Saving for tax and how to deal with debt

Not sure what taxes you need to pay or feel like getting into tax debt is a real possibility for your small business? 

With Aussie small business owners grappling with a staggering $24 billion in tax debt, this episode slices through the complexities of business tax sharing what you need to know to get on top of your compliance avoid tax debt.

Safeguard your business's financial future with tips to help you save for tax and if you're already in debt, how to dig yourself out. 

Transcript

Speaker 1 0:35

You're listening to the Secrets of Successful Business podcast, your go-to source for business tips, tricks and proven strategies that will help you create a streamlined and profitable business. We chat to the best minds in business about their journey. It's my business and I'll do it my way, how they started, rather than going harder to get more focus on growing more with what you have. What they learned along the way. How long are you going to give this?

Speaker 2 1:03

What compromises are you going to make Just because you can do it?

Speaker 1 1:06

doesn't mean that you should do it. It's really important to remember that it's a long game and, of course, we'll ask them for their secret sauce for creating a successful business. If you're not failing, you're not doing it right. You should be struggling at times. That is part of the journey. Join us as we take a sneak peek behind the curtain. Talk solutions for those business pain points, working smarter, not harder, mindset and the challenges of fitting it all in with the demands of today's busy lifestyle. If you're a business owner, side hustler or just starting your business journey, this podcast is for you. Now here's your host, business coach and content creator, justine McLean from Flossie Creative.

Speaker 2 1:48

Hello and thanks for joining me on the podcast today. In case we haven't met, I'm Justine, a small business owner on a mission to uncover and share the secrets of creating and running a profitable, sustainable and successful business. I've been in business for over 20 years now and I get to use all that I've learned along the way to help other women in business reduce the overwhelm, gain visibility around their numbers, charge what they're worth and make more money. It's about designing a life you love that fits into your definition of success. So if I can help you create the profitable business you deserve, please reach out Now without further ado. Let's dive into today's episode. Hello and welcome to the podcast.

Speaker 2 2:43

Today we're talking tax, a subject that either terrifies people or really annoys them, because who wants to pay tax? Right? But the reality is that paying tax is part of working and doing business, no matter where you live. And if you live in Australia, as of 2021, which was the most recent stat, I could find we were ranked fourth as one of the highest income taxed countries in the world. So fourth on that list. Yeah, we certainly pay our fair share, but, as Ben Franklin once said, in this world nothing can be said to be certain except death and taxes, and ain't that the truth? And so, like it or not, we all need to pay our fair share of tax Now.

Speaker 2 3:25

Right now, aussie business owners Aussie small business owners owe $24 billion yes, I said $24 billion, with a B in back taxes. This collectible debt relates to their business activity statements, or BAS as we call them here in Australia, and these are quarterly statements that we need to send into the government, basically to tell the government what we have collected on their behalf in goods and services tax and, as pay as you go, income tax, so that's the tax that come out of our staff's wages, or even out of our own wages. Apparently, there is more than $8 billion owing in pay as you go income tax. There's $8.5 billion in GST, $5.5 billion in pay-as-you-go installments, so that's money that the ATO is essentially asking for in advance that's income tax in advance and around $1.9 billion in superannuation, and an increasing number of businesses are continuing to fall behind on these debts. So it's really a struggle street for a lot of businesses now in Australia and look, it's no wonder when I think about it. The system is really complicated. It can often be confusing. Just explaining the difference between pay-as-you-go tax and pay-as you-go installment to people. You can see their eyes rolling back in their head as I do it.

Speaker 2 4:59

But the setup in Australia for small business as it is now, is that essentially, we have been given the fabulous job of being a tax collector for the government, so we need to do that, whether we like it or not. The trouble is that once you collect that tax whether it's the tax that you take out of your staff's wages or the tax that you take out of your wages, or whether it's the goods and services tax, sales tax for other countries that you will be withholding it could be months before you actually need to pay that money to the government, and so you're expected to be really disciplined, leave it sitting in an account, keep it separate to everything else and not touch it. The government expects you to be able to do that as a small business owner and, in principle, great idea, right. But when cash flow is tight and you can see that big pot of money sitting there, it's really tempting to spend that money now, to just borrow it for a month or a week and pay it back later, and you'll definitely have that paid back by the time that the tax liability is due. But obviously we're just not doing that and to me, either people are spending the money that they've got saved for tax or they're not saving it at all because they are not really understanding that money that they're collecting, that portion of money doesn't belong to them.

