Tag: Accounting

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Finance

What is negative gearing?

Negative gearing is a rising trend among investors. People who want to purchase investment properties often need to borrow money from lending institutions. When people borrow, they calculate the risks and potential rewards carefully. Most ordinary investors will try to ensure the monthly profits from their investment property will surpass the mortgage repayments and interest rates.

Negative gearing doesn’t follow the same rules. People borrow money knowing that the profits from the property won’t cover the monthly interest and mortgage repayments. Investors make up for the shortfall between the interest payments and income earned with the help of deductions from their current income tax. Negative gearing is prevalent in Canada, Australia, and New Zealand because of the tax policies and concessions in these countries.

What is the benefit of negative gearing?

Why would you invest in a property that doesn’t offer profits that actively cover your expenses? Even if you get a tax break from the government, you don’t earn enough profit through rent to justify the initial investment. Here’s what you need to understand about negative gearing:

  1. Negative gearing works because investors don’t intend to retain the property over the long-term. Their investment only bears fruit after they pay off their loan and sell the property.
  2. For negative gearing to be profitable, the property must be a part of a thriving housing market. Property values should increase over time instead of remaining steady or decreasing.
  3. If you purchase the right property in the right market, you can potentially earn several hundred thousand dollars in profit. This investment is risky and can potentially lead to complete loss of money.
  4. Investors need to plan carefully and ensure they have enough financial stability to bear the shortfall between interest rates and income even with the tax break.

Negative gearing is a financially sound decision only if your capital gains are greater than your initial investments and related expenses.

How does negative gearing work?

You need to consider a number of factors before you invest in negative gearing. If you don’t plan your investment well, you can face losses amounting to several thousand dollars. Here’s what you need to consider:

  1. The total income from the property. For this, you need to multiply the weekly rent by 52 to calculate the annual income.
  2. Tally all expenses including mortgage repayments, vacancy, repairs, insurance, manager fees, bank fees, council rates, water rates, land tax, strata fees, and property improvements costs.
  3. Subtract the total expenses from the income. Deduct depreciation as well.
  4. Calculate the amount of tax you need to pay and determine how much of it will be refundable.
  5. Consider the capital growth of the property in the market.

All of these factors will help you determine the capital gains from your investment. If you don’t perform these calculations, you won’t know if the property is worth investing in and whether you will get enough money to justify the investment. This is how negative gearing works and delivers profit. It relies solely on the market demand and supply as well as the growth in property rates.

An example of negative gearing

It’s not easy to understand how negative gearing works without considering a real-life example. Here is an example that illustrates how you can earn profit using this investment strategy:

  1. You purchase a $440,000 property on a loan of $400,000 with 7% interest rates. Your interest will be around $28,000.
  2. If you earn around $450 rent every week on this property, you earn $23,400 in annual rent income, which leaves you with a shortfall of $4,600.
  3. If the value of the property increases by 10%, you gain a profit of $44,000 at the end of the year and once you remove the shortfall of $4,600, you have an overall profit of $39,600.
  4. You can deduct the other expenses from this calculation and still get ample profit at the end of the year.

If the value of the property doesn’t grow by 10% or more, you won’t gain enough profit to justify your investment.

Contact local property lawyers

What expenses can you claim as deductions?

In most cases, you can claim a deduction for any expenses related to the management and maintenance of an investment property, this includes any interest you pay on loans. When your asset is negatively geared, you may be able to deduct the full amount of rental expenses against your rental and other income, including your salary and wages.

The rule of thumb is, property investors can claim deductions in three main categories:

  • Building allowances – in most cases you can claim building allowances such as for depreciation over time
  • Revenue deductions – you may be eligible to claim revenue deductions such as the interest on borrowed funds
  • Capital items – major items such as a oven or dryer in a rental property are subject to depreciation over time and can be claimed over several years

Are there any changes in negative gearing in 2021?

The 2021 budget includes a number of measures relevant to property investors, however it doesn’t directly address or change existing arrangements around negative gearing.

How does this affect Australians?

Negative gearing is still a good investment option for Australians, particularly if you have enough financial stability to support the shortfall between the interest rates and the income generated. The housing market is on the upward trend so you can expect the value of the property to grow comfortably over a short period of time.

It’s a good idea to consider a short-term investment instead of long term investment if you intend to use negative gearing. Most people only invest for one year and see several thousand dollars in profit. This can keep you safe from any changes to regulations the government makes in future years.

