What's A Good Rainy Day Number To Have?
In terms of setting your businesses Rainy Day Number – anything is better than nothing. But if I was to give any business a target, it is three months worth of expenses to run your business. That means that if you couldn’t sell anything for three months, you could pay all of your expenses – this includes paying yourself, profit, tax, and debt, all of that for three months and not have to freak out about it.
This changes your physiology as well, from a scarcity perspective, to a mindset of abundance or security that if things hit the fan, you’re in a good place. The key to this is regular – and I would suggest weekly – consistent contributions. As an accountant, a client of Inspire – and we do this for clients with our tax forecaster – we can help you with how much tax to set aside. We can calculate that on a weekly basis if you’d like. It’s basic, but it is so powerful.
Tax Tip: Repairs And Maintenance
When you’re running a business, sometimes things break or need repair, and you have to go and fix the printer, or a piece of machinery that might be busted in the warehouse – what this tax tip suggests is that if you need some repairs or maintenance done on something, if you get them done before 30 June, then we can claim them this financial year. If you wait until next financial year, we claim them the following year.
So let’s say you have $10,000 worth of repairs to do on something. The timing of that – this year or next year – might mean up to $3,000 or $4,000 of tax that you don’t have to pay for this current financial year. So it’s just a suggestion – If it needs to be done, then consider getting it done and paid for before 30 June, so we can claim it sooner.
I don’t advocate for spending $1 just for the sake of it, so only get stuff that you’re going to need to repair, or you need to spend money on maintenance for over July, August, September and bringing that money forward. But don’t just spend willy nilly just because of tax savings. Never spend $1 just to save 40 cents – make sure you’re going to be doing it anyway.
Need a second opinion? Book a zero cost strategy call with an Inspire Accountant.
We Want To Save Our Clients $2.1 Million In Tax In 2021
We want to save our clients $2.1 million in tax in 2021, which is a massive goal for our team! Interestingly enough, we’ve already hit $769,000 out of that target (as at 4 May 2021) – so just over 36% which I’m blown away with. We’ve still got more work to do and it’s not going to happen without a lot of effort.
This campaign is something that we’re focused on absolutely as a whole team for the next 12 weeks. If you want to be a part of this, feel free to book a strategy call with an accountant to discuss next steps. You can usually get a call the same day, or the next business day with one of our accountants. So if you do want to explore what that might look like, you’ll not only be saving tax, but you’ll also be contributing to that massive goal.
For more tax tips visit https://info.inspire.business/save2point1m
#InspireCA #InspireLifeChangingAccountants #Tax #SAVE2point1M
Tax Tip: Update Your Trust Deed
This tax tip will be relevant for you if you’ve got a family trust or a discretionary trust, and it runs a business or receives investment income, and you use that to distribute to family members or entities in your family group.
A trust deed is the document we use to make sure someone can receive money, or be a beneficiary of that trust. But it’s also the document we need to rely on to allow accountants to be able to do things like trust distribution streaming, where we distribute different types of income to different beneficiaries. Going into that a bit more; sometimes your trust might receive interest income, or it might receive business income, or capital gains income that financial year, or even franked dividends, and sometimes it might get a better tax outcome to distribute certain income types to different beneficiaries. For instance, capital gains – if there’s a discounted capital gains, individuals get a 50% discount on those and it carries through, but if you distribute discounted capital gains to a company you don’t get that 50% discount – so it can be a considerable difference there. And to be able to do that we need an up-to-date trust deed.
There was a big case that went through the courts in 2012 (Bamford was the name of the case), and as a result, Bamford said that your deed needs to be able to allow you to distribute those different types of income. And soon after that case was finished, all of the lawyers updated their deeds to allow that sort of thing. So what we’re making sure there, is that if you rely on that ability, that your deed is updated – and it’s actually good practice to update them every few years anyway to keep them current with current legislation and current precedents that lawyers do. But particularly if your trust is older than 2010/2011/2012, I’d recommend it definitely gets a review and potentially updated. But again, we want to be doing this every three or four years, just checking that it’s up to date.
So again, this tax tip is on keeping your trust deed up to date and what you don’t want to do is from a tax perspective try to do something that you’re deed doesn’t allow. That wouldn’t be a great outcome.
