- In every business, it's important to have a user-friendly accountant who can handle all the numbers including taxes.
- Here are some frequently asked questions about taxes which answers are essential to know for every business owner.
- What if my company is generating a loss and I don't have enough money to pay the tax?
Starting your business and running a company can be daunting, especially when you have limited accounting experience. However, armed with some basic knowledge and by employing the services of a user-friendly accountant, running your business and paying taxes can be a breeze. An accountant is a powerful ally, and can help you navigate the financial minefield, including the dreaded Australian Tax office (ATO)!
Here are some answers to questions you may have about filing your company tax return for the first time.
1. How should I keep records?
The key to a stress-free End of Financial Year (EOFY) and an accurate tax return is maintaining careful records throughout the year so that you are not caught unawares by any year end results.
The records you need to keep depend on your personal circumstances. If you are not sure, it is better to keep a receipt and not be able to claim than throw it away and lose the deduction forever.
You need to be able to support all the expenditure that you have claimed as a business tax deduction. The easiest way to do this is to use some accounting software and make sure you keep copies of all tax invoices received, invoices issued, mileage logs etc. Using software will enable you to prepare a Balance Sheet and Income Statement and analyse your information in detail. There are a multitude of options to choose from and these days the online accounting packages are very easy to use and well-priced and allow you (and your accountant) to access your books from anywhere at any time. My top picks would be Xero or Quickbooks. Xero has a large range of plans on offer ranging from $10/month upward.
Documents that you are required to keep can be in written or electronic form. If you make paper or electronic copies they must be true and clear reproductions of the original. Paper receipts often start to fade after even a few months, so keeping electronic copies makes a lot of sense.
There are lots of good apps out there these days to make it really easy and painless to store your documents electronically. Apps such as Receipt Bank or Hubdoc are great and these will integrate with the above-mentioned accounting software which means you can keep the documents with the actual original transaction, making it very easy to locate a document at a later stage. Even the ATO app is a great little tool to keep track of your records and it is free!
2. What should I consider if my company is generating a profit?
If the business is likely to earn taxable profits, consideration should be given to the following:
- Is it worth considering paying additional salaries to the directors/owners (review in conjunction with personal tax position)?
- Receive additional tax deductions by salary sacrificing super – i.e. paying your super straight from the company and therefore achieving a lower taxable income. NB: super contributions are limited to $25,000 and must be physically received by the super fund prior to 30 June. Furthermore, this option should be considered in conjunction with current cash balances and future working capital requirements
- Can the business prepay expenses e.g. rent, insurance?
- Delay sending out sales invoices until 1 July - this is purely a timing issue and will shift the income into the following year, which may not be beneficial if your income is on an upward trend, as this will mean higher tax next year.
- Small & Medium Enterprises (SMEs) can receive an immediate asset write-off for asset purchases less than $20,000. Again, this option should only be considered in conjunction with working capital requirements.
- Are there any specific debts that should be written off as unrecoverable?
3. What should I consider if my company is generating a loss?
Even if the business is expected to make tax losses, there are steps you can take to reduce your overall tax liability of the owners and the company, namely:
- Reduce salaries paid to directors/shareholders, thereby reducing the tax losses in the business, whilst minimising tax paid by the individual
- Bring forward the date of sales invoices to 30 June (where possible)
- Push back expenses to 1 July (where possible)
4. Anything else I need to think about before finalising my company tax return?
Other matters worth bearing in mind around year-end include:
- Future plans for the business, including forecast performance for current and future years. A decent cashflow projection is invaluable
- Directors loans, particularly any falling under Div7A rules - this will impact adjustments that need to be made around year-end
- Current cash balance and forecast working capital requirements
- Franking account balance and whether it is worth declaring dividends. Franking credits are available when the company has already paid the tax on the profit prior to declaring the dividends, so the timing of the declaration is critical.
5. When do I need to lodge my Company Tax return by?
Companies can have a variety of lodgement due dates determined by their turnover or registration type. In general, if you are utilising a tax agent then you will have until May 15th of the following year to submit your return.
6. What is the Company Tax rate?
The company tax rate is:
|Income category||Rate (%)|
|Base rate entities||27.5%|
|All other companies||30%|
From the 2017–18 income year, companies that are base rate entities must apply the lower 27.5% company tax rate.
A base rate entity is a company that both:
- has an aggregated turnover less than the $25 million for the 2017–18 income year; and
- is carrying on a business.
The base rate tax rate of 27.5% will be in place until 2024 and is then due to fall over the next few years down to 25% by 2026-27 tax year and at the same time the turnover threshold will be increasing to $50 million from the 18/19 tax year. With tax rates falling a company can be a very tax-efficient entity to operate.
7. When do I need to pay the tax
Payment dates again vary based on the lodgement due date. In general though, if you are utilising a tax agent and lodge your return by May 15th, you will need to pay your tax on that same day. Prior to that the tax is payable generally around 4 weeks after your lodgement of the return.
For a full table of the various due dates please see this link on the ATO Website
8. How should I plan to pay the tax?
It is very important that you put money aside to pay your tax at the end of the tax year, bearing in mind that for the first year the tax is payable almost 12 months beyond the year-end date. The best thing to do is to open up a separate business savings bank account and transfer funds over to that account on a regular basis, as you recover money from your debtors. A conservative rule of thumb is to transfer 20% of all sales to the savings account.
After you have paid your first year’s tax the ATO will calculate a Pay As You Go (PAYG) Instalment, which will be paid quarterly. The calculation of this is purely the prior year tax divided by 4 and payable at the end of every quarter usually with your Business Activity Statement (BAS). If needs be this amount can be manually varied by yourself or your tax agent. You can do this if your circumstances change or your level of income changes.
Once this process is in place it will become easier to plan the cash flow movement of the tax payment as you will not need to save your cash for a long period of time.
If you have generated a taxable loss in the current year then this loss can be carried forward to offset against future profits.
9. What happens if I don’t have the money available to pay the tax?
If you do end up in a situation where you don’t have enough funds available to pay the tax due, the most important thing is that you don’t ignore it and stick your head in the sand.
Call your accountant immediately! Communicate with the ATO (or ask your tax agent to do so on your behalf) and you will find that they can be quite understanding and will usually assist with a payment plan, assuming you have not defaulted on previous payment plans and can give them assurances that you will be able to settle the debt.
10. How long do I need to keep my records for?
Generally, you must keep your written evidence for five years from the date you lodge your tax return. There are some extended periods where you need to retain records, i.e. when claiming depreciation on a fixed asset or have a capital gains tax event. The more records you can keep electronically the easier it is to retain these records in a state where they can be easily found and still able to be read! See point 1. above.
If you have any additional questions or require any further information don’t hesitate to get in touch with me or your own trusted accountant.