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News & updates

A guide to submitting your business tax return

We’ve talked to our best accountants to bring you this business tax guide for FY2021/22

This year, changes in the economy and places of employment provided the opportunity for many to start their own business and work from the comfort of their home. One of the tasks that might be confusing for a new business owner might be how and when to file your taxes. Filing taxes is something that most do not enjoy, and you want to get it finished so that you can get back to doing what you love most, running your business. Here are a few of the basics that you need to know about filing your tax return in Australia. 

Important Dates

Your tax return due date primarily depends on your lodgement history and whether you are registered with a Tax Agent. There are some important dates to remember when it comes to lodging your income tax return.

May – June – Contact a Tax Agent prior to financial year end to ensure you understand what tax concessions and business deductions you could claim. According to Dexterous Group, it is crucial for businesses to be proactive and not reactive at tax time specifically when it comes to paying superannuation, writing off bad debts and claiming any instant asset write-offs.

30th June – financial year end and the cut-off date for claiming business deductions, or any instant asset write-offs.

31st October – the due date for lodging your income tax returns (if you’re not registered with a Tax Agent)

15th May* – the general due date granted to Tax Agents to complete your income tax return on your behalf. Please note this may vary depending on a number of factors so please contact a Tax Agent for confirmation of your due date *following year

“Be proactive, not reactive when it comes to tax time.”

– Nick Urry from Dexterous Group

Handy apps to have at tax time

  • ATO: The Australian Taxation Office has its own smartphone app which is free to download and use,  here you can access relevant tax and super information for small businesses
  • E-sign apps for digital signatures e.g. Docusign, HelloSign – the ability to sign remotely is very helpful in the tax return process according to Dexterous Group
  • Oneflare: an app that connects you with the best accountants in your local area by providing personalised quotes from businesses
  • Etax: an app with third-party tax service providers
The Dexterous Group, bringing you the best business tax advice / Source: Dexterous Group

What information do I need to provide in my business tax return?

What you need for your large or small business tax return depends on the structure of your business.

Sole trader: As a sole trader, your business income counts as your individual income. You may claim deductions for any eligable expenses and must include all income you have made in the financial year in your tax return. As a sole trader, you are required to lodge the following:

  • The business and professional items schedule for individuals
  • A tax return for individuals, including the supplementary section

Partnership: As a partnership, you are required to submit a partnership tax return to report net income. You may deduct any allowable expenses, which then leaves the assessable income. 

As well as this, any individual partner must also file an individual tax return to report:

  • Your share of any partnership net income or loss
  • Any other assessable income you have earned, such as wages and salary, dividends and rental income

Note: With a partnership, each partner must pay tax on their individual share of the partnerships net income.

Trusts: In a trust business structure, the trustee lodges a trust tax return to provide the following:

  • The trust’s net income or loss for the financial period

Note: an individual tax return must also be lodged by each beneficiary of the trust

Companies: If your business operated under a company structure, you are required to lodge a company tax return to provide the following: 

  • Taxable income
  • Tax offsets and credits
  • PAYG instalments
  • Tax payable amounts or refund receivable amounts

Note: if you are a company director, you are still required to lodge an individual tax return. 

Contact local accountants

What can my business claim as tax deductions?

As a business, there are many expenses and deductions that you can claim. This list is a few suggestions of things that your business may be eligible for but it depends on what type of business you operate and your specific circumstances, for example as a tradie you are eligible for deductions like transport costs. If you are in doubt, you should contact your tax professional or the ATO to answer questions about whether your business is eligible. Here are a few things that you may be able to claim on your business:

  • Advertising costs
  • Interest paid on business loans
  • Travel expenses for business
  • Renting or leasing your place of business
  • Electricity related to business operations
  • Internet and phone expenses
  • Cost of starting and operating a website
  • Wages to employees
  • Super contributions for employees
  • Vehicle Expenses
  • Office costs, such as computer, printer supplies

Note: If you have been working from home during the financial year, your tax return may be different to previous years, you may be eligible for additional deductions. Consult your tax professional to get information for your circumstances.

What are the business tax rates?

The best place to find tax rates for filing your ATO business tax return is on the ATO tax table. As a sole trader, you submit an individual tax return and do not have to pay tax on the first $18,200 that you earn, (see table below for individual income tax rates). Different business structures will have different tax rates. This is just a guideline, and you should consult a professional for advice tailored to your business.

