Tax Planning Tips – Pay Employee Superannuation early

Tax Planning Tips – Pay Employee Superannuation early

Paying your employee’s superannuation on time, in full, is essential. Especially now that the introduction of Superstream means that superannuation funds will report employers who fail to meet their payment obligations to the ATO.

What if I told you that making this payment early, rather than late, is actually a effective tax planning tool?

 

A bit of background information

Each time your employees come to work they accumulate a superannuation entitlement. The current rate for superannuation is 9.5%. Some employees don’t qualify for superannuation payments but for the purpose of this exercise I’m focus on those that do.

At the end of each financial quarter (e.g. July to September, or January to March) we need to pay this superannuation amount into the employee’s super fund.

These payments are due on the 28th day of the month after the quarter ends. For example superannuation that relates to the January to March quarter is due on the 28th of April.

What most business owners are not aware of is the fact that until the superannuation is paid it is not deductible and if you miss the payment deadline (the 28th) the amount is no longer deductible at all, even after you pay…but you still have to pay!

 

How does this strategy work?

Your employees superannuation payments for the April to June quarter are due on the 28th of July.

If we pay them on time they are not claimed as a deduction until next year because they were paid after 30 June.

If you paid $100,000 in wages during the March to June quarter that’s $9,500 of superannuation you’ll need to pay in July. This payment will be claimed as a deduction next year.

What if we brought the payment forward? Just one month? You’d get the tax deduction in this financial year. Assuming you are managing your business cashflow well the money should be set aside each time you process payroll. If the money is just sitting there, why not bring the deduction forward?

Assuming you pay an average of 30% tax the $9,500 payment, which you have to make in July anyway, would reduce this years tax bill by $2,850 if you paid in June!. That’s extra cash in your bank account now rather than after you lodge next years tax return.

 

Option 1 – No Tax Planning: Pay the $9,500 superannuation bill in July (next financial year):

You make the $9,500 Superanuation payment in July 2018.

The $2,850 Tax Deduction is received in September 2019, or later depending on when you lodge your tax return.

This means you don’t get the cashflow benefit of the payment for over 12 months after you pay it!

 

Option 2 – With Tax Planning: Pay the $9,500 superannuation bill in June (this financial year):

You make the $9,500 Superannuation payment in June 2018.

The $2,850 Tax Deduction is received in September 2018, or earlier depending on when you lodge your company tax return.

The net result is $2,850 of cash in your bank account 12-18 months faster just by making the superannuation payment 1 month early. I know a few $thousand here and there may not seem like much but this is an easy win and it’s just one of the tax planning options you should be exploring with your accountant at this time of year (April-June).

 

Other Points to Notes

1. You need to make your payment before business closes on 30 June. The funds must have left your bank account. Ideally, process the amounts at least 3 working days before 30 June.

2. Paying your superannuation obligations early might inadvertently push your employees over their contribution cap for the year and be detrimental to them. Currently your employees can contribute a maximum of $25,000 per year to their superannuation fund.

 

Profit First Australia

A common issue during Tax Planning is a lack of cash. All the great ideas in the world are useless if you don’t have the cash available to implement them. This is just one of the many reasons we recommend Profit First. If the system is up and running in your business the money required to implement this and many other tax planning strategies will have been accumulated through-out the year. When you reach year end it’s just a matter of chatting with your accountant and implementing the plan!

If you’re interested in getting your cashflow on track you can learn more about Profit First Australia here.

 

Next Steps

What should you do next?

  • Look out for more tax planning tips in the coming weeks!
  • Ensure you and your accountant are working towards a year end tax planning strategy, and
  • If your accountant isn’t doing tax planning then contact us!
Using Profit First to improve your relationship with the ATO

Using Profit First to improve your relationship with the ATO

In recent years there has been an escalation in the conflict between the Australian Taxation office (ATO) and small business owners. It’s been a hot topic in the media this week and was discussed at length on 4 Corners last night. The ATO have been accused of deliberately targeting small business owners, rather than big business or high net wealth individuals, because they lack the funds to fight back. They’ll just “pay up so the problem goes away”.

I honestly can’t say whether that is true or not. In my 10 years of dealing directly with the ATO on a daily basis I’ve experienced significant variation in the treatment my client’s have received for what I believe were exactly the same issues. Most of this I had  chalked up to the different phone operators I was dealing with. It’s an inside joke in the accounting industry that if the ATO doesn’t give you the answer you want just hang up, call back and hope to get someone in a better mood.

