It’s been a successful year, but one look at your tax assessment sure knocks some of the shine off any satisfaction you may be feeling. Especially when it’s a bill that you didn’t budget for! We’ve seen the damage that a large tax bill can have on stress levels, relationships and your business – causing you to lose focus from the things that made you so successful in the first place. So, if you find yourself in this predicament, here’s a list of dos and don’ts to assist:
DO – Seek to understand how the tax bill came about. Was it as a result of a larger year of trading, overall increase in profitability, a negatively-geared loan that has now been repaid or the disposal of an investment property? Are there additional deductions that you could have claimed? Talk these things through with your accountant to make sure you understand what has caused the tax bill and find out if there is anything you can do to help lessen the impact in future years. If you don’t feel like you can get a satisfactory answer, get a second opinion (preferably before you lodge your return).
DO – Understand the options available for funding. Even when you have the money saved to pay your tax, there is merit in talking through the payment options with your accountant. If you’re a sole trader and are borrowing to pay the tax on your business income, the interest you pay on this borrowing can be tax deductible.
Some credit cards still provide frequent flyer points for paying your tax bill (however check your card’s T&Cs to ensure tax payments are included before you incur the merchant fee!). The Australian Taxation Office (ATO) also provides a number of options for repaying your tax in instalments. The interest is significantly less than unsecured credit and overdrafts, and the payment terms can be quite flexible.
DO – Be Proactive and Plan. The best tax strategies rarely happen after year end. One of the services your accountant should offer is to talk through your projected income and tax position prior to the end of the financial year (usually between April-June) to help you understand what your tax position will be for the current financial year and also to discuss any strategies to help reduce your tax. This is especially important when the event you are dealing with is a once- off (for example, starting a business/sale of your practice/disposal of an investment asset). It is worth knowing that if you lodge your return through a tax agent, you have a much later lodgement and payment due date which can be a good cash-flow tool.
DO – Understand how this bill will impact your Future PAYG Instalments. Once you lodge a tax return with business or investment income over $2,000 the ATO will likely place you on the PAYG Income Tax Instalment system and require you to pay your tax in quarterly instalments. Whilst paying quarterly instalments does keep your future tax up to date, there are two particular things you need to look out for. Firstly, this means that if you are negotiating to repay the previous year’s tax debt in fortnightly or monthly instalments, you will also need to factor in the upcoming quarterly PAYG Instalments into your cash-flow.
Secondly, if you are already on the PAYG Instalment system and you have a large tax bill, the ATO will increase the instalments you are paying to ‘catch up’ to the higher required instalment amount. This can mean that you will end up with a large tax bill in May one year and another ‘catch up’ instalment of a similar size two months later in July. If you are expecting a tax bill for the 2017 year, be sure to ask your accountant about the impact of your future tax instalments.
DON’T – Make rash decisions! Decisions that were made purely for tax deduction purposes rarely end well – ask anyone who has previously invested in an agri-business or aggressive tax scheme. Tax forms an important part of your decision making but it should never be the key driver of your investment or spending decisions. Additionally, be wary of businesses offering an ‘easy’ way out of paying your tax debts, recommending insolvency as an initial option for your business entities or selling you expensive tax loan finance – many of these do not have your best interests in mind.
DON’T – Go AWOL or not lodge. The tendency when you receive a large bill is to bury and ignore it or to avoid lodging the return that sits behind it – but this only exacerbates the problem. The ATO is very helpful if you continue to communicate with them, however if you (or your accountant) ignore the correspondence they send, the tax office works on the basis that you are being deliberately non-compliant and can pursue you quite aggressively for the debt. Importantly, from 1 July 2017, any non- repayment of tax debts can also negatively affect your credit rating – which can have a much broader impact.
The best thing that you can do if you find yourself with a nasty tax assessment is to act promptly, get good advice and keep in communication with your accountant or the tax office.
By Elissa Lippiatt, Director and Chartered Accountant