Tax tips and traps
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Tuesday, 19 September, 2000 - 21:00
THE new tax system has resulted in fundamental changes to the way Australians do business and even more changes are in the pipeline. CPA Australia, Australia’s largest professional body of finance, accounting and business advisors, has issued some timely advice for business about to survive and thrive in this brave new world.
Cash Flow
Good cashflow management is crucial to financial success in any business – but especially under the new tax system. Now, tax payments will be brought forward through the operation of PAYG company tax installments. This will place added pressure on businesses to “collect” tax in the form of GST and to redeem input tax credits as quickly as possible to avoid cashflow drain. To become a winner in the cashflow stakes:
* Ensure your accounting system captures all GST input tax credits or you will pay tax on tax.
* Be aware of your PAYG installment obligations for each quarter as early as possible. This will usually depend on the instalment rate (IR) provided to you by the ATO (determined on the basis of your 1999 results, unless you choose to vary the rate, and your ordinary income for the quarter. If you wish to hold funds in reserve against your tax liability, your CPA will be able to assist you with this.
* Separate your net GST liabilities and estimated PAYG installment obligations from your other revenues. Remember this money is not yours. Transfer this money each month into a separate account. Don’t leave it in a trading account!
* If you haven’t already, rein in those bad debtors. Businesses experiencing trading terms difficulties risk serious cash flow problems when GST collections and payments are added to their cash management workload.
l Businesses submitting quarterly Business Activity Statements (BAS) may be able to plan business-related purchases to benefit form the quarterly remittance and claim structure.
* Manage the timing of large sales on credit – particularly at the end of the quarter. For example, if you make a large sale on September 30, you will pay GST on October 21 (or November 11 if you are able to take advantage of the extended BAS extension for 2000-01) even though you might not be paid for 45 days.
Small contractors
Small contractors should especially be aware of potential cashflow problems in the new financial year.
Unless they make voluntary withholding agreements or adopt strict cash management practices, there’s a danger they may spend money that isn’t really theirs.
Under the new tax system, many small contractors operating as companies, partnerships or trusts will have to pay their own Pay As You Go (PAYG) tax installments for the first time after the September quarter this year, and may also be required to be registered to collect GST.
Many small contractors will be temporarily “cashed up” under the new tax system because of increased cash flow from GST charged and from not having PPS deducted from their income.
There’s a danger that some contractors, still unsure how the PAYG system affects them, will spend this money before it comes time to pay the Tax Office.
Contractors now need to put the money aside to pay the PAYG and remit the GST collected to the Tax Office. This should be transferred to a separate account as soon as payment is received.
Cash Flow
Good cashflow management is crucial to financial success in any business – but especially under the new tax system. Now, tax payments will be brought forward through the operation of PAYG company tax installments. This will place added pressure on businesses to “collect” tax in the form of GST and to redeem input tax credits as quickly as possible to avoid cashflow drain. To become a winner in the cashflow stakes:
* Ensure your accounting system captures all GST input tax credits or you will pay tax on tax.
* Be aware of your PAYG installment obligations for each quarter as early as possible. This will usually depend on the instalment rate (IR) provided to you by the ATO (determined on the basis of your 1999 results, unless you choose to vary the rate, and your ordinary income for the quarter. If you wish to hold funds in reserve against your tax liability, your CPA will be able to assist you with this.
* Separate your net GST liabilities and estimated PAYG installment obligations from your other revenues. Remember this money is not yours. Transfer this money each month into a separate account. Don’t leave it in a trading account!
* If you haven’t already, rein in those bad debtors. Businesses experiencing trading terms difficulties risk serious cash flow problems when GST collections and payments are added to their cash management workload.
l Businesses submitting quarterly Business Activity Statements (BAS) may be able to plan business-related purchases to benefit form the quarterly remittance and claim structure.
* Manage the timing of large sales on credit – particularly at the end of the quarter. For example, if you make a large sale on September 30, you will pay GST on October 21 (or November 11 if you are able to take advantage of the extended BAS extension for 2000-01) even though you might not be paid for 45 days.
Small contractors
Small contractors should especially be aware of potential cashflow problems in the new financial year.
Unless they make voluntary withholding agreements or adopt strict cash management practices, there’s a danger they may spend money that isn’t really theirs.
Under the new tax system, many small contractors operating as companies, partnerships or trusts will have to pay their own Pay As You Go (PAYG) tax installments for the first time after the September quarter this year, and may also be required to be registered to collect GST.
Many small contractors will be temporarily “cashed up” under the new tax system because of increased cash flow from GST charged and from not having PPS deducted from their income.
There’s a danger that some contractors, still unsure how the PAYG system affects them, will spend this money before it comes time to pay the Tax Office.
Contractors now need to put the money aside to pay the PAYG and remit the GST collected to the Tax Office. This should be transferred to a separate account as soon as payment is received.