I will concede that many small business owners (and their advisors) have been guilty of not taking the ATO seriously. Ignoring requests for information, consistently paying late and generally not managing thee relationship very well.

Rather than bash the ATO, I wanted to cover off on a few things you can do to improve your relationship with them. That way you can try to avoid being on the receiving end of the powers they seem to be increasingly happy to use.

 

Use Professional advisors

I often hear comments along the lines of “I don’t need an accountant, I just lodge my own tax return online”. Is this a good idea? In my opinion, only taxpayers who meet the following requirements should consider taking a DIY approach to tax:

  1. They earn a Salary/wage with PAYG withheld from it (they are employed, not self employed);
  2. They claim very basic deductions – amounting to a couple hundred dollars at most; and
  3. Have no investments or other complex tax issues.

Everyone else should be using a professional.

You’re free to disagree with me. However, my opinion is shared by the majority of tax professionals in Australia. Everyday we hear examples of taxpayers having their businesses crushed by the ATO for having misinterpreted a section of tax legislation.

 

The ATO Website

The ATO website is a great resource but should be used in conjunction with professional advice. The general information they publish is intended to simplify what is otherwise quite complex tax legislation. Their aim is to present it in a way that the general public will understand. While this is a noble venture you must keep in mind:

  • The information is often over simplified;
  • It gives very limited guidance on how to apply it to your specific set of circumstances; and
  • None of it is binding on the tax office – if you inadvertently misuse the information you have no defence. Their response will be “you should have obtained professional advice on the matter”.

 

Implement Profit First

Using Profit First will dramatically improve your relationship with the tax office. That might seem like an odd statement to make but let me explain:

Benchmarking

Every year the ATO compares the information you report in your tax return with the data collected from everyone else in Australia that uses the same industry code as you. They calculate averages and standard deviations and use that information to look for tax payers who are reporting profits well below average for their industry. They want to audit these businesses to see if they are claiming tax deductions incorrectly.

By implementing Profit First you can ensure your business is above average from a profitability stand point and lower your risk of an audit.

Meeting tax obligations

For decades now small business owners have used withholding taxes, GST  and unpaid superannuation as a source of working capital. Personally, I believe the real reason the ATO seems to be targeting small business owners can found right here. As business owners we should be taking out business loans at market rates and managing our cashflow effectively. What’s happening in reality is that business owners using the ATO as a source of interest free capital. What we are seeing is the ATO’s attempt to ‘call in the debts’.

In recent years the ATO has:

  • Rolled out super stream so that superannuation funds can report late super payments to the ATO;
  • Started regularly rejecting payment plan applications where the debt is GST and PAYG. In the words of an ATO operator I was speaking to just last week “business owners shouldn’t need a payment plan for GST or PAYG. It was never their money to spend in the first place!”;
  • Referred debts to their internal Debt collection team just days after the first reminders have been issued to the taxpayers;
  • Launched single touch payroll (effective 1 July 2018). Now your own payroll system will report your withholding tax obligations directly to them.

Profit First helps fix this situation via the Tax Account. The whole purpose of the Tax Account is to accumulate the amounts you need to meet your various tax obligations. Taxpayers who regularly lodge on time and pay in full are far less likely to be audited.

My initial interest in Profit First as a service offering for my Accounting firm was specifically to help my clients break out of the tax debt cycle and get the ATO off their back!

 

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Profit First Australia – Advanced Banking – Other Additional Accounts

Profit First Australia – Advanced Banking – Other Additional Accounts

Anyone who reads my material on a regular basis knows that I like to keep everything as simple as possible. This is especially the case when it comes to Profit First. The more accounts we add the more difficult the process becomes to manage.

Having said that, a number of other accounts are being used by Profit First business owners to quite effectively management particular situations. In this week’s tip I wanted to run through a few of those accounts.

Payroll Account

This account is very common in businesses that have employees. While you could simply pay your employees from your Operating Expenses account many business owners prefer a specific payroll account.

The account is used as follows:

1. Do your Profit First allocations as normal;

2. Immediately transfer the cash to make this week’s/fortnight’s payroll to your payroll account. This should include amounts required to pay their superannuation.

3. The money remaining in your opex account is for the remaining bills.

One reason I like this account and/or method is that it guarantees payroll is on-time, every-time. I’m not one of these business mentors that preaches about you ‘eating first’. Your employees come to work everyday in good faith and their only expectation is that you pay them. Failing to meet payroll obligations, even by a few days can have detrimental effects on team morale, effectiveness and retention.