Speaker 2 6:19

So for a lot of small businesses it's a bit like being stuck between a rock and a hard place, and the interesting thing is that historically, australians have been great at paying their tax on time and that was the way it was up until the pandemic. But the culture seemed to change through the pandemic and there could be a thousand reasons why. But the Australian tax office has decided that now is the time to fix it. Yes, in the middle of a downturn, they want to chase that $24 billion that they're owed from small business. They're not happy about chasing debt, quite obviously, and they're not happy about chasing it at the rate that they have to chase it now. And honestly, the truth is that if the ATO decided to get tough on debt tomorrow and apparently they are there's a lot of small businesses who are just going to have to close their doors because they're not going to be able to stump up the cash that they need to pay their debts. Now I know firsthand what it's like to be in hot water with the ATO, with the tax office, and it is not pretty.

Speaker 2 7:25

Let me tell you when my husband and I went into our second business, pretty quickly we ended up in $42,000 worth of tax debt, and if you've been listening for a while, you would have heard me tell this story before we went into a payment arrangement for that debt. But what that meant for us was that while we could pay off $42,000, all of our other tax liabilities so whether that was the money we were collecting for GST or the PAYG payments we were paying to our staff all of that had to be paid on time. There was no adding to the $42,000 debt. Now that's changed. Over the last few years A lot of businesses have been allowed to add to their debt because they've almost been working in a cash flow void because they've used their tax for something else. They've gotten themselves into trouble. So now they're using the tax that they're collecting today to pay the tax from the last three months. So the ATO have definitely allowed that to happen. They've allowed people to add to their debt and so that has become a problem.

Taxation Tips for Small Businesses

Speaker 2 8:29

But the one thing that I know even when we were in that debt and we weren't allowed to add to our debt when you're in debt, especially to the tune of thousands of thousands of dollars, it's really stressful because you don't have that money handy. If you did have that money, you would have paid it up and you wouldn't be in that debt. But it's often really hard to dig yourself out of such a big hole. It becomes so stressful and you really need to be mentally tough and have a strong resilience muscle to be able to just keep going when you find yourself in that situation. So because I've been in that situation and I know what it's like to dig myself out of that situation, I have been super careful over the years to have a system where I never get into hot water again. And in this episode, particularly for any of those business owners that are listening that are in debt right now, I thought I would share some of my tips and suggestions for getting out of debt and, if you're not in debt, making sure that you don't get into debt in the first place. So here we go.

Speaker 2 9:34

The first one is to really understand that you are a tax collector for the government. That part of doing business, wherever you are, will mean that you have to collect tax, whether that's GST, sales tax, vat, whatever it is. If your business is earning over a certain amount of money each year, you have to add that sales tax, that GST, that VAT, to all of your products, all of your services. So you are collecting that on the government's behalf and you need to remit that to the government when they say it's due. Likewise, if you have staff and you're paying staff, in addition to paying them their wages, part of the commitment that you made to them when you offered them that casual, part-time, full-time role was that you would pay their salary and you would also pay their tax and any superannuation obligations as well. That money is not yours. That money belongs to the government. The taxes belong to your staff, essentially, but you're holding them, you're withholding them and you're paying them to the government on their behalf. So that's the first thing understanding that the money isn't yours. And because the money isn't yours, you need to safe, keep it until you need to pay those debts.

