One of the more confusing elements of our tax system is the PAYG instalment system. In this blog we set out to answer our most commonly asked questions in relation to the system.

In Part 1 we looked at the scary, but meaningless, statistics around cashflow and business failure and answered the question how much cash is enough cash. In Part 2 we are going to take a more detailed look at the specific actions that result in cashflow shortfalls with businesses and what actions you can take to avoid becoming part of this atrocious statistic.

Over the years I have been asked to talk or write about cashflow. I have found it incredibly hard to do so and do my best to avoid it. Until recently I found the concept of cashflow rather abstract (a bit of a worry seeing as I'm an accountant). It sounds simple enough. Money in versus money out, but what does that really mean?

It has been a common practice of business owners, operating through companies, to transfer surplus cash into personal mortgage offset accounts. Then at the end of a financial year transferring the cash back into the business to avoid the consequences of Division 7A (i.e. the funds being treated as an unfranked dividend in the hands of the recipient), before transferring it all back to the offset account in July.

The number one tax strategy to minimise tax, whether you are an individual or business is by making super contributions by 30 June. However, it is easy to miss out on a tax deduction if you don’t know the rules. Here is what you need to know to make sure you don’t miss out:

Owning a company comes with its own set of rules to get money out, once it starts making a profit. It is essential to have a plan on how to pay yourself to avoid the Problem with leaving profits in your company. Not having a plan can also lead to surprise tax bills (and not in a good way). Here are five ways to pay yourself from your company.

One of the really attractive things about companies is that profits are taxed at 26% if they meet certain conditions (if the company is trading and aggregated earnings are less than $50m per year they will qualify). It gets better still on 1 July 2021 where the rate drops to 25%. That’s a massive 22% saving in tax (and Medicare Levy) if you are in the highest marginal tax bracket. Once you earn more than $45,000 a year, where the marginal tax rate changes to 32.5%, there’s a real incentive to keep your money tucked up in your company so you don’t lose a big chunk to the taxman.

I’m not usually a fan of making loans from companies. The most frequent use of them is purely reactionary, to delay paying tax. These loans often arise when a shareholder or one of their associates pays for personal expenses or simply withdraws cash from the company bank account without processing these transactions through payroll (and therefore paying PAYG withholding and super). If left unchecked, what usually results is a large sum of money being owed to the company at the end of the financial year. The ATO requires the loan to be repaid in full at the time the company’s tax return is lodged or a complying loan agreement is put in place otherwise they will deem an unfranked dividend. The unfranked dividend most often results in the shareholder (or associate) with a large and unexpected tax bill.

Our case study about how Adrienne used the principles of Mike Michalowicz’s book, Profit First, really showed how cashflow is king. By following the recommendations of the book, Adrienne transformed her cashflow and made it through COVID. If you are wondering how to improve yours and not quite sure you have the time to read the book, here is my review of Profit First. The essence of the book comes down to 4 profit-management principles…

Adrienne owns a small architecture firm and spent the 2018-19 Christmas break reading Mike Michalowicz’s book, Profit First. She was so excited by the read and wanted to implement it in her business straight away. I was a little sceptical as being an accountant I know that being in business is about cashflow first. Curious, I decided to have a read. I wasn’t long into the book before I realised it’s about a methodology to manage cashflow. I settled in and enjoyed the read.

One of the things we love to do at Accounting Heart is to champion financial confidence and one of the ways we do this is by having quarterly catchups to talk all things numbers…profit & loss, balance sheet, break-even, budgets, cashflow, long term forecasts, tax etc. Sounds like fun, I know ?. In recently preparing for one of these catchups I opened up our client’s Xero file to find a very different set of numbers to what I was expecting, and the colour drained from my face.