Donations & Tithe Accounts

Donations Account

Some business owners feel passionate enough about particular causes that they make donations directly from their business. Personally, I donate funds directly from Panic Atax to Beyond Blue.

The easiest way to stop your business consuming the cash you wish to donate is to set it aside in another account. In practice I have seen business owner’s approach the amount to put aside as either a fix dollar amount each week/fortnight or as a percentage of Real Revenue.

Tithe Account

This account works the same as the donations account except it’s specifically for accumulating funds for tithing to a church or other religious organisation. Often there is an unwritten expectation that members of particular congregations will tithe a certain percentage of their income. This account ensures the funds are available.

Debt Destroyer Account

In the early stages of most business’ Profit First journey the first goal is debt reduction. Given that business owners have a habit of spending more than they can afford that shouldn’t come as a shock to anyone.

A debt destroyer account can help here. How do you use a debt destroyer account? Right before you do your next round of Profit First transfers you may have a residual amount still sitting in your Opex account from the previous transfer period. Some Profit First businesses transfer this amount into the debt destroyer account and start the next Profit First cycle period with the Opex account at $0.

Why not just transfer the amount directly onto the debt? I guess, in a way, it’s a safety system. The Opex account may have had money left in it just because a major bill is a few days late this month. If you go and put the cash directly onto the debt you may not be able to get it back once you realise what the problem was!

Tax Implications

It is important to remember that Profit First is a Cash Flow system. We have set aside funds in these accounts to spend in the future. However, because the amounts have not been spent yet we can’t claim a tax deduction for the amounts. You should work with your accountant or Profit First Professional to determine whether or not the cash sitting in this account is subject to Income Tax or GST.

A Quick Warning

I will include this brief warning/comment in each article regarding the use of accounts beyond the core five. It is very easy to over complicate the Profit First system by adding too many accounts. In fact, it is one of the most common reasons entrepreneurs fail to stick with the system. Please keep this in mind when considering whether the account(s) discussed in this article are right for your business.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Living Profit First

Living Profit First

The Profit First book focuses on improving business profitability. You set-up your small plates, cut expenses and finally start to see some reward for all your efforts. Recently, I started working with a new client who really doesn’t have this problem. Don’t get me wrong, his business struggles to pay its bills and never has cash to pay the ATO, but business expenses are not the problem. The business is profitable, the business owner just spends too much of it! That was clear 30 seconds after I opened his Xero file. After the somewhat uncomfortable conversation that followed I thought I’d quickly touch on the concept of living Profit First.

Sometimes the Cashflow problem is you!

I’ve been working with small and medium sized businesses for about 10 years now. You’ve all heard the stats about small business failures and the constant cashflow battle. That’s usually when Accountants start talking about concepts like Debtor and Creditor Days, Inventory management techniques and other working capital management topic.

While those are certainly important you wouldn’t believe the number of times the problem has nothing to do with the business at all. The customers pay on time, the creditors give more than generous payment terms and, overall, the business is profitable.

The problem, as hard as it may be to accept, is the owner. If they spend $75 out of every $100 that comes in the door on personal expenses no amount of business coaching or accounting advice can dig them out of that hole.

This is particularly an issue for start-up businesses where the owner has personal bills to pay but the business hasn’t established a solid monthly income yet.

Living Profit First

Very early in my business I was concerned that I wasn’t building wealth. The business was making money and I was taking my salary but now that I was self-employed I wasn’t getting superannuation contributions (for example). As my salary grew so did my expenses and I still had nothing left. Parkinson’s Law all over again!

To prevent myself from starving my business of working capital, control my personal expenses and avoid my lifestyle consuming the funds that should have been building wealth for my family I implemented the following:

Opened a personal Income Account:

This works exactly the same as my business Income Account. Each fortnight the business pays a fixed salary into this account and I budget from this amount like I would if I was an employee.

Opened Four (4) Money Management Accounts:

Live:

50% of my fortnightly salary goes into my living expenses account. A lot of cuts were made to my personal expenses to be able to bring the number down that low!

Grow:

25% of my fortnightly salary goes into my Grow Account. This is my investment money. If, after I do my tax planning calculations, I decide to make a super contribution I get the money from this account.

Blow:

20% of my fortnightly salary goes into my Blow Account. This is pretty self-explanatory. It’s the money I’m allowed to have fun with. Entertainment, presents for my family (or a new Xbox for dad). I allow myself to spend this without feeling guilty!