Methods for lodging

  • Online through the myTax portal: You can file your small business tax return online if you meet certain requirements. This is only allowed for simple returns. 
  • With a registered tax agent: Any person or business can file with a registered tax agent. The cost of hiring a tax accountant can be between $75-220, but there are many advantages of doing so. It saves you time, ensures all the right deductions are made, and extends the time you have to file. The biggest mistakes that are made by businesses, according to Dexterous Group is incorrectly claiming deductions. Some businesses aren’t fully aware of all the deductions they are eligible for based on their industry, business type and related deduction thresholds, which can lead to; mistakes, an increased tax bill or even penalties.
  • As a hard copy:  You can fill out the tax return yourself and send it through the mail. You might have extended processing time if you choose this method. 
  • Using SBR enabled software: Certain third-party applications are available that allow you to file online yourself. One of the most important things to consider if you use this method is to verify the registration of the software with the ATO.
Hard copy tax return / Source: Shutterstock

Other important documents to consider at tax time

It is good to have the following documents available when you lodge your tax return, regardless of whether you plan to do it yourself or by a professional. It is better to have the record and not need it than to need it and not have it. Nicholas recommends storing digital copies of receipts, by simply taking a photo and storing them in a folder on your phone or computer.

  • Copies of any payments received
  • Invoices for any business expenses
  • A list of debtors
  • A list of creditors
  • Bank records
  • Employee and contractor details
  • Any capital gains events (e.g. buying or selling business assets)
Invoice documents / Source: Business Finance Townsville

How to hire an accountant

The Australian tax code can be complicated, especially if you are a new business. The last thing that you would want to do is to make a costly mistake. Fees and fines can be pretty steep if you make an error or miss a deadline. Hiring an accountant takes the worry off you and is often cheaper than the time it takes to do the research and file the return yourself. 

The cost of a small business tax return usually depends on the type of business you have and how complex the return is to file. You should compare rates and service reviews, but the most important thing is that you make sure they are a legitimate accountant and registered agent.

Licencing and qualifications

An accountant must be a Registered Tax Agent, BAS agent, or Tax Adviser. Agents must be registered to specialise in individual or company taxes. You need to make sure that the professional you hire knows how to handle the type of taxes you need to file. It is also a good idea to find someone who has many years of experience.

Categories
News & updates

4 ways to grow your margins through automation

Staying ahead of the curve for trade companies is notoriously tricky. The number of moving pieces involved in carrying out a job means that from the initial job request through to invoicing there are thousands of points where a job can go south.

The sheer scale of staying across every single facet of two or three jobs, let alone 20 or 30, is a task that nobody can or should be expected to complete flawlessly. In a lot of cases, there’s a sense that trade businesses are too much trouble past a certain point.

Over the past five years, however, we’ve seen trade companies start to emerge from piles of paperwork and mountains of debt by automating repetitive tasks and adopting smarter organisational tactics.

To spread the good word and help our tradie mates out, we’ve put together a list of tactics we’ve seen take trade companies from ditches to riches.

1. Accounting software

In the early days of running a trades business, there can be a tendency to want to learn how to do everything yourself. It, however, often a much better use of your time to hire a bookkeeper to look after your accounts for you.

To support this, it’s invariably in your best interests to move your books onto accounting software like Xero. Xero is a simple way of staying across all of your financials in a straightforward interface that both you and your bookkeeper can access remotely. Among other smarts, Xero can read photos of all your rogue receipts and turn them into expenses in your dashboard, easily create financial reports, and track inventory.

2. Online Price Books

Flicking through 20kg supplier price books all day is enough exercise to cripple the heftiest of footy players let alone a wee office manager. So put down the deep heat and pick up a job management software solution that does the heavy lifting for you with online price books. Online price books are the new kid on the trade block: they allow you to significantly reduce time spent on manual data entry by saving supplier price book files and auto-populating materials with their respective costs when you’re building quotes and estimates.

3. Just in time stock control

It’s often the little expenses that eat away at trade and service business profits, so it’s pivotal to make sure as little falls through the cracks as possible. Just in time stock control is a framework employed by some of the world’s most successful manufacturers to help with loss mitigation and cash forecasting. This is a methodology for managing materials costs. It requires you only to buy the materials that you need when you need them so that you’re never left with expenses that won’t ultimately be covered by the customer. Here’s how to do it:

  • Quote exclusively what you purchase: Quote with surgical precision and make sure that all the materials you’ll need will be accounted for.
  • Order what you quote: Only purchase the materials required to complete a job.
  • Charge what you buy: If you’ve purchased materials for a job that you know you need to complete the job, make sure you charge them to the job.
  • Control what you buy: Be disciplined in buying (or instructing your team to buy) the correct amounts of materials that have been included in quotes. An easy way to do this is to use the quote as a shopping list.

For many companies, it’s not as easy as going to the supplier a few times a day for materials specific to a job (and moreover, that would be inefficient). If you’re miles away from the nearest supplier, plan and buy all the materials you need for several jobs at once.

