On tax returns for founders.
30 June has come and gone and you know that means most income-earning people in Australia have to lodge a tax return.
While we can cover what that means for businesses generally, we’d thought we’d consider what that means for the founders behind the businesses.
We’re not HR Block by any means, so we may include some insights as to how tax returns are really approached on a yearly basis.
NB: The below is general advice only, so supplement your insights with tailored advice from a tax agent who knows your situation.
Etax or tax agent?
The ATO is smart. They encourage people to prepare their own tax returns. So they’re offering a carrot, called MyTax, which means people can do their tax online. While it may seem like a good idea, will it actually save you money? After all, if you do your own tax, you won’t have to pay a tax agent.
Wrong. Unless you’re tax savvy and know the ins and outs of all things claimable, most founders are better off both cash-wise and tax audit-wise with an expert at the helm of the tax return.
For starters, navigating your way through the sophisticated tax code takes an experienced scout — usually your trusty tax agent. Your tax agent is obliged to keep everything shipshape and how to get there without the dodge claim.
And that applies to all income — except, of course, if it is below that tax-free threshold of $18,200 a year. Even if you’re a seasoned self-lodger, the tax legislation regularly changes, so it’s just a savvy business decision to use the services of a tax agent so you don’t end up on the curb.
Now, as a business founder, you might have a complex tax situation. How much taxable profit goes into your business, and how much into your own name? If you’ve used an accountant, you’ll have planned this in advance, well before 30 June. Or at least we hope you have! Tax planning with a pro-active accountant can usually save the entrepreneur at least a few thousand a year.
Tax refund or tax payable?
Around 80% of employees get a refund because they overpay income tax via the regular PAYG Withholding taxes deducted from their payslips.
But as a founder, you don’t usually have the luxury of overpaying your tax throughout the year to get a tax refund. In fact, most founders find that they have tax payable, instead of getting a refund. Doesn’t seem fair based on all that overtime, does it?
When they start out, founders may find themselves earning contractor income or doing side-hustles to keep afloat while working on their business. These often are paid without involving tax.
Once the business is funded or is making a break-even income, then founders can then find themselves with a payslip that increases their chance of a refund in the year. Groovy.
Got to declare an income?
There’s a whole bunch of ways to get paid from your business, with some mentioned below.
If you’re an employee of your company, this means awaiting the PAYG payment summary from your employer — and that’s you! Employers are generally obliged to lodge this with the ATO by the 14th of July, which is usually the soonest you can begin to prepare your tax return.
Even if only director’s fees were paid, we still recommend that you wait until the PAYG Withholding summaries and the June BAS have been lodged, to make sure the ATO is not confused. A confused ATO is not good.
If your accountant arranged for your company to pay you a dividend through the year, it’s highly likely that your dividend was fully franked, especially where prior company tax paid. Because your company has already paid income tax on its profits, the ATO provides you with some tax credits (otherwise known as franking credits) to offset your own tax payable.
Some founders also receive a distribution from their trust, in which case they too, will have to wait for the trust tax return to be prepared beforehand as well.
Eventually, you may also have a significant business event occur, such as the sale or transfer of some of your shareholdings or business to another party. These often create taxable capital gains events, so well before you’ve finished toasting the sale or transfer, you should consult a tax accountant like us for tax planning and projections around the event.
But wait, there’s more. It’s everyone’s favourite tax topic.
Deductions
There are four major areas where you can reduce your taxable income through the magic of deductions.
1) Work-related car travel
Work-related car travel is one of the major areas where founders claim against their taxable income. But there are many rules in play that limit the claimable amount, so it’s important to be aware of them before you make a claim or you might get a big slap on the wrist.
Cents per km travel at 66c is still the most common way to claim car travel. To claim this legitimately, you need to log all ad hoc car travel made for business, such as visiting clients or potential clients. But before you get too excited, in most cases this excludes common trips to and from your office. But with the limit of 5,000 kms per car, it’s still a good way of starting your deductions.
The logbook method, alternatively, allows you can also make a claim on your actual car expenses. However, you need to keep a logbook over 12 weeks, where you record opening and closing odometer readings and keep tabs on the business kms travelled in between.
To make it simpler, there are apps for that, including Drivers Note and Vehicle Logger. These also mean no dog-eared logbooks with pages smeared with coffee stains whilst on the run.
2) Work-related travel
Most founders are engaged in partial interstate or overnight travel — particularly when they seek to expand operations outside their own backyard. So it’s great to hear that, in most instances, your overnight travel and associated accommodation and food are deductible as well. But that won’t include your favourite 2014 Penfolds Grange Bin 95. You’ll have to slum it with a glass or two of a modest label or house wine instead, you trooper. Where travel is for more than six nights in duration, you’ll also need to maintain a travel diary to illustrate that most of the time is related to business travel.
Outside the above, deductible travel could also include parking, tolls and Uber-type trips where on route to your client meeting or conference.
3) Work-related training
There’s always a lot to learn when overseeing most aspects of a new or thriving business. Feeding your knowledge bank is, thankfully, a deductible expense, so please include those Udemy courses, Kindle purchases, audiobooks, University courses paid upfront or on FEE-HELP, in your suite of deductions.
Online courses and Masters’ Degrees, particularly MBAs, are great territories for making a claim. Make sure you also include your associated expenses, such as software or purchases from Officeworks or an electronics store. The main criteria is that your training must relate to your current work. A course in Middle Eastern cookery may be fun, but it doesn’t cut it with the ATO as a deduction.
4) Home office deductions
Founders usually clock up many, many hours and as such are open to a greater range of deductions than most. While a separate office at home is becoming a bit of a rarity nowadays, the ATO allows some additional deductions to help you recoup some of the costs of working from home. These include work-related phone and internet costs, and the work-related portion of depreciation in the value of a computer.
If you have a dedicated place, such as a study, for doing work, then these would apply to you:
· Gas and electricity bills. That said, you need to apply the percentage which relates to your work. The formula is on floorspace — your workspace floor area versus the total floor area.
· Cleaning costs;
· Office equipment such as chairs, tables, photocopiers (if you can still find one) and so on.
A neat alternative to calculating the actual costs is to claim 45c per hour (a statutory rate) that you operate in study or workspace.
If your home is your primary place of business, then deductions can extend to a portion of your actual accommodation costs as well:
· Rent or mortgage interest;
· Property insurance;
· Land taxes and rates;
Just be wary that making claims on these will have some bearing on the Capital Gains Tax exempt status of the property, if it is your primary place of residence.
Other deductions
There’s a whole raft of other deductions that are best covered in detail in another article — or better yet, after a discussion with your tax advisor.