Emergency:

5% of my fortnightly salary goes into my Emergency Account – just in case! With a young family and a small business, you never know when something is going to come up.

The Barefoot Investor

While my personal focus is on business finance and tax issues Scott Pape and his book The Barefoot Investor takes the Envelope cash management system and applies it to your personal finances.

If you’re interested in another perspective on this type of financial management system I’d certainly recommend the book. I’ve heard mixed reviews on the paid ‘Blueprint’ service offering. However, the book itself is full of useful information.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Capital and Expense Accounts for Profit First

Capital and Expense Accounts for Profit First

To truly conquer your cashflow, proper planning is everything. A large, surprise expense can trigger cashflow distress and seriously undermine the long-term stability of your business. In this article we’re going to look at Capital Expense Accounts and Large Expenses Accounts. You may use one or both as part of your long-term planning process to ensure you avoid any nasty surprises.

Capital Expense Account(s)

When we talk about Capital Expenses in the realm of business we’re talking about buying Assets. Plant and Machinery, Office Furniture and Equipment, Motor Vehicles and the like. Large items that the business will use over a number of years to generate income.

Usually, items of this nature require loans of one sort or another at the time of purchase. You will recall from the Debt Freeze article that taking on debt for essential business equipment is one of the few times when debt is acceptable in Profit First. Provided you can service the repayments from your Operating Expense Account that is!

Any alternative approach which can remove (or at least reduce) the need to take on debt is to establish a Capital Expenses account. Each time you do your Profit First Transfers you set aside a pre-dermined amount which gradually accumulates over time. The long-term aim of the system is to have a large amount of cash saved up ready to buy the required asset outright rather than borrowing to fund the purchase.

Large Expense Account(s)

These accounts work exactly the same as Capital Expense Accounts but are intended to help the business pay large expenses that fall at particular points during the year. Not all your expenses can be paid monthly so planning for large, annual payments is crucial. A common example here is insurance policies. Rarely do business insurance policies offer a pay by the month option. They send the business an annual invoice which you either pay in full or use some form of premium funding product to borrow the money. In Profit First we prefer to set aside some money each week/quarter/month so that when the bill comes in we can pay it in full without having to pay interest!

Do these accounts need to be actual bank accounts?

In practice I’ve seen two different approaches here:

  1. Open an account for each item: This is pretty self-explanatory. For each large/capital item you will need funds for in the future you open a separate Savings Account with Bank 2. While this is the easiest option from a visual perspective you may end up with a lot of accounts if you get too carried away; or
  2. Open one Capital/Large Expenses account: Open up a single account and use a spreadsheet to track how much money needs to be transferred to the account and what each dollar transferred is intended to pay for. If you’re a spreadsheet person you’ll probably find this method keeps your banking structure clean. If you’re not a spreadsheet person stick to option 1!

Client Profile – How Fiona Fell uses these accounts in her business

Fiona Fell is an online marketing specialist, offering both one-on-one support as well as training for business owners who prefer a DIY approach. In Fiona’s own words “I help local business owners share their drive, hunger and excitement for their business, their products and their services through online marketing”.

Fiona is also one of Panic Atax’s Profit First Australia clients and is using the account types discussed here in her business. I thought this would be a perfect opportunity to give you a live example of some more advanced banking concepts in action.

Once the core implementation was working for Fiona the conversation moved to planning. What would she like to be able to afford to do in the business that wasn’t currently covered by Profit First? The result of that conversation was the following:

  • Fiona wanted to upgrade all of her business I.T equipment in two years’ time, at an estimated total cost of $6,000; and
  • On-going professional development is important for her business and she’d like to set aside at least $3,000 a year to pay for courses.

To facilitate these requirements we opened two new bank accounts. One for I.T Equipment (a Capital Expense Account) and one to accumulate funds to pay for study materials (Large Expense Account).

Each fortnight the required amount is transferred from the Operating Expenses account into these new accounts (as part of the PF transfer process) to ensure that the funds are available when the purchases need to be made.

Tax Implications

It is important to remember that Profit First is a Cash Flow system. We have set aside funds in these accounts to spend in the future. However, because the amounts have not been spent we can’t claim a tax deduction for them. You should work with your accountant or Profit First Professional to determine whether or not the cash sitting in this account is subject to Income Tax or GST.