4. Digital job card apps

If you run a trade business and you’re just hearing about job card apps now, it’d pay to take a seat as you might get a little light headed when you realise how much time, money and stress you could save by adopting this system. Within job card apps office managers, project managers and tradespeople alike can make real-time updates to job briefs. Whether you’re rescheduling a job, adding hazards, changing an address, scheduling a second job or adding photos/notes – the job card is your oyster. The benefits here speak for themselves; it’s a game changer.

All things considered

Trade and service businesses aren’t an easy game, and things will always go wrong, but it’s on business owners to create a business structure that eases the pressures on their employees and minimises room for error and ultimately grows their margin. There are plenty of ways to do this, but they won’t come knocking at your door, so it’s best to think creatively and be resourceful to find solutions to suit your business.

Categories
Finance

How to do a Tax Return in Australia

We’ve reached that time of the year when the ATO (Australian Taxation Office) and accountants begin getting ready for the slew of calculations they will be handling as people across the country lodge their tax returns. The cost of having a registered Tax Accountant lodge your tax return on your behalf can vary. If you prefer to prepare your own tax return there are quite a few things you will have to remember.

Before we take a detailed look at how to complete your tax return, here is some basic information you should be aware of:

  1. Your tax return for any particular year (eg: 2020) is for all income earned from 1 July 2019 to 30 June 2020.
  2. The tax return for 2020 will be available in June 2020, with lodgement available from 1 July 2020.
  3. If you’ve missed any tax returns for previous years, you must complete them as soon as possible to avoid any fines from the ATO.
  4. Since most of us are now working from home due to COVID-19, the ATO has introduced a new method to calculate your expenses working from home called the Shortcut Method. Find out more about the Shortcut Method in our guide explaining How to Lodge a Tax Return if You’re Working from Home.

How to do your tax return online

As an individual doing their own taxes, you may have several questions. Here are some useful tips on how to do your taxes online:

Gather your paperwork

Before you lodge your tax return you need to gather all relevant information and paperwork to ensure it will be accurate. You will notice that the ATO pre-fills certain information from superannuation funds, Centrelink and banks in your online form. However, it is recommended that you check the accuracy of this pre-filled information. Some of the documents you require for your 2017 tax return include:

Your income

  1. Payment summaries – These record the income you’ve received from superannuation funds, an employer, or any government agencies such as the Department of Veteran’s Affairs or Centrelink.
  2. Bank statements – These will detail the interest you may have earned over the past financial year.
  3. Shares, managed funds or unit trusts statements – These will be required to calculate any dividends or distributions made to you.
  4. Statements of buy and sell investments – You can acquire these from your stockbroker or investment advisor if you purchased or sold any shares.
  5. Records from rental properties– This has information relating to either a capital gain or capital loss from the sale of any property.
  6. Foreign income details – All details of foreign pensions or any other form of foreign income will be required.

Your expenses

  1. Statement of your private health insurance policy – This will be required to complete the tax return section that requires information about your private health insurance. See more information below.
  2. Donation receipts – These are needed from all the approved charities you make contributions to.
  3. Educational receipts and records – Not every expense is claimable, refer to the self-education expenses page on the ATO site for additional information.
  4. Investment property receipts – These will be required to claim the maintenance and repairs costs on any investment property you own.
  5. Your spouse’s income and expenses – If you have a spouse, you will require details of their income as well as their expenses to ensure your entitlements are correctly calculated.
  6. Union membership – The cost of your union membership can be deducted from your taxable income amount.
  7. Work-related expenses – You might be eligible to claim certain work-related expenses.

Medicare levy and private health insurance rebate

From 1 July 2015, income thresholds used while calculating the Medicare levy surcharge and the private health insurance rebate have been frozen for three years at 2014-15 levels. If there is an increase in your income, you may move into the next threshold for the private health insurance rebate. This may mean a few things:

  1. If you have private health insurance, there may be a decrease in your rebate entitlement.
  2. If you don’t have the required level of private health insurance, you may have to pay the Medicare levy.
  3. If you paid the Medicare levy surcharge payment last year, there could be an increase in the levy you pay in 2017.
  4. If you’ve received an increase in pay, contact your health insurance provider to make sure the appropriate rebate is applied. You will be able to find more detailed information about income thresholds for private health insurance on the ATO’s website.

Claim your deductions

You may be eligible to claim income tax deductions for certain job-related costs; the expenses must meet these criteria:

  1. Relevant – The expenses must be job-related.
  2. Real – The money spent must have been your own and has not been reimbursed.
  3. Recorded – You must have records such as receipts as evidence of the job-related cost.

You will find more details on the ATO website about how you can claim work-related expenses.

