• I don’t want to pay tax.
• How can I save tax?
• Why aren’t I getting a tax refund?

Once I help these business owners better understand how it works I can usually shift their mindset towards:

• How can I make as much money as possible?; and
• How can I budget/plan for and reduce this expense?

Income tax – How it works

I will over simplify the issue so we can focus on concepts rather than getting bogged down in figures. I am going to be focusing on a sole trader who does not have a company/trust; and will not be focusing on the following topics which will be covered in future articles in this series:

• how we can reduce income tax;
• tax refunds and how they work; and
• GST & BAS statements.

Two key points to remember:

• If you make a profit (not revenue), then you pay a certain percentage to the tax office (but it will never be more than the profit you make); and
• If you don’t make a profit … you won’t pay income tax.

A quote I use for people who sometimes struggle to understand this concept is:

“It would be great to have a $100,000 tax bill … because that means I must have earned at least $280,000 in profit”.

To understand how I came up with the above you need to be aware of the income tax rates which are listed below (I have excluded Medicare levy, private hospital cover, budget repair levy & other tax offsets for simplicity).

To explain this table

• If you earn $18,200 of profit you will pay $0 of tax on that income
  • 0% tax on $18,200 ($0 income tax)

• If you earn $37,000 of profit then you will pay $3,572 of tax on that income
  • 19% tax on $18,799 ($37,000 less $18,201 = $3,572 income tax)
  • 0% tax on $18,200 ($0 income tax)

• If you earn $87,000 of profit then you will pay $19,822 of tax on that Income
  • 5% tax on $49,999 ($87,000-$37,001 = $16,250 income tax) PLUS
  • 19% tax on $18,799 ($37,000 less $18,201 = $3,572 income tax)
  • 0% tax on $18,200 ($0 income tax)

And this concept continues as you earn more.

Income tax – Calculations

Rather than get too wound up by the mechanics I’ll put a few figures into the below table so we can better see how it works:

A couple of points that I’ll make from this table:

• Income tax is expensive!; and
• The more you earn … the more left over spending money you have!!!

The last point is too often overlooked which is why it is highlighted. Whilst income tax is expensive, the more you earn the more you will have left over to spend on holidays, housing renovations and reinvesting into your business.

Rather than fret about income tax you are best to focus your energy on:

• How can I make as much money as possible? and
• How can I budget/plan for and reduce income tax?

What should I do about income tax?

Whilst it’s great to earn a large profit, income tax is still every expensive and regularly catches business owners off guard. A couple of points you should focus on:

• Reduce income tax as much as possible

There are strategies we can undertake to minimise income tax as much as possible. Still focus on earning as much profit as you can but remember to regularly get taxation advice.

• Prepare for it!

If I told you in October 2016 that once I lodge your 2017 tax return you would have an income tax bill of $10,000 … you might not be too happy. However, in July 2017 when your tax return comes back as $10,000 payable there won’t be any surprises and hopefully you would have budgeted for this expense. This is a better scenario than having no idea and suddenly in July 2017 you are hit with an unexpected $10,000 tax bill!

I recommend to my business clients that they come and see me once a quarter. In addition to preparing your Business Activity Statement we can estimate how much your next tax bill will be and can undertake strategies to reduce this expense as much as possible.

Just remember that once the year is over there is only a limited amount that we can do to reduce your tax bill so it is better to be proactive during the year than reactive and only deal with it when preparing your tax return.

For advice and assistance with your business income tax, please contact Nieuvision on 1300 832 554.

MORE INFO:
Robert Paprzycki
Chartered Accountant
E: robert@nieuvision.com.au

– – – – – –

Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.

The post Understanding Income Tax – A Guide for SME’s appeared first on Nieuvision.

• Because Excel spreadsheets are free; or
• Because I don’t know what else to do

I would like to bust the myth that Excel spreadsheet record keeping is free and advise all SMEs that there is a much better alternative available.

Why managing your business is better with the right accounting software

Firstly, Excel spreadsheets are not really free. Whilst you may not have to part with any  money to use a spreadsheet there are several hidden costs to consider, including:

• It can take a few hours to set up your spreadsheet template;
• It can also take hours every month to manually input the data; and
• Spreadsheets can be difficult to update when your business situation changes.

In my opinion, Excel spreadsheets are a time waster for SMEs.

As a busy business owner, your time is much better spent on trying to win more work and finishing jobs you already have on the go.

A few simple examples of how your time could be better spent than manually entering data into a spreadsheet include:

• Asking your friends for an introduction to their workplaces to potentially sell your product or service to;
• Placing advertisements on the internet and social media platforms to promote your business;
• Working on improving your product or service offering; and
• Enjoying the weekend with your family.