My Own Experience

Like Fiona, I also use these account types in Panic Atax. I’m running the following accounts with ING:

  1. Motor Vehicle Account: My Accounting services are mobile. For client’s in Brisbane I travel to their homes or businesses rather than asking them to come to me. This does mean that having reliable transport is a must. I’ve set myself a spending estimate and a goal to buy a new car when my daughter, who is now two, turns Five. Why? Because right now my adorable little toddler is destroying the back seat of our current car and watching that happen to a new car would make daddy cry!
  2. I.T Upgrades Account: My firm is cloud based so keeping up-to-date from a tech perspective is important. As such, I like to upgrade my primary computer equipment at least every 3 years. I’m setting aside an amount each fortnight to ensure I can make this purchase in cash when the time comes.
  3. Professional Development: I also like to set aside funds to pay for education and professional development. As a Chartered Accountant I must undertake 100 hours of training and research every 3 years to maintain my registration. Putting aside some money each fortnight means I have the funds available to pay for full-day courses as they come up through-out the year.

A Quick Warning

I will include this brief warning/comment in each article regarding the use of accounts beyond the core five. It is very easy to over complicate the Profit First system by adding too many accounts. In fact, it is one of the most common reasons entrepreneurs fail to stick with the system. Please keep this in mind when considering whether the account(s) discussed in this article are right for your business.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here

Stock Accounts for Profit First

Stock Accounts for Profit First

In my experience one of the most difficulty cashflow management issues businesses run into is maintaining Inventory levels. Often, funds are required to be paid to your supplier(s) well in advance of your inventory arriving ready for sale. If you then on-sell that inventory to your own customers on payment terms there can be a considerable cashflow lag. With Profit First we seek to combat this issue with The Stocking Account.

Does your business hold some sort of inventory? Then read on….

What is the Stocking Account

The Stocking Account is a separate bank account used to accumulate funds for the purchase of Inventory. In the Profit First book Mike talks about this account being for ‘large purchases and inventory’. My personal preference is to be far more focused with your stocking account and only use the account for inventory purchases.

Benefits of using a Stocking Account

1. Improved Cashflow control by gradually accumulating the money required to replenish your inventory;
2. For businesses exposed to constant trend changes (for example, clothing retail) the Stocking Account helps to ensure funds are available ready for next season’s purchase which may happen months before this season’s stock goes on clearance sale;
3. For growing businesses, the stocking account approach can also help to increase total inventory levels.

Stocking Account v’s Materials Account

In our earlier discussion about the Profit First Core Accounts we covered the Materials and Subcontracts Account. As you make each sale the amount that can be attributed to Direct Materials and the use of Subcontractors is separated from your income account prior to doing you Profit First core account distributions. As part of that article we looked at the 20% rule – that is, unless an item is at least 20% of the total sales price then it bypasses the Materials and Subcontractors account. For keeping the system simple on a day-to-day basis the 20% rule is great but one major issue comes up. What happens when we need to replenish our stock of material items that were too small to be captured by the Materials and Subcontractors Account? That’s where the Stocking Account comes in.

Getting funds into the Stocking Account

Each Profit First Transfer period you allocate an amount from your Operating Expenses account to your stocking account in preparation for planned purchases. How much should you allocate? That depends on a few factors:

• How large the purchase will be;
• How much time you have been today and the required purchase date; and
• How much of the required amount is already being captured by your Materials account.

The aim is to spread the load evenly over an extended period so that the business is not trying to find too much of the cash in any one week/fortnight/month.

Modifying the Materials and Subs Account

In practice I’ve seen some business owners modify their use of the Materials and Subcontractors account with great effect. The modified procedure is:

• The Materials and Subcontractors Account becomes the “Subcontractors Account”.
• The Stocking account becomes the “Materials and Stocking Account”.

Why? Under this modified approach the Stocking account received all the funds relating to your inventory needs, both the allocation of large amounts from the income account and the periodic allocations from the Operating Expense account. It saves some confusion when trying to decide which Invoices, or part thereof, should be part from each account.

The Stocking Account and Tax

It is important to remember that Profit First is a Cash Flow system. Just because we have set aside funds in our Stocking Account to be invested into Inventory this doesn’t negate our tax obligations. You should work with your accountant or your Profit First Professional to determine whether or not the cash sitting in this account is subject to Income Tax or GST.

A Quick Warning

I will include this brief warning/comment in each article regarding the use of accounts beyond the core five. It is very easy to over complicate the Profit First system by adding too many accounts. In fact, it is one of the most common reasons entrepreneurs fail to stick with the system. Please keep this in mind when considering whether the account(s) discussed in this article are right for your business.

Further Information

Read our comprehensive review of Profit First here

Join the Facebook group here