2021 Tax Rates For Individuals Vs. Companies
As an individual, the tax rates have actually changed from 2021 Financial Year versus the year beforehand. But with individuals, the more money that you earn, the more tax you pay as a percent. Here’s the income threshold breakdown for individuals:
- The first $20,000 – you pay no tax at all, and that’s what we call the tax-free threshold.
- $20K to $45K – you’re looking at 21% tax, and this includes the Medicare levy that everyone pays. The private health insurance one is on top of this, if you don’t have private health cover.
- $45K to $120K – around the 34.5% tax mark, so that’s about a third of your income going to the government in this bracket here. This tax bracket got bigger, which is pretty cool – it used to be $45K to $90K.
- $120K to $180K – close to 40% tax.
- $180K or more – close to half your profit, at 47% tax, so we definitely want to stay away from this bracket here, if we can, from a tax planning perspective.
I’m not saying don’t earn the money, there’s certain structures that you’re in that you can’t actually change this stuff and you’re stuck, but, better to earn the dollar and pay 47% tax, than not earn the dollar in the first place. But if you can keep as much of that money as you’ve earned, then why not do that. So that’s individuals.
The company tax rate depends on your turnover. Most businesses in Australia will fall under the “under $50 million in annual turnover” category. If that’s you, you’re looking at a 26% tax rate. It’s a flat tax rate, meaning it doesn’t go up the more the company earns – on the first dollar you pay 26%, and on the millionth you pay 26%. If your turnover is greater than $50M, or you’re an investment company like a bucket company (which we use quite often at Inspire), you’re sitting there at 30%.
The last one I want to mention is a Trust. Trusts give their profit to other people in the family group, or other entities in the family group. So trust themselves don’t pay tax; they sort of share the love around, and then the person receiving the money pays that.
Watch the full webinar and learn the 12 things you need to consider to legally reduce your tax bill in 2021 at https://learning.benwalker.com/courses/TaxPlanning2021
Tax Tip: Amazing Power Of Bucket Companies
So this strategy actually requires you to have a trust that’s earning income – that could be investment income or business income, it doesn’t really matter too much, but the whole purpose of a bucket company is to receive the rest of the distribution from a trust.
When we’re looking to distribute from a trust, we want to consider who are the best people in the family group (or entities) that you might have in the family group or superannuation (even churches and charities). But when we run out of people or entities that kind of make sense, if we’re left with an amount of profit to distribute, then we want to consider a bucket company.
Now, the whole purpose of considering a bucket company is because companies pay a flat rate of tax. Unlike individuals where the more that an individual earns, the higher their tax rate – bucket companies pay a flat rate of either 26% tax if they’re what’s called a “base rate entity” or they’re receiving directly from a business, or they’re receiving business income directly from a discretionary trust. So you could be on the 26% tax rate from a bucket company, or you could be on a 30% flat rate of tax for a bucket company as well – It kind of just depends on your structure for that difference of 4%. The point to make here is that that might be a lot more attractive than paying 34.5% tax, 39% tax, or even 47% tax, which is our highest marginal tax rate for an individual.
Things to consider with a bucket company as well is that the cash actually has to move into the bucket company from the trust when it makes the distribution, or soon after, otherwise we might create what we call a “Division 7A loan”, which I’m not going to go into too much detail there, but it is important that you understand that cash actually has to move into that bucket company.
So make sure this is one you consider if you’ve got a family trust, and there’s a balance to it. We want to make sure that you’re not just distributing to a bucket company first, we want to make sure you’ve considered yourself, maybe your spouse, kids, parents and all the other family members, and then with anything that’s remaining, we look to consider a bucket company. And this is something that we can assist you through our tax planning process, where we guide you on who are the people that might make sense and work through those options, and then we look towards maybe setting up a backup company to take the rest of that income.
Cut Your Tax Bill In Half With Tax Planning
Our tax planning season is between March and June every single year, and this involves every single client. Now, the reason why we enforce that is because it’s so critical – It’s just such a no-brainer part of working with a client, that we need to do this with you. There’s plenty of other accountants who might not do this stuff and that’s fine, but we can’t not – it’s a huge amount of value that we give to our clients each year.
In terms of the process, we estimate your profit for the whole year. We know what your September quarter looks like, and we know what your December quarter looks like – it’s in the past. March is just past (or finishing shortly if you’ve started this process early), and then we guess what June is going to look like. So that’s kind of what we do from a profit perspective.
