OUTLINE
0:00:00 - Introduction to Planning Day event and importance of business goal clarity
0:02:30 - Overview of tax season and self-assessment with the ATO
0:03:45 - Consistent income: Avoiding red flags with the ATO
0:07:00 - Excessive business expenses: Identifying and addressing issues
0:09:45 - Separating business and personal finances: Importance of dedicated accounts
0:13:30 - Final advice and offer of assistance for small business owners
THE ERIN DAVIS SHOW
Hello, beautiful people and welcome to another week on the Erin Davis Show. Before we get started, I want to remind you about the Planning Day, which is happening very, very soon. Now, this Planning Day is all about getting super clear on what's important to you and your business so that you can stay hyper focused, have a huge amount of clarity, and just really take the action which is aligned to achieving those big goals that you want.
Now we're going to break it down and just focus on the next 90 days, so that you can just stay focused in that space. I know that when you have that clarity and the direction, it is easier to take the small actions which will bring you closer to those outcomes that you want. When you're just fumbling along and you're just carrying on as if every day is the same, there's really no plan or structure, and that makes it really hard to be able to move you towards those big goals. And I know that you want those big goals because you're here to make a difference, and you're here to create a life for you and your family which provides the financial freedom and emotional freedom that you need and that you want.
The Planning Day is happening the 19th of September. It is at the most beautiful place, Carrington house, and I really can't wait to invite you to share this experience with me. It is going to be very calm and relaxed and just really grounded, so you can tap into what it is that is important to you. Details are at erindavis.com.au/planning and of course, I will put the details in the show notes.
So let's get started on today's episode. We're almost a quarter of the way into the new financial year here in Australia, and that means we are right in the middle of tax season. And as an accountant, I'm going to put my accountant hat on today, and I'm going to share with you three things that might alert the tax office to come and have a look at what it is that you're doing. And I always tell my clients that it's up to them as the client to be doing the right thing with the Australian Tax Office system or the tax system. It's really based on self assessment, so the tax office are looking at the tax returns that you launch and comparing them to their benchmarks or their standards, and then if they discover something that is not quite right, it is then up to the taxpayer or the business owner to prove what it is that they are claiming or what they are reporting.
Therefore the onus is back on the taxpayer. It's up to you to make sure you are doing the right thing. So I have three things today, which I know will alert the tax office, and it's really important that you are getting these things right, because you don't want to have the extra financial stress and the extra burden that worry comes with not understanding or not providing the correct information to the Tax Office.
The first one is being very inconsistent with your income. Now, if your income is up and down from year to year, it is falling with it, not within the benchmarks of the particular industry that you're in, or your income is super low, it is going to highlight to the tax office that there are some issues here. Now the Tax Office can look at personal bank accounts, personal income, and if you have income going into your account, or sorry deposits going into your account, which aren't accounted for or they're not shown in your business financial statements, and your financial statements are showing a really low level of income, the tax office can determine that those other deposits are actually income.
Therefore, it's really important that you as the business owner, need to be reporting all of the income that relates to the business. So therefore, you need to make sure you have good records. You need to be able to substantiate all the income that's coming into the business. And if the income is very up and down, you know, you need to be able to. Explain it. Is it seasonal? Is the industry that you're in? Do they have these usual fluctuations? Does your business have fluctuations from year to year? So it's not necessarily an industry thing, but it's a business thing that's backed up by previous financial history of your business, also looking at the benchmarks of your business. You know, if you're outside of those benchmarks, then it's really important that you know why it's also good, from a reporting perspective and a growth perspective, to match yourself against those benchmarks. You know, every business is different. However, the benchmarks are there for a reason, and they're gathered from a lot of different industries, and it gives you a really good indication of which area of the business you may need to improve on.
So that's the first one, making sure that income is fairly consistent. You know, you don't have a lot of control over that. However, have a look at it. Does it look like it's a red flag? If the income is up and down significantly, then you need to be able to explain it. And if you can, there's no problem at all.
The second one you need to be aware of is excessive business expenditure. Again, there are benchmarks for particular industries which the tax office looks at, and depending on where you put information into your tax return, it could flag to them that there is excessive expenses claimed in a particular area. Some areas that stand out for us are repairs and maintenance. You know, should it be repairs or should it be capital? There's obviously different tax consequences depending on what treatment it is. So if repairs are significant, then it needs to have a further look and a closer look, also looking at advertising and promotions, if it's entertainment, whether it's deductible or not. And there are special rules around what is entertainment, and depending on the structure that your business is in or has, are there fringe benefits, tax? There's a whole range of different things that come into play when you're looking at whether an expense is excessive or not. So if you're not sure, then you need to ask your accountant. You need to check in with them and ask, Are these things deductible?
