your Australian business?..We can help