When you were an employee, tax provisions were done for you. You didn’t even see the money come in because it went straight to the ATO.
Now that you are have a tradie small business, payments like GST, superannuation for employees and Pay As You Go tax (PAYG) don’t happen automatically.
You may not realise you need to allocate for personal tax payments month to month. If you don’t you could find yourself in financial shock when EOFY comes around. Or even many years later when there has been no tax planning and you end up with an enormous lump-sum tax bill.
Why do tradies end up in tax debt?
Let’s face it. As a tradie small business owner you would rather spend your time trying to grow and operate your business so you can make higher profits. Unfortunately, other "less exciting" aspects of your tradie business, such as finances, end up neglected. Before long you are behind on your tax obligations of reporting and payments to the ATO. This keeps on piling up until you are looking at serious tax debt and the prospect of bankruptcy.
Ways to minimise taxes
With the 2019 financial year coming to an end, tax time will soon be upon you again. So now is a good time to get out your receipts and statements and book a meeting with your accountant to get a tax estimate and advice on what deductions you can claim. Here we look at common strategies to minimise your taxes this year and plan for the next one.
$20,000 to $30,000 instant asset write off
The ATO has extended its instant asset write-off to 30 June 2020. This means if you bought or buy an asset for the business, such as a vehicle or equipment, and it costs less than the relevant threshold amount to buy you can write off the business portion of it in your tax return for the relevant income year. The amount you can write-off depends on when you purchased your asset and first used or installed it ready for use in your tradie business.
If you bought your asset:
- From 7:30pm (AEDT) on 2nd April 2019, you can immediately deduct each asset costing less than $30,000
- From 29th January 2019 until before 7:30pm 2nd April 2019, you can immediately deduct each asset less than $25,000
- From 12th May 2015 until 28th January 2019, you can immediately deduct each asset less than $20,000
Assets you can write off aren’t limited to vehicles and equipment, but also office furniture, computers, printers, mobile phones and even TVs or other recreational items provided they are used by you or your employees in your place of business.
Assets costing more than the threshold for the relevant time period cannot be immediately deducted but can continue to be deducted over time using the general small business pool. You can claim a 15% deduction for assets in the year you buy them and a 30% depreciation deduction in subsequent years.
Your business is eligible for the instant asset write off if it turnovers $10million or less from 1st July 2016 (or $2million or less in prior years) and the asset was first used or installed ready for use in the income year you are claiming it in.
Consider deferring invoices
If you haven’t been keeping up with reporting, payments and BAS to the ATO and you think there is going to be a big tax bill this financial year, consider putting off invoicing clients until after you file your tax return. While you will have to pay taxes from these earnings the following year, it may give this financial year a breather so you can sort out your finances better for the next tax year.
With online banking and paperless bills commonplace today, keeping on top of your monthly or periodic expenses is easy through automatic debits. And when it comes to tax time you may forget to add them to your deductions. Go through your bank statements carefully to include these automatic expenses to your list of deductions. Your expenses could include telephone and internet plans, insurance premiums, subscriptions to trade and professional organisations, rent or leasing agreements, office electricity and water usage, conferences or seminars/webinars.
Writing off Bad debts
Because you own a tradie small business, chances are you’ve probably encountered a bad debt: some customer or a business that hasn’t paid you for your services no matter how many times you ring, email or send invoices to. You can only write off a bad debt in your tax return if you record your income on an accrual basis, that is, you recognise income in your accounting system when it is invoiced, not when it is banked into your business account. A debt is considered ‘bad’ if:
- A debtor has died leaving no, or insufficient, assets to meet the debt
- A debtor cannot be traced and you cannot find any assets
- A debtor is bankrupt or in liquidation and insufficient funds exist
- Sufficient steps have been taken to recover the debt and there is justification for no longer pursuing the debt as there is little or no chance of the debt (or part of it) being recovered
However, if your bad debt is later paid to you after you have written it off, you will need to include it as income in the year the debt is recouped.
Prepaying expenses for next year
If you can afford to, consider prepaying for expenses that are due early in the following financial year, such as income protection insurance, interest, next months rent. This is a common and legal tactic to help reduce your tax bill.