Speaker 2 10:54

Really understanding what taxes you're liable for then becomes super important. And if you're really not sure, particularly when it comes to things like qualifying for GST here in Australia. If you're not sure what the threshold is at $75,000 in a financial year, by the way then you need to speak to an expert and find out exactly what you're liable for. So all of the different taxes that you're liable for and depending on what sort of business structure you have, that will make a difference. And then make sure you're registered for all of those taxes and make a note of the due dates that all the compliance is due for those particular taxes, because that's really important. Even if you have a bookkeeper or a BAS agent or an accountant that are going to be processing those things on your behalf, it's important that you don't abdicate that responsibility completely, that you make a note of what your compliance obligations are and the dates that things are due.

Speaker 2 11:55

My next tip is to make sure that things are lodged on time. So whether that's your tax return, whether that's your business activity statement, no matter what it is, lodge on time because you don't want to get a silly fine because you're late. If you're working with a professional, they tend to have extensions, extra time to process and therefore you have extra time to pay. Bas agents, for example, have an extra month to lodge, and so you get an extra month to pay your debt. So that can be quite useful and certainly worth the money that you're paying them. And then, of course, your accountant will have extra time to lodge your tax return so they can opt into a late lodgement program. But if you're lodging yourself, make sure you lodge on time, because those dates are set in stone.

Speaker 2 12:43

The next thing to do is to set up a separate account, and that account is just for your taxes, and you need to get really serious about putting your tax obligations aside. So if you are subject to GST, if you're a GST registered business same as if you're registered for sales tax or VAT put aside the money that you collect every single week. Now I am a GST registered business, so at the end of each week actually on a money Monday I retrospectively look back over the last week and I take 10% of all of the money that I've earned and I shove it into my tax account. Obviously, I am saving too much, but that is just going to be a bonus for me at some point down the track. The other thing that you should do is if you are paying wages whether they're wages for the staff or for yourself, just like if you were the payroll officer for a big organization. You need that money, that money that is owing for the tax and the superannuation, and you need to put that into your tax account as well. So act as if you're just paying another wage or another supplier.

Speaker 2 13:52

If you don't have staff but you need to pay tax for yourself, you're a solopreneur and you don't know what your tax liability is going to be until the end of the financial year, for example, when your tax return goes in. So that you're not looking down the barrel of having a massive debt to pay, the best thing to do is to look at last year's return, divide that by 52 and save that number each week so that you've always got some money that's going away for your tax. If you are a company here in Australia, you need to look at your profit number and know that 25% of that profit essentially belongs to the government, so that's just on face value. Obviously, your accountant will do some magic, and so it probably won't be technically that 25%, but put that away just in case. Now, if you're paying off a tax debt, if you already have a tax debt, you really need to allocate that portion of money too and that's super important to just keep paying. Remember that when you have a debt, interest is accruing on that debt, so you don't want more interest to accrue than is necessary. Really important to keep paying it off regularly.

Speaker 2 15:00

My tip there is to set up a direct debit, because if you don't and you default on your payment arrangement, it will result in the payment arrangement being stopped. Automate your transfers where you can. I know that's not always easy. Certainly that wouldn't be an easy thing to do in my business, where the money ebbs and flows. But if you've got a lot of cash flows sitting in your operating account, it could be an easy way to make sure that you've always got money going away into your tax account.

Speaker 2 15:26

Of course, when saving for tax, you don't need to go into as much detail as I mentioned previously. You can simply estimate an amount that you want to put away each week. So you could do that as a general percentage of your turnover 15 to 20% and you could just save that each and every week. But the bottom line here is to be consistent. Now, it goes without saying that none of us want to pay more tax than we need to, whether it's business tax or whether it's personal tax.

Speaker 2 15:56

So my advice is to know what you can and cannot claim as a deduction upfront. The best way to know what you can and cannot claim as a deduction upfront, the best way to know what you can and can't claim is to speak to a professional, especially as you get near to the end of financial year or as you enter a new financial year, it's a great idea to have a tax plan in place for your business so that you know exactly what it is you are aiming to earn and what you need to save, and what you can claim and what you can't claim as tax deductions. The best way to keep track of everything, of course, is to keep great records, and, in my opinion, the best way to do that is to use a cloud accounting system, rather than running around and collecting all of those receipts at the end of the financial year and working out what's deductible and what isn't. If you have a cloud accounting system, it can all go into one place and it's as simple as inviting your tax professional in or running a few reports if you're doing your taxes yourself, and all of the information is there. So it's definitely a great investment in your business.