MyDeductions

Tax Return Australia - MyDeductions
Source: Australian Taxation Office

The myDeductions tool on the ATO app can be used to help you keep track of all your deductions. Using this tool, you can:

  • Record all work-related expenses
  • Store photos of receipts
  • Record gifts and donations
  • Track car trips

NB: myDeductions isn’t for small business owners. It’s only for those claiming various work-related expenses as employees. With effect from 1 July 2016, these deductions can be pre-filled on your online tax return via the app. Alternatively, you can share this information with your tax agent.

How to track my tax return

To lodge your tax return online, you need to ensure you have a MyGov account (this can be easily created if you do not yet have one). This account will have to be linked to the ATO. Once you have completed the process and lodged your tax return, you should check your MyGov inbox for the tax receipt and your notice of assessment.

If you are planning to use a professional to handle your tax returns, make sure the tax agent is registered. You can check the agent’s registration status via the online tax and BAS (Business Activity Statements) agent register.

Categories
Automotive

How to finance a car loan when you’re self-employed

Purchasing a new car isn’t something everyone manages outright. Throw self-employment into the mix, and the challenge can be harder.

Variable income and unpredictability often make securing finance feel out of reach. But that’s not the case. If you’re self-employed or an owner of a micro-business, there are options to secure a car loan that doesn’t break your bank.

Now with times more uncertain than before, it pays to invest and choose wisely. Here’s how you can increase your chances of successful car financing. 

Interior of a red ferrari with white leather seats and black steering wheel.
Source: Creative Car Care

Prioritise loan type

One of the most common financing mistakes is falling in love with the car before the loan.

You wouldn’t buy a house without sorting the paperwork, and your vehicle buying strategy should follow the same rule.

If you want to save money, seek pre-approval first and understand how different types of car loans work. This helps you budget, compare and approach the right lender for your needs and is the smartest way to determine what you can afford. Apply this strategy whether you’re shopping new, used or private.

Make sure you:

●  Review interest rates, fees, charges and repayment frequency to work costs into your budget

●  Prioritise your credit score to confirm your current financial position

●  Shop for car financing before you visit car dealerships

Tip:  Be careful not to apply for too many loans in a short period of time as this impacts your credit report and may decrease chances of approval. 

Research, compare and negotiate

Will you be leasing or buying your car?

The type of loan you choose depends on your business needs. Consider the purpose of your car, budget and whether you need to keep its ownership. Research and compare at least three loans from various lenders before you decide.

If buying outright isn’t for you, leasing enables you to get a new car with low monthly repayments. But it still pays to do your research first to compare and strengthen negotiating power.

Pre-approval of car finance also improves your negotiating influence.

Consider potential tax benefits

Buying a vehicle for business is a great tax advantage.

You may claim your car against business tax with a registered ABN. Generally, leasing means you won’t pay GST.

If you’re GST registered, the tax is charged on the purchase price which you can claim back when you lodge your statements. Depending on the type of car you’re after, see if you’re eligible for the Australian Government’s instant asset write-off. This only applies to new and second-hand cars under $20,000.

Minimise lender risk

There are a few ways to minimise the lender’s risk, which could improve your chances of approval.

  1. Have a substantial deposit
  2. Get your credit score up to scratch
  3. Keep balance sheet to prove business growth, profit and equity 

Weigh up features and restrictions

Every contract will have its own set of benefits and loan restrictions.

Before you sign, review the fine print. Sometimes, there are features to fuel savings like additional warranties and Guaranteed Auto Protection (GAP) insurance. Optional extras such as maintenance plans, GPS navigation and car alarm installation may sound good, but verify they’re meeting your needs and not adding to the total costs unnecessarily.

If there’s a chance you’ll pay your loan out early, look for flexible payment options and smaller payout fees like a chattel mortgage. These are favourable for self-employed individuals or tradies.

Buyer Beware: Not all features are what they seem. For example; some extended warranties are only valid if you return to the same dealership for servicing, which could end up costing you more. Remember it’s a car salesman’s job to upsell features, so it’s important to know what you’re really getting and if it’s worth your money.

Partner with a financial advisor

Partnering with an accountant or financial advisor is a wise move to determine all options and tax benefits.

Whilst it’s always vital to do your own research, a financial advisor provides knowledgeable guidance, so you find the best loan, lender and deal for your industry. These professionals have access to a network of financiers to save you the hassle of negotiating with each. Such savings in time and energy are valuable when you’re self-employed or a small business owner.

Flexibility, simplicity and clarity are the essential ingredients for anyone who is self-employed and looking to apply for car finance. The right loan will assist in the growth of your business, by ensuring access to the transportation you need.