Superannuation and bonuses
If you have employees you will be paying superannuation to them. Ensure you pay it, and check the superfund has received it, before the end of the financial year to claim it as a deduction on your tax return. If you give bonuses to your employees you can also claim it is a tax deduction only if it is paid before the end of the financial year.
Employee and related trade deductions
Any expense you pay for your full and part time employees can be deducted. Employee deductions can also extend to contractors you employ for the purpose of completing a job, such as project managers, site supervisors, labourers, carpenters, plasterers, painters and builders. Expenses that may be deducted include training workshops, uniforms, work phone and overtime meals.
According to the ATO, any expense related to your business is deductible. These can include car servicing, uniform and protective clothing, stationery, petrol, dry cleaning, ink and paper for home office, parking fees, self education expenses and last years tax lodgement fee can be claimed. If work is performed outdoors you can even claim for costs for safety glasses, sunglasses, sunhats and sunscreen. However, you must be able to prove that:
- You needed to incur the expense to earn an income,
- The expense is not private or domestic in nature, and
- The expense is not related to capital asset.
Beware of claims you aren’t entitled to
With the ATO cracking down on dodgy deductions, particularly focusing on claims around travel expenses and electronic devices used for home office, be sure you know what you are legally entitled to claim. The most common mistakes tradies make with deductions are:
- You cannot claim travel expenses for private use of the vehicle, and between your home and worksite, unless you are a home-based business you can generally claim the cost of trips you make between your home and other places for business purposes.
- You cannot use the cents per kilometre claiming method for larger vehicles (one tonne or more, such as a ute or panel van).
- Fines you incurred when you were at work, such as parking fines.
- Claiming 100% of the expense when you only use a portion for business. For example, if you use your mobile phone 40% for business and the rest for private use, you can only claim 40% of the expense.
Remember that over-claiming and illegitimate claims can send warning bells to the ATO. Not only will you have to pay back the deduction and receive a hefty fine, you could run the risk of the ATO delving deeper into your tax returns from previous years. If in doubt about what you can claim, seek the advice from your tax professional.
Records Are Everything
No one likes to be audited. When it happens to you and your business you begin to wonder if you did something wrong on your tax return and worry about getting a fine. To be sure you do the right thing, KEEP RECORDS. Receipts and bank statements can be written or digital. Even though the general rule is to keep receipts for any business deductions over $300, you still need to be able to show how you arrived to a dollar amount for deductions under $300. So it’s best to just keep everything. Record logbooks for distance travelled for work for petrol expense claims. Claiming all legitimate deductions, big and small, can add up making the difference between a high tax bill and a manageable one.
To make it easier to handle and store your records, look at tax record-keeping software. Talk to your bookkeeper or accountant about a record system that is easy to understand and operate to suit you and your business. Not only will it show what you are entitled to, it can save on the cost of managing your tax affairs providing clear, organised records, rather than a shoebox of paperwork.
Remember to keep your records for five years:
- from the date you lodge your tax return, or
- from your last claim for decline in value for deductions, or
After it is certain that no capital gains tax event can happen when your acquire or dispose of an asset
While keeping tax records, receipts and logbooks can be time consuming, long term they can save you money this financial year and later ones. And if you are audited you can rest easier knowing you have records to back up your claims.
None of the above constitutes tax or legal advise for your own business, be sure to talk to your accountant about the rules mentioned and impact on your business structure.
Paying tax is a certain eventuality. It’s how much you are left with afterwards that can make or break your tradie business. If you find your business is making a small return after expenses and debts are paid and you are still paying lots in tax this financial year, then you need help.
Although your accountant can check your numbers and make sure you claim the right deductions, they will not have the knowledge to help your tradie business thrive. Even the most well organised small business can get caught out with a huge tax bill without the right advice. But paying a big tax bill is fine provided you also made a lot of money. A business professional (such as a business coach) can help to assess the health of your business and finances, so even though you still pay taxes, your business will get the best business strategy to make the most profit.
At Tradie Accelerator our training programs combine both coaching and mentoring to get the best results, so feel free to contact us from our contact page or if your prefer to talk to one of our consultants call 1300 658 403.