Five Strategies To Help Avoid The Year Two Business Cashflow Blues
Moving from earning wages to owning a business can be a confusing time for tradespeople, especially when it comes to tax.
You may know a lot about plumbing, electrical wiring or carpentry, but understanding how the business tax system works can be one of the biggest challenges of going out on your own.
Most tradies start working for themselves under an individual ABN, which is the simplest way to get set up and ready to invoice.
Under this system, you have income tax obligations from day one, but in the first year you are not required to calculate or pay income tax until you complete that year’s tax return.
So it can be more than 12 months before you know how much income tax you owe the Federal Government.
If you have not set aside any money for your tax obligations during that first year, then you will find yourself playing catch-up at the same time as the ATO wants you to start pre-paying towards your anticipated tax bill at the end of your second year.
It is for this reason that many tradies really feel the cashflow pinch during their second year of business.
But an early meeting with your tax accountant to discuss a few simple strategies can help you avoid these second year business cashflow blues.
Budget for Tax From The Start
You need to make a reasonable estimate of your turnover and profit of your first couple of years in business, then plan how much tax and/or GST you may need to put aside every week.
Individual v Business Income Tax
It may feel like you are paying more tax, but, ultimately, if you earn $100,000 in wages, or make a $100,000 business profit under an individual ABN, then the tax you owe is the same.
Understand the First Two Year Tax Cycle
Realise that the first year, when you are not required to pay any tax, is not the reality of being in business. You will get a tax bill to pay at the end of year one and then the ATO will start expecting you to pay towards what they estimate will be your second year taxable profit.
Get Your Year One Business Tax Return Done Early
If you do have a tax bill to pay, find out early. Then if you fall a bit short, when you still have some time to plan how you are going to find some extra cash.
Get Into The Right Tax Mindset
Tax and GST is not your money to spend, so get it away from your working bank account right from the start. It will make sure you are assessing your business performance based on real figures – ie the dollars left over after you allow for paying your tax obligations.