Did you get an unexpected bill from Mr. ATO after you lodged your most recent tax return? Well, that just plain sucks. I know this, because it’s part of my job to deliver this not so good news to clients sometimes.
First – let me say that owing tax is actually a good thing, because it means you made more money than you spent in your business. So if you end up with a tax bill, you don’t have the problem that over 70% of businesses in the first 2 years of operations have. Congrats is definitely in order for that!
If you ended up with a bill, here are some strategies you can put into place to avoid the same thing happening again next tax return.
Track your income and expenses during the year instead of doing it once a year at tax time. Most clients I have that end up with surprises, only do their accounts once or twice a year and not regularly, so they have no idea how much money they have made in their business!
Open a dedicated bank account for tax savings and transfer money into it each month, quarter, etc and don’t touch it! Think of it as the ATOs money, not your money.
Enroll in the ATO’s PAYG Instalment scheme. This is where you sign up to prepay income tax each quarter to the ATO, and if you pay too much tax in advance, you will actually get a REFUND at tax time! This is a good option for those who can’t help but spend the money in their tax savings account in Tip#2.
Put away 30% of net profit (income less expenses) into tax savings. This is a good round number to save that should cover enough tax for most Australians. 30% tax savings will likely be higher than you actually need, because the average actual tax rate across Australians is 25%. Future you will thank me for overestimating your tax savings, because then you can choose what you want to do with the extra monies if you have over saved. Holiday anyone? 🙂
Remember, tax is knowing the laws and applying them to your individual situation. The laws don’t drastically change without notice, so being organised and informed in advance is an option available to everyone. You just gotta work it out yourself or ask a pro for help!