Five things you need to know about tax before starting a small business

Tony Featherstone

One word more than any others strikes fear into the hearts of new small business owners: TAX. An unexpected tax bill can steamroll your venture and flatten your spirit. Then the taxman bumps up your quarterly tax instalment and reverses over you a few times for good measure.

That’s better than a tax audit, or the prospect of one. Many a business owner has taken a liberal view of the rules, or applied “small business concessions”, to pay less tax. They think they are too small to bother the taxman. Until they do. Big time. And the taxman cometh, in rage.

Poor record keeping is often the root cause of tax problems, and also among the biggest small business killers, according to insolvency data from the Australian Securities and Investments Commission. It can send more businesses into insolvency than a weak economy.

Clearly, your small business brain needs a good shot of tax knowledge. Enough to understand the basics, develop tax systems upfront, and maintain them. But not so much that you think you’re a tax god who can slay a balance sheet in a single strike.

Too much tax knowledge, in the hands of the untrained, is dangerous. Leave your tax to the pros. It’s too tricky, boring and important for most people, and why waste time keying in data when you can make bigger bucks elsewhere.

Forget about trying to master debits, credits and accounting standards if you have no background in it. Life is too short. Instead, focus on getting the right advisers and frameworks to tame your tax. Nothing beats good value, advice from an accountant you like and trust.

Here are five tax tips for micro ventures that are starting out, and business owners who struggle to do a personal tax return each year, let alone a business one.

Before you get serious about the venture, find a tax accountant who understands your type of business.

Build your tax entourage

Before you get serious about the venture, find a tax accountant who understands your type of business. Someone who knows that a small business is not like a major player when it comes to record keeping, but is not so lax that your next meeting could be in jail. Use a bookkeeper for data input – even quarterly is better than nothing – and buy some good accounting software.

In the long run, you will save a lot more than the advice costs and sleep easier at night knowing the pros are in your corner. You will also save bucketloads of time when the tax bill is due.

Don’t be a tax Stooge

Do some simple tax planning upfront with your adviser. There is little wriggle room once the financial year is over and you realise you approached tax like the Three Stooges.

Simple steps such as deciding on a monthly wage, paying superannuation, keeping receipts, paying GST, allocating PAYG each month and so on, make a huge difference.

Your venture is not an ATM

It’s easy to blur work and life, and business and personal income tax. Many a new small business owner has used their company account for day-to-day living expenses, much like they would their regular bank account. It causes a huge mess when the shit hits the fan.

Blurring business and personal income is a rookie mistake. So repeat after me: “My business account is only for business-related revenues and expenses. My personal bank account, which receives a wage from the business, is where I go crazy with living expenses. My business and I are separate tax entities.”

Do some simple tax planning upfront with your adviser. There is little wriggle room once the financial year is over and you realise you approached tax like the Three Stooges.

Your life is a giant receipt

Step one: use your venture’s debit card for every business-related purchase. At least you’ll have an electronic record of each transaction and, for many owners of micro businesses, the bank statement is effectively the basis of their cash flow statement – and true indicator of performance.

Step two: keep receipts for everything. Throw them into a shoebox if you’re a terrible filer, better still, give them to your bookkeeper to store neatly. Where possible, receive electronic bills and receipts; it’s a lot easier that a million bits of paper with fading ink.

Become a squirrel

It’s too easy to feast on raw cash flow that flows in your business and forget a chunk of it has to go to the taxman for that quarterly or annual GST bill or end-of-year tax charge. Squirrel money aside each month so your GST, PAYG or Fringe Benefits Tax bills are covered.

It’s all about planning, discipline and routine. Working with your tax adviser, figure out your venture’s approximate revenue, GST bill, wages, superannuation and other key metrics. It can always change, but approximating your business and personal tax bills, and chipping away at them each month or quarter, will stop that tax steamroller in its tracks.

Tony Featherstone

Tony Featherstone is a former managing editor of BRW and Shares magazines. Readers should seek professional tax advice before acting on the themes above.

Image: Simon Cunningham, lengingmemo.com under Flickr CC license

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