Speaker 2 17:00

My last bit of advice when it comes to paying taxes and whether this applies whether you're in debt or not is don't suffer in silence. If you're not sure or if you are in trouble, don't put your head in the sand. Ask for help, speak to a professional or go to the ATO directly. I was literally talking to someone this week who was sharing a story about how they were in a position where they hadn't put tax in for years and as each year went past, they became more and more afraid of putting their tax in because they were worried about what the result would be, what the outcome would be. People think that their local tax office are really out to get them, but I can absolutely assure you through years and years of dealing with the wonderful people that work there. They're there to help. They genuinely don't want you to be in debt, but if you are in debt, then they are genuinely going to try and help you get out of that debt, to come to some sort of resolution. Of course, if you don't want to contact the local tax office yourself, you can always speak to your accountant or your BAS agent to speak to the local tax office on your behalf and work out a payment plan to help you afford to pay off your debt.

Speaker 2 18:22

I think one of the big things that I see with business owners who are in debt is that once they take that step, once they make the decision to ask for a payment plan, they become very unrealistic about how quickly they're going to be able to pay it off. I suppose the reason for that is that they're concerned about any interest that will it off. I suppose the reason for that is that they're concerned about any interest that will be added to their debt. And the truth is the tax office here in Australia will add interest to that debt as you go. But nine times out of 10, when you make the final payment on your outstanding debt and you ask for the interest to be refunded, they will actually refund that interest to you. So again, they're nice people. They're there to help you. They're not trying to cane you and keep all that money in their coppers. They're more than happy to pay it back to you. In most cases, they're just using it as an incentive to keep you paying to your repayment schedule.

Speaker 2 19:22

Definitely, make sure that you're realistic about what you can afford when you go to set up a repayment schedule, because the last thing you want to be doing is putting yourself under more pressure. As I said earlier, you've really got to stick to that payment schedule once you agree, because if you default on that payment schedule, they'll just cancel it. So if something happens and you, for whatever reason, you can't afford to pay your weekly or your fortnightly debt payment, get on the phone, call the ATO in advance and set up a new arrangement or explain to them that you're not going to be able to pay, and they can reassess that arrangement for you. If you are a late lodger, if you haven't lodged your tax in a while, or you're overdue with an activity statement, there definitely could be penalties that are attached and in most cases, those penalties that's just like any other fine it's money that you lose. But again, like any other fine, it's money that you lose. But again, in my experience, the ATO can be very lenient about those penalties. So just make sure that you communicate.

Managing Tax Debt and Financial Success

Speaker 2 20:26

That's the biggest tip that I can give you right here. I think we know that paying tax is inevitable and, as I said right at the start, so many of us live in fear of paying tax. But if you want to think about it in a really positive way. When you have to pay tax, it means that your business is making money, and that's a good thing. So, while I'm not suggesting that you pay more than you should, that's where your tax plan with your accountant comes in, by the way, something that you set up at the end of the financial year or new financial year.

Speaker 2 20:56

When it comes to taxes and all of the other business money stuff, the best way to get ahead and to make more money in your business is to get educated, stay abreast of those changes and, of course, if something happens and you're not sure, always get professional help. Okay, that's it for taxes and for paying off tax debt. I hope this episode has helped you either set up a plan to save for your tax or especially helped you if you're trying to pay off a tax debt. And, of course, if you need help, you can reach out to me. I offer in-person one-to-one sessions, virtual sessions as well, group workshops, and then, of course, there's my business money magnet program and my book of the same name, which is out very soon. Here's to your success Until next time.

Speaker 1 21:46

Thanks for listening to the Secrets of Successful Business podcast. For more information on all things business, head to flossycomau and make sure you hit subscribe on the show so you don't miss another new episode. If you're enjoying the show, please give it a quick rating or review, share it on your socials or with friends who might enjoy it. Catch you next time.