Hey guys and girls, long time ozbargain visitor, first time poster. I am seeking some advice as I'm not in a position to hire an accountant yet, but recently I have started a small business. I am employed full time on approx $65k and have started some afternoon work separate from my regular employer using my own business name and ABN. There is little expenses as it's mostly my labour and It should earn approx $25k in its first year. Is there any things I should be doing to avoid a big tax bill at the end of the year? I am not registered for gst, Should I be spending all the income on expenses, and business purchases or could I just put majority of it in the companies savings account. Can anyone offer any suggestions or see any problems arising down the track. Thanks
Advice for novice starting small business
Comments
I just put majority of it in the companies savings account.
I thought sole traders just do income tax?
Just odd jobs, I have friends who give me a fair bit of work.
Am I right in assuming it's all calculated at the end of the financial year. Wages from job + income from business - expenses from business = total income, , then tax is calculated on that?
You should really speak to an accountant if you are interested in 'expenses'.
- You're talking about sole trader and then you talk about company, do you know what you are doing?
- So your friends are giving you work, you looked up PSI?
- When you make expenses, you consider you can't just expense everything and somethings need to be depreciated?
- Do you know how to apply the small business offset?
Considering you are making money, why would you not pay for some advice.
Haha neg'd for putting out the hard questions. Good luck anyway.
are you really operating an enterprise or can this be a hobby? the former requires that you report income and pay taxes. the latter requires that you have fun and may make some money on the side.
Remember when you buy stuff you're really only getting the tax back… So on that you're saving 30 cents in the dollar. People forget that and think it's free.
So if you earned $1000, you would pay $300 tax, leaving you with $700 in your pocket. If you spend the $1000 on something you don't really need, yeah you haven't paid the tax but you've "lost" your $700 on some crappy item. So only buy something you actually need.
Also get your employer to take out extra tax for you, then you are paying tax as you go instead of big bill at the end of the year, if that's what you are worried about.
I never understood this logic.
Why not set aside 30% of the money in a savings account and actually earn interest on it until payment is due.
Definitely. But be warned, if you're earning income that doesn't fall under PAYG withholding, the ATO may make you start making quarterly installment payments.
That fine if you have enough self control /cash flow to actually do that.
Many people and small businesses don't, and will dip into money that's not really theirs when they "need" it.
Plus savings accounts rates are pretty rubbish at the moment, so you have to weight up the cash flow impact vs what you would earn in savings.
"Should I be spending all the income on expenses"
Remember there is no point spending a dollar to save 30c…still gotta find the dollar :/
It might be worth sitting down with an accountant, paying for their time as a one off, to discuss options.
I'm not in a position to hire an accountant yet
If you can't answer these questions, you're not in a position to not hire an accountant.
Hi OP, firstly welcome to OzB.
In your first year as a sole trader with a day job (assuming you have not set up a separate company), these are some considerations I thought would be relevant to you from the outset based on your estimated earning levels:
Available business deductions - Your side income earned on your ABN may be deemed personal services income (PSI) where only limited expense deductions are available (think of normal deductions that are available to employees) unless you meet the relevant PSI tests. This is likely a consideration since you have stated that the income is mostly for your labour (and skills?). Worth speaking to an accountant as you get near your first year projection/the business expands (say you start servicing more people rather than the same family/ friends and work out if you need a better structure going forward. Do this before June 2017 and the advice may be deductible to you. Unfortunately, as the current law stands, personal superannuation deductions are not available to you in 2017 as your day job earnings cover more than 10% of your total earnings for the year. However, this may be available to you from 1 July 2017 as the relevant law abolishing the 10% rule becomes effective.
“Work-related expense” vs “business expense” - Note that the deductions available in connection with your day job and your sole trader business should be separately accounted for. An example would be the use of your car if that’s relevant in your circumstances. Maintain good record keeping – this will keep things less complicated and your costs down even if you decide to engage an accountant/tax agent to lodge your 2017 tax return with some of tax planning advice.
Avoid Medicare levy surcharge and be prepared for reduced rebate for your Private hospital cover – Your projected income in gross terms, $65k+$25k is approaching the $90k threshold for single ($180k if partnered). Any chance of an underestimation in your actual income, minimal work-related and business deductions, or you also have other source of income like interest /dividends, this is certainly an extra thought/action needed if you haven’t already had a private hospital cover or if you had one, not having the correct rebate tier applied to your premiums.
Income Tax Pay As You Go requirements – ATO won’t know the extent of your business income until your first tax return gets lodged that includes your business net income information. So, in your first year (assuming this 2017 financial year) work out your own strategy of managing the tax bill. Make an allowance for roughly 35 cents for each $1 you receive from your paying clients (roughly based on where your 25k sits in the scale of your marginal tax rate above your day job earnings of 65k). And for each dollar you need to spend on deductible expenditure, you reduce your allowance by the same 35 cents. This “tax coffer” will help you make a mental mote of how much is required as the share of tax payable in relation to your business net income. If you engage a tax agent for your 2017 tax return before 31 Oct 2017, your final tax bill may only be due in May 2018 – that’s some time for you to plan for if you don’t like to locking away your money in a bank account. In the following year though or as soon as the ATO gets your 2017 tax return, ATO will put you on a PAYG Instalment regime whereby you will pay at least quarterly based on a set amount or a percentage of your business and investment income for the period.
Thank you, your advice has been very helpful
I'll go first.
What is it you actually do in your business?