The introduction of GST and BAS Lodgements in 2000 also saw the increase in Small Business Debt to the Australian Tax Office. The main reason for this was that Small Business Owners didn’t really understand how to deal with the GST side of their business. The increased pressure to do more reporting to the ATO and the ‘holding of GST’ until lodgement of the BAS made things increasingly hard for the Small Business Owner.
Now 15 years later the Small Business Debt to the ATO has grown significantly and has even sent many Small Business Owners into bankruptcy. BAS time and the payment of GST obligations is one of the main stressors within a Small Business. So today I want to look at a few ways that you can reduce that stress.
Understand what GST
The Goods and Services Tax (GST) is a Government Tax that is applied to most Goods and Services. It is an indirect board based consumption tax. Indirect means that it is not levied directly on your income, but levied on goods, services and activities. Broad based means that it generally applies to all transactions undertaken by all taxpayers with limited exceptions.
The current GST rate is 10% charged on most goods, services and other items sold or consumed in Australia.
Businesses with a turnover of less than $75,000 are not required to register for GST, but they may elect to do so.
If you would like to go into more detail on what GST is, then you can read a previous blog of mine – Understanding the Goods and Services Tax
GST is not your money
For most things that you sell, either as a product or service, you must add 10% to the price. This 10% is the GST portion of the sale and is not actually your money. That is where a lot of Small Business Owners come unstuck, they don’t associate that 10% as a tax and NOT BELONGING to them.
So when a client pays the Small Business Owner their bill of $1,100 dollars, the Small Business Owner doesn’t see this as only really being $1,000 and the $100 being GST and not belonging to them. So the whole $1,100 stays in the bank and gets used to pay wages or bills.
As a Small Business Owner, you really need to see that all the money that comes into your bank account isn’t necessarily your money, that at least 10% of it is GST and needs to go to the ATO.
Now I know that when it comes to BAS time that you take off what you have already paid in GST through purchases before you send the money to the ATO, but if you get into your mind that of everything you collect as payment from clients, 10% of that is GST and doesn’t belong to you, then you are one step ahead of most Small Business Owners.
Set up a 2nd Bank Account
The first thing I suggest to my clients is to open a 2nd bank account and call it GST Account. Then at the end of each week, work out how much as gone into your Trading Account and transfer 10% out into your GST Account. This is the simplest way to collect your GST and not spend it. If you become disciplined (even if you have to set an alarm on your phone to remind you) and do this each week, then the stress of meeting you GST obligations will disappear.
As mentioned above, you wont have to pay the whole lot to the ATO as you will have GST Credits from any purchases you have made that have GST in the purchase amount. So some times when its BAS time and you are working out what your GST obligations are you will have ‘excess’ money in your GST Account.
Now that is where the fun can be had. You could use that money to purchase your business a new piece of equipment or pay down some other debt that is stressing you. But be careful not to over spend and be careful to only use any ‘excess’ money from that period and not the new period you are in.
I have some clients that feel that they are not disciplined enough to just have money sitting in another bank account, the temptation to spend it is just too much, especially if they have quite a bit of debt, so they put the 10% into their mortgage or some other loan facility that they can then redraw on at BAS time.
Pay it straight to the ATO
I know this sounds weird and the ATO are not too excited about this option, but sometimes I have clients who literally would spend all money sitting in any account, not for personal expenses, but just because they run their business tight to the line and any money they get in is used to pay bills and wages.
So I tell them to pay 10% of their income each week to the ATO straight away, that way it is out of their bank account and is paid to where it should be going anyway.
Now I have had a client where the ATO returned the money he paid as they thought it was an overpayment, but he just kept paying them and eventually they didn’t refund it anymore.
PAYG Withholding Obligations
If you employ staff and need to pay the ATO their PAYG each quarter when you do a BAS then you need to put that money aside as well.
What I suggest to clients is to use the 2nd bank account that you are using for GST and also put the PAYG into it each time you do wages. So you process wages and pay your staff the Net and then pay into the GST bank account the total amount of the PAYG, a bit like paying an extra person.
Once again, this only works if you are disciplined not to touch the bank account, so try putting it on your mortgage or straight to the ATO if you can’t resist spending the money in that 2nd account.
PAYG Instalment Obligations
After the first time your business has made a profit and you are required to pay income tax, you will be required to pay PAYG instalments towards the following years expected income tax liability. This PAYG instalment will be added to your BAS statement and will be another thing that has to be paid at BAS time.
The best thing to do is read that letter that comes from the ATO that advises you on how much you will be required to pay and over what period. Then take that amount divide it by the number of weeks in that period and start putting that money aside, into your 2nd bank account each week as well.
And once again, this only works if you are disciplined to not touch the bank account, so try the other options of your mortgage or straight to the ATO if you need to.
Fringe Benefits Tax (FBT) Instalments
Certain benefits that you provide your employees, including their family or other associates attract a tax called Fringe Benefits Tax. The benefits you pay your employees maybe in addition to, or part of, their salary or wages package.
FBT is separate tax from income tax or GST or PAYG, but if you were required to pay more than $3,000 in FBT in the pervious year, then you will need to pay an instalment each quarter on your BAS.
As per your PAYG instalments, you need to read the letter you get from the ATO which will advise you how much you need to pay and over what period. Work out how much that is each week and then put that money aside into that 2nd bank account.
And once again, this only works if you are disciplined to not touch the bank account, so try the other options of your mortgage or straight to the ATO if you need to.
Other Obligations on the BAS
There are other obligations on the BAS, like Luxury Car Tax and Wine Equalisation Tax. If you are in an industry that is affected by these taxes then you just need to work out how much your obligation is for each of the taxes and put the weekly amount aside into your bank account, mortgage or straight to the ATO.
So now when it comes to BAS time, your GST, PAYG Withholding, PAYG Instalments, FBT, Luxury Car & Wine Equalisation Tax will all be sitting in your 2nd bank account, paid to your mortgage or straight to the ATO and you will not have to stress about where the money is coming from. All you have to do is get the BAS lodged, make the payment and sit back and relax.
If you use another idea on how to keep you BAS Debt under control then let me know on either Facebook, Twitter or in the comments below. Use the Hash tag #BASDebt.
If you would like to download my free BAS Checklist, you can do so by clicking the link below.