It's also really important that you are consistent with how you are allocating things. It's our job as the accountant to make sure that these expenses are deductible. However, again, the onus goes back to the taxpayer. It's self assessment. We're not auditing. However, we need to bring to attention if there are expenses which we know are incorrect. We can't claim them, but we're not auditing. We're not checking every single receipt. We're not checking every single thing that goes through, and if the tax office comes looking, the onus goes back to you as the taxpayer to be able to substantiate your deduction with receipts. So keep your receipts, upload them into your accounting software. Xero is great for this. It means that you can go paperless, and you don't need to have all of the little bits and pieces of paper lying around your office creating a mess, and then you can't find anything. So really look at your systems and your processes to be able to streamline how you record your expenses, like income. It's important to make sure that things are allocated correctly, but it's also important to make sure that you're claiming the right things. Excessive claims are going to be flagged, and they're flagged by where they're put into the business tax return. So if you're preparing your tax return yourself, make sure you understand exactly where these items need to be included in your tax return, and if your accountant is preparing them, they will know where to put it. However, it's again, up to you, you're signing off on the return to make sure that the expenses are correct.
So then the third one is not separating your business expenses from your personal expenses. I see this time and time again that particularly small businesses, and a lot of women in particular, get very messy with how they record their business income and expenses. You know, a lot of small business women start their business as a hobby. It's just this little side hustle that is something that they're really just dabbling in. They're not quite sure if it's a business yet or not. We might just give it a go and see how we go. And at that stage, the lines are blurred. We've got income and expenses going into personal accounts, money going all over the place, and it's really, really hard to track exactly what is a business expense and what is business income. So I would suggest that you have a separate business bank account and make sure that all business income and expenses go through that bank account.
You can get into trouble when you have income and expenses, particularly expenses coming from all different places, whether there's credit cards, different business accounts, personal accounts, everything gets messy and it's really hard to record and it's really hard to track. So there's a couple of pieces here that it's going to alert the tax office, because you don't have that consistent level of expenses, you're not able to easily prove what those expenses are. And then it's also too, are you actually claiming everything you're entitled to, which you know the Tax Office doesn't mind about, because then you'd be paying more tax.
But from your perspective as a taxpayer, you want to pay the least amount of tax possible. Obviously, we need to pay our fair share of tax, which is a given. However, we don't want to pay more than we have to, and one of those ways that you don't pay more than you have to is by making sure that all income and expenses are accurately recorded. That means everything relating to the business goes through the business account. And you know, this might sound pretty straightforward, however, there are still so many business women that get very confused with this. They feel very overwhelmed. They can also end up with maybe 20 business accounts and are Transferring money between all sorts of accounts, trying to keep things separate. However, they just end up confusing themselves.
So my recommendation is definitely an operating account. So this is the main account where business income and expenses come into and out of I would then have a separate bank account set up for your GST. If you're registered for GST, you need to put 1/11 of your sales away, but then allow for the GST on expenses. So if your accounting software is up to date, you can look at what that GST amount is at the end of the week and transfer that amount across into the GST bank account. The alternative is looking at the last BAS working out what the net GST was, and then transferring one amount every week. So break it down into 13 weeks, because that's how many weeks are in the quarter, and then transfer that amount over to GST bank account. The other bank account that I think is pretty crucial for small business, particularly those that have staff, is a superannuation and PAYG withholding bank account. Now the PAYG withholding is the tax that you'll be holding on staff wages. This is not your money. This is not something that you can spend, and it's important to put it aside because it is due to be paid to the Tax Office, just the same as the Super.
The Super is a cost of employment, it is an amount that needs to be paid. And if you don't pay your super on time, there are hefty penalties which end up being non, not tax deductible, and are another reason why the tax office would come and look at your accounts. So again, you don't want to invite the tax office to come and look at your accounts for any reason whatsoever. So it's really important to make sure that the Superannuation is put aside and it is paid by the due date, and the staff tax is put aside and also paid by the due date.
So I think there's really three bank accounts. You could also have a fourth one that is setting aside some money for tax. And depending on how well you manage your cash flow, that may be all that you need. Looking at what are the things that you might be doing that the tax office could be alerted to is having inconsistent income, like your income is not matching their benchmark or their expected range of income, you've got excessive business expenses. Again, it's not within those benchmark ranges, and there are items that get flagged depending on where they're put into the tax return, and then there's a messy, blurry line between what's business and what's personal.
So if you are doing any of those things, or you have those things in your business, I would suggest that it's time to have a look at it. We're two months into the new financial year. We've just started September, so now is a perfect time to adjust and reflect, change, redirect, set yourself up so that the rest of this financial year can be smooth sailing. So when you lodge next year's tax return, you're not stressed and you're not worried. It's all of these little things that you do throughout the year which reduce the big, overwhelming, scary tax scenario that could happen next year.
So again, that's my accountant's take on this. I see these things all the time from small business women, and it is something that is quite easily resolved when you know how. So if you are struggling with this type of thing, then reach out to me, because this is what I do. I am a small business accountant. I look after many women across many different industries, and I help them get this stuff sorted. This is part of becoming financially aware and financially independent. And when you create financial independence, women feel in control, they reduce that mental load, which we know that we carry, and they're able to smile more, walk taller, be happier, and really just chase their dreams without this financial worry. So if this is you, let me know it's something that can be resolved. It's fairly easy to work through. Once you get your systems and strategies in place, it's easy to get yourself set up so you're ready to rock and roll and keep the Tax Office on your side!
