With financial year end fast approaching, I could assemble yet another checklist to help you prepare the last 12 months of business paperwork ready to hand over to your tax agent. Instead, here are some practical anecdotes drawn from real life bookkeeping experiences that will assist you to understand why bookkeepers and accountants can be so fussy.
All businesses benefit from working with great bookkeepers and accountants. Their role is to help keep you the business owner out of jail. If your bookkeeper or accountant is primarily absent, then find another. If you are trying to do the books on your own, read on. I’ve put together valuable end of financial year tips for small business owners.
Your Chart of Accounts will expose you
Let’s review the Chart of Accounts. ‘What’s that?’ you ask. Run a Profit and Loss report. All those listed accounts in the report come from the Chart of Accounts. This Chart of Accounts is what I call the backbone of your business.
Everything, absolutely everything starts and finishes with the Chart of Accounts. These accounts are what you code things to – where your income comes from, where your money has been spent, what you owe and who owes you. When transactions are correctly coded in the Chart of Accounts, your business profit and net worth are revealed. Profit is what you pay tax on. Pay attention – you pay tax on profit, so you want to be sure that what is shown as profit is accurate.
Businesses operating without an advisor tend to think that the more expenses listed, the lower the profit and therefore the less tax to pay. ‘Sounds reasonable’, you say. Yep, until we deep dive into just what has been added to expenses.
Red flags for your Advisor
- Flagged Account #1 – Miscellaneous/General/Sundry/Admin
Do not use these accounts. Delete them. It’s as simple as that. These accounts beg to be looked at. If you don’t know where to code it to, then ask for advice. School fees are not claimable, regardless of how smart your kids are or if they help out in your business every other weekend.
- Flagged Account #2 – Entertainment
There is a stack of rules around entertainment. Good luck getting your head around them. If ever there was a time to seek advice on what to claim, what can’t be claimed and what the GST implications on claims are, this is the right time. Just for the record, adult entertainment and paid bribes are best left out of the business.
- Flagged Account #3 – Travel
We all love to travel and we love to spoil our families. Unfortunately a business trip to the Gold Coast won’t stretch as far as including the whole family. Don’t be upset, when the kids are finally really working for you then maybe that travel claim will actually be legitimate.
- Flagged Account #4 – Guard dog
Working from home? I know your Chihuahua or Maltese Terrier can be snappy, but try to convince the ATO to let those vet bills and pet insurance expenses remain. Good luck.
- Flagged Account #5 – Car payments/Leases
Payments to finance companies for equipment and motor vehicle finances I am sorry to point out, just aren’t an expense. Really. It’s a payment to a liability account – part of the ‘what you owe’ scenario. So that just wiped out 100K of listed expenses. Woops. Where’s that advisor when you need one?
Incorrect coding, unfounded claims
Incorrect expense coding is just a part of the story of your finances. One of the rules of accounting is that every transaction has to have an opposing/complementary side. This means that things just can’t appear from thin air.
An example, your business operates with cash transactions. You pay cash for purchases. You want to claim those purchases. Now the dilemma. Are those purchases paid for by you, out of your pocket? Or are they paid for out of income generated within your business? Careful how you answer this one. Newtons Third Law of Motion applies – for every action there is an equal and opposite reaction.
So your business has done well and you decide to treat yourself to a new and relatively expensive car. Don’t get too excited about thinking of all those deductions and GST credits. There is a Luxury Car Tax GST limit which means that the full GST isn’t claimable on cars whose value is over a certain limit. Then there is the percentage allowable on deductible expenses. Chances are your car isn’t 100% claimable and then there are Fringe Benefit implications. To avoid disappointment, best talk to your accountant before making that new car purchase.
How about the government’s $20.000 instant asset write off program? Generously extended to June 30, 2019 in the recent budget. Can I simply point put that a purchase of assets to claim an instant tax refund sounds great but before doing so, please assess whether your business can afford to do so.
Going into debt to fund a new asset that may provide minimal tax benefits, may be questionable. Bear in mind, it’s not an immediate tax deduction, but is only realised once the businesses tax return is lodged. Also the tax benefit is not a $ for $ refund but is based on your income tax rate. So for every dollar spent, only a portion is refunded.
These are just the obvious accounts and purchases to review. There is more involved. So next time you question the value of the services your bookkeeper and accountant provide, think of them as your business partner. They are there to make sure your business is doing things right. You might not always like the answers you receive, but at least you know it will be right. Something else to consider, paying tax means that your business is profitable. So to pay tax is a good thing.