A much better alternative to Excel spreadsheets is using an online accounting package (such as Xero or MYOB). There are many benefits to using an accounting software package.  A list of some of the  more important benefits is below:

• (Almost) eliminate data entry – If you can set-up most of your income and expenses to be paid into or drawn from your business bank account this can be linked to your accounting software and will (almost) eliminate data entry;
• Easy to prepare GST & tax returns – Once the data coding is taken care of (it’s quick!) it is a very simple process to prepare the information for your GST or tax return each year;
• Easy to send quotes – Quotes can be prepared in front of a customer & emailed directly to them. This will save you going home to prepare a quote and you can discuss the price with the customer on the spot to help overcome any concerns;
• Easy to send invoices – Rather than sending invoices out once a week after completing jobs you can prepare invoices instantly immediately after each job is complete. This will help customers to pay your invoices sooner;
• Automated overdue invoice reminders – Don’t like sending reminders about outstanding accounts? Accounting packages can be set-up to generate automatic email reminders to customers who may have “accidently” forgotten to pay your bill;
• Payroll becomes simple – Payroll can be tricky with the tax withholding & superannuation requirements. Using a proper payroll function can dramatically save you time and will help you stay on top of these items;
• It’s interesting – As an accountant who spends all day in front of a computer and spreadsheets I’m reluctant to use the word “fun”, but compared to manual data entry on a spreadsheet it’s a pleasant experience; and
• Reviewing better financial information increases the chances of your business surviving – A recent US study showed that businesses which have access to timely financial information over a 5 year time frame are much more likely to survive than those who don’t (85% vs 50%). This is because businesses that regularly review their financial information are more likely to rapidly cut costs and/or change their pricing when things aren’t working. It also makes it easier for you to work with an advisor (accountant, business consultant) to determine what is happening in your business and make timely changes when required.

In my experience, entering data into a spreadsheet is boring, time-consuming and generally inefficient. It’s a big part of the reason why we regularly see businesses fall 2 to 8 quarters behind in lodging their Business Activity Statements.

Whilst there is a cost to having an accounting software package, most likely you have invested anywhere between $1,000 and $1,000,000 of your money into your business, not to mention hundreds of hours of your time. Increasing the chances of your business thriving, making it easier for advisors to help you and decreasing the boring, time-consuming recording keeping requirements, in my opinion, more than makes up for this expense.

I enjoy talking to my clients about the benefits of accounting systems and how understanding financial information can help business owners make better decisions. If you are thinking about switching over to an accounting package or about starting up a business, please feel free to contact me for a no obligation, no pressure chat about the best options for you. I would much rather assist you to make a good decision for your situation than try to pick up the pieces down the track.

MORE INFO:
Robert Paprzycki
Chartered Accountant
e: robert@nieuvision.com.au

– – – – – –

Disclaimer: We recommend that you seek independent financial and taxation advice before acting on any information in our articles and newsletters. They contain general information only and have been prepared without taking into account your personal objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply.

The post Accounting Software vs Excel Spreadsheets for SMEs appeared first on Nieuvision.

The biggest whack of the stick is a tax called stamp duty. The state governments issue this tax, therefore the amount and the way it’s implemented vary from state to state. Here in SA, the Stamp Duty is the highest in the country. Added to that it isn’t tax deductible up front, it can only be added to the cost base when you sell an asset (for investment purposes).

A possible way to reduce stamp duty is to construct or buy off the plan. This allows for stamp duty to be calculated on the land component only and doesn’t not calculate on the final value.

This can save you as a purchaser tens of thousands on the initial investment. Sometimes State Governments provide incentives for apartments close to the city, to reduce urban sprawl. If you are interested in apartment investments, this could save you tax monies in reduced stamp duty also.

When it comes to investing in property there are many tricks, traps and strategies to maximise your tax benefits and reduce your tax payments, the above scenario’s illustrate to carefully consider your decision and the consequence before you act, I always recommend speak to your Accountant for tax advice.

Nieuvision offers Property Strategy planning and tax advice in a packaged service. Download our free Investment Property Finance Guide

The post Is it possible to reduce your tax payments when Investing in Property? appeared first on Nieuvision.

Acquiring your property and figuring out initial costs
Acquisition costs are generally not deductible, but any borrowing costs incurred can be deducted over five years. Initial repairs are generally not deductible either, but expenses such as advertising for tenants are, provided the property is for sale. One approach would be to claim depreciation on your investment as a capital works deduction over 40 years.

 
Find sustainable ways to manage maintenance costs
Depreciation can only be claimed where the property is tenanted and expenses are deductible only in the year they are incurred. Depreciating items such as appliances and furniture are deducted over a number of years. But keep in mind that capital costs, such as doors, built-in robes and renovations, form part of the cost base of the property.
Investors may claim a tax deduction if the dwelling was constructed after 17 July 1985. The building cost can be depreciated at a 2.5 per cent rate per annum (four per cent if constructed between 18 July 1985 and 16 September 1987). A quality surveyor can prepare a depreciation report for these properties. You’ll save enough in deductions to recoup their fee within the first year.

 
When it’s time to get a new tenant
Costs incurred while preparing a property for sale are deductible, even after a tenant has vacated, provided they relate to the period of rental. For example, painting would be depreciable however, capital improvements such as a new bathroom generally would not be. Some of these expenses will form your cost base as well, including: agent’s fees, advertising and legal fees relating to the transfer of title.

 
Surviving and thriving as a property investor
It’s just as important to manage your finances as it is to manage your sanity. There are lots of small ways to make your property work for you. Claim as many trips to see the property as you like, so long as the sole purpose is to genuinely inspect it. If you’re expecting a lower income next year (due to factors such as redundancy or maternity leave), consider not prepaying interest for up to 12 months in advance before year end on your rental property, which will reduce your higher income. Keep your receipts. It is essential you can explain and justify every one of your claims. Defer taxes for another year by waiting to sell your property and exchange contracts until after 1 July. And lastly, as with anything in life, surround yourself with quality people. Hire great accountants and surveyors and see the returns on those investments for years to come.

 
If you would like additional, or more personalised tips regarding how to make taxation work in your favour as an investor, contact the experienced team at Nieuvision today.

 
This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances before acting.

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