A prevalent answer to this question is that people simply don’t. What we’ve found is that a lot of people run their business, take what they believe to be a fair – if not less than – drawing and hope that come tax time there’s enough in the end to pay the ATO. Sound familiar? Whilst this may be common practice, it doesn’t necessarily mean it’s the right way. It’s undoubtedly the easiest option but then it potentially lends itself to issues in the future.
What if there isn’t enough at the end of the day to pay income tax?
Just like other expenditure, income tax is something we strongly encourage people to take a more proactive approach. If we budget for purchases or advertising or business development, so too should we do the same for income tax. A safe rule of thumb would be to set aside 30% of net profit. Whether you have a savings account to separate it from everyday expenses or it sits in your offset account until you need to pay it (a strategy that – if supplemented with discipline – can result in significant savings to mortgage repayments), budgeting for income tax will give you far more peace of mind than sitting and waiting for the accountant to finish your tax returns and deliver the news.
No one likes nasty surprises and a tax bill you weren’t expecting would certainly qualify as one.
It may have been simpler working as an employee, having the tax deducted from wages and superannuation paid on a regular basis, but could you go on a spontaneous holiday if you felt so inclined? Do you miss having to answer to someone? Don’t you want to have the freedom to make your own decisions?
In running your own business, you have these liberties, this independence, but with it come other considerations that we strongly recommend that business-owners come to terms with. At Proactive, we endeavour to educate our clients so that there are no surprises, so talk to your Proactive accountant today.