Now once we know that, we also kind of have an idea of what your tax bill might be. So let’s say your profit is $300,000, your tax bill on that might be $100K or roughly 1/3. Once we apply strategies, that’s the process of working out what you can do from a legal tax saving perspective, it reduces your tax.
So that’s the thinking I want to share: The value of tax planning. Without any strategies, there’s a potential to have a large amount of tax to pay. If you do these two, three, four, five, six strategies, you’ll reduce your tax bill to a smaller figure.
The 4 Savings Accounts Every Entrepreneur Should Have
I’m not suggesting you have 30 accounts for your business, but there’s a couple of main ones that we want you to have, and these are;
An account for your tax savings – to cover your quarterly BAS and your monthly IAS.
An account for Super – If your super is $5,000 a month, just start chucking a grand and a bit a week into an account so that when the Super’s due every quarter, you’ve got that ready to go in an account and it just goes from there.
A rainy day fund – COVID shows us that we can have rainy days that we don’t expect. In fact, we can have rainy years. So having a rainy day fund where you’ve got some cash stashed away is a fantastic thing to do and great peace of mind.
We had so many clients who took our advice on this one years beforehand, and in COVID, we started getting thank you messages out of the blue. Even people who weren’t clients that had come to a workshop and heard about it, just saying, “Hey, thanks so much. I just wanted to reach out and thank you because I didn’t have to fire six people.” Like that’s the sort of messages we got – It was incredible.
Your pay – make sure you regularly pay yourself, but ensure you’ve got a little bit of a buffer in place in case the cashflow was a bit tight for a week or a month that you can still put food on the table.
Watch the full webinar at https://insp.red/TFCreplay
Practical Ways To Improve Your Cash Flow Days
Some practical little nuggets that you could pull the trigger on to improve your cash flow days is to keep less stock on hand – but don’t be doing it so you can’t deliver to your customers, don’t go so low. If you’re a service business, it could be invoicing earlier; don’t wait four months on every invoice. Invoice every week interim bill, or invoice in advance. It’ll save you money upfront, and then your WIP days will be zero or negative – you get it upfront.
There’s this perception that we shouldn’t get paid until we get our work done first, right? There is some business industry where getting paid later is the standard – that’s not necessarily the case. I implore you to challenge that idea, and see what you can do to improve some of those days to keep the cash closer to your pocket, rather than sitting on your shelf or sitting on your balance sheet as debt that has to be collected. It just gives that peace of mind a little bit more as well, when you have cash that’s sitting in your bank account, versus owing money.
The Importance Of Financial Forecasting
If you could generalise businesses across the board, the valuation principles worked off, what is your adjusted profit times by your business valuation multiple? The answer is an indication of the risk in your business. So, you get a higher business multiple if you’re a lower-risk industry or business, or you’ve got systems in place, or the business owner works five hours a week. You’ll get a very low multiple there if you’re working 80-hour weeks, or you’re reliant on a very small amount of customers (and if one leaves, you’re up the wrong creek to be up) – things like that that are at high risk, will mean low multiple. The more we can work on our business multiple and increasing our adjusted profit, means that the higher our business valuation will be.
If you use Xero as your accounting software and you open the profit-and-loss statement, that’s a guide to working out what your profit is, but we really need to make sure that we’re looking at what a potential buyer might be looking at. So we’ve got to adjust for things like, what would that business purchaser need to pay you (or another person) to run that business? Usually, they add back interest if you’re funding your business and it pays interest, because the buyer would need to take that into their own considerations. Things like depreciation usually come out of that. Any benefits that to you, as a business owner, that the incoming buyer might not need to keep on, like your car or optional international travel. Even business coaching; a buyer of your business will probably not continue some of those things, so that can come out of your expenses, and so it’s a bit of a different adjusted profit.
So, there’s a bit of method in the madness to work that out, but once you know how to calculate it, do you know what your adjusted profit is? Or do you know what your business multiple might be – or at least your industry average or benchmark? The other thing to consider with that is, do you know how to increase that? So, increasing your adjusted profit or increasing your business value. If you de-risk your business (or do things to reduce the risk), then you will end up increasing your business value.
If you’ve got higher profit and less hours, this means less key-person reliance. Ideally, more happiness as a result of those two things. They will mean increasing your business value.
Learn how to increase your business value and watch Total Financial Control FREE through my e-learning page at https://learning.benwalker.com/courses/total-financial-control
Get Cashed Up
