Tax traps for tradies
Avoid these common tax mistakes and save yourself from headaches (and worse) at tax time. By Clea Sherman
You’re an expert in your trade but how are you at managing your money? For many trade-based professionals, it can feel overwhelming to run a business, deal with customers and stay on top of all things financial. Accountant Adam Reeves founded his business Your Sidekick to provide financial services specifically for trade businesses. “I noticed from my work as an accountant that tradies have incredible skills but are terrible at their books.” says Reeves. “I now provide ‘done-for-you’ services, helping keep their finances on track so they can focus on other things. Often, tradies get in such a mess they don’t know where to turn,” he explains, adding that he sees the following tax mistakes time and time again.
POOR CASH FLOW MANAGEMENT
Getting paid is always great but the hard fact is a portion of the money you collect is on behalf of the tax office. This includes your income tax and 10 per cent GST. It is easy for tradies to collect their fees but neglect to think about tax throughout the year. When it comes time to declare their earnings, they end up with a bill running into the thousands. The key is to put money for the Government aside as you go and arrange to pay your tax in quarterly instalments. Reeves also advises you hold onto receipts and keep a credit card specifically for your business. Work-related expenses can be used to reduce your tax bill but you need the right evidence of your spending.
If you’re working for an employer, you may pay for tools and supplies upfront as you complete jobs. However, if you are reimbursed by your employer, you can’t claim this as a business expense. Similarly, it can be easy to write off your entire mobile phone or vehicle expenses as work-related, even though you use both on your days off. “You can get away with overclaiming…. until you’re audited,” explains Reeves. With the ATO on alert for fraudulent claims, it is better to err on the side of caution and be specific when doing your tax return.
TAKING CASH PAYMENTS
Reeves warns about the so-called ‘black economy’ and requesting cash payments from customers as a way of minimising declarable income. “These days, Big Brother is watching”, says Reeves. “If you’re living it large but only declaring a basic income, you may be asked to explain how you’re financing your lifestyle.” If you do not share your true income with the tax office, responsibility will fall on you. “Your financial support team helps you lodge your tax return but you will sign a document declaring all information to be true and valid,” says Reeves.
DECLARING TOO LITTLE
While paying tax is unavoidable, it makes sense to work with your accountant to minimise your bill. However, one thing to be wary of is pushing your income to such a low amount that you jeopardise an insurance claim or loan application. If you earn $150k per year but only declare $45k, your insurer may base the amount it pays you on this during an income protection claim. What’s more, your annual tax report is reviewed when you apply for a loan. If your income looks too low, you may miss out on approval.
Setting yourself up as a sole trader works well when you start out but as your business grows you may be better off with a different structure. “Company tax rates are capped at 27.5 per cent so once your earnings cross a certain threshold you should chat with your accountant about restructuring. This will help you be more flexible and pay less tax,” says Reeves. For a lot of tradies, advice about taxes comes from chats with friends. Reeves stresses how important professional guidance can be. “Without the right advice about what you can claim and how you should structure your business, you could be missing out on massive savings,” he says. “And there’s nothing wrong with doing everything possible to minimise your tax bill—so long as it’s legal!”
HOW TO GET OUT OF A TAX TRAP
Being so busy with work can make it too easy to bury your head in the sand when it comes to money and taxes. Small problems snowball and one year of not filing a tax return can easily turn into five or more. Avoiding doing your taxes or being deceitful about your income can lead to fines, bankruptcy and even prison terms. However, Reeves’ advice is that it’s never too late to sort things out. With the help of an experienced accountant or adviser, you can get on top of your taxes and come up with a payment plan. “The ATO runs like any other business,” says Reeves. “If it can be satisfied you are making inroads to pay off your tax debt, you won’t have it constantly breathing down your neck.” When it comes to avoiding tax traps, prevention is always better than cure. Just as you hope your accountant would come to you to repair a tap or light fitting, you should rely on their expertise to help organise and even automate this part of your business. “As well as helping you keep on top of your tax requirements, your accountant can show you how to expand your business and start earning more,” says Reeves. “Get comfortable talking about money and asking questions. You’ll get the advice you need to live life on your terms.”