Personal services income (“PSI”) is income received as payment for individual personal efforts and skills. It applies to many contractors who provide services as their means of earning an income. PSI rules can apply to individual sole traders and other types of business entities, but not employees. If PSI rules apply, the entity is called a personal services entity (PSE).
The PSI rules ensure the income is attributed to the individual who performed the services and not apportioned across other entities.
There are several tests to work out if your income is PSI or if you are instead conducting a personal services business (PSB), which means the PSI rules don’t apply. If a personal services entity qualifies as a PSB, the ordinary tax rules apply for that financial year.
At least one of these four tests must be satisfied for an entity to be classified as a PSB.
- Results test: the individual must be paid to produce a result, is required to supply their own equipment and tools to produce that result and is liable for the cost of rectifying defects in the work.
- Unrelated clients test: the sole trader or entity must be engaged by unrelated clients and services must be advertised to the public.
- Employment test: in general, a sole trader or other entity must engage one or more entities to perform at least 20% of the sole trader’s principal work. Entities other than individuals must not be associated with the sole trader.
- Business premises test: the entity must maintain and use business premises to conduct personal services. The business premises must be exclusively used by the PSE and physically separate from private premises and customers.
If more than 80% of income in a financial year is derived from one customer, the PSE must satisfy the results test to be classified as a PSB.
If none of the four tests are met, the income is classified as personal services income, and the PSI taxation rules apply. PSI rules restrict the type of allowable tax deductions made in relation to personal services income-earning activities.
If you’d like to know more about PSI, talk to us to see if the services you provide meet the tests for conducting a personal services business. We’ll make sure you are claiming the maximum allowable deductions and being taxed correctly.
Making time to look over your financial reports each month is an important task for any business owner. If you are not taking the time to do this, either because you’re too busy or perhaps you don’t really understand what you’re looking at and it doesn’t make sense to you, then here are six reasons we recommend that you should start to.
- Understand your business better – by looking at your Profit and Loss (“P&L”) report monthly you will get a good picture of how your business is performing month by month and it will provide a better understanding of what makes up your profit. Looking at revenue and expenses clearly on one page in a monthly P&L or comparing periods, this will help to identify trends in your data and may also help to highlight anomalies in coding/categorising.
- Accurate information for lending purposes – if you are applying for a loan or an overdraft, the bank or financial institution will look closely at both your Profit and Loss report and the Balance Sheet as a lot can be learned about a business by looking at these reports together. If you are unsure what some of your balances are in your accounts, get in touch and we can explain them further.
- Get paid quicker and reduce bad debts – by looking at your Accounts Receivable Aged Summary each month you can follow up with overdue accounts promptly which often results in getting paid quicker. The longer an overdue amount is left unpaid the higher the risk of it not being paid at all, so it is important to keep on top of this.
- Better relationships with your suppliers – assuming you are entering your supplier bills into your accounting software (recommended for most businesses to get an accurate profitability figure) your Aged Payables report will alert you to any unpaid or overdue amounts. Supplier relationships are an important aspect of your business and paying on time is crucial to maintaining those relationships.
- Better cashflow – having an accurate understanding of how much money the business is owed and how much money the business owes, can help with cashflow planning to ensure that there is enough money when needed. Additionally, understanding the trends of your business, its profitability drivers, expenses, etc., can help to plan sales and marketing campaigns so that the revenue keeps coming in.
- Better business decision making – your financial reports tell the story of your business and it’s important that you understand the story that they are telling you. The better you understand what’s going on in your business the stronger position you will be in to make better business decisions that affect the profitability of your business and its financial viability.
Depending on the complexity of your business, at a bare minimum you should be looking at the following reports:
- The Statement of Financial Performance, also known as the Profit and Loss report (P&L) or the Income Statement. As the name suggests, it’s how your business is performing over a period of time, such as a month or a financial year. In broad terms it shows the revenue that your business has generated, less the expenses for that same period. In other words, it shows how profitable your business is.
- The Statement of Financial Position, also known as the Balance Sheet. This shows the value of the business’s Assets, Liabilities and Equity.
- Assets include things like money in bank accounts, Plant and Equipment, Accounts Receivable balances
- Liabilities include things like Bank loans and credit cards, Accounts Payable, and Hire Purchase balances
- Equity is the difference between your Assets and Liabilities and includes Retained Earnings and Owner Funds Introduced
- Accounts Receivable Ageing report (Aged Receivables) shows how much money is still owed to the business as at a certain date in time, and is usually segmented as to how overdue they are or sometimes by how far past the invoice date they are. Generally you will have Current, 30, 60 and 90 days columns.
- Accounts Payable Ageing Report (Aged Payables) shows who the business owes money to as at a certain date in time and, like the Accounts Receivable Ageing report, is usually segmented by overdue period.
So why bother?
If you would like to know which reports are relevant to your business and you want to better understand what’s going on in your business, then get in touch so we can make a time to go through them with you.
Your business success is important to us and we are here to help you.
Christmas is a great time to acknowledge and reward your employees and other associates by celebrating and giving gifts. But don’t get caught out by entertainment rules! Claiming entertainment and gifts as business expenses is not always straight-forward, as there are implications for GST, income tax and fringe benefits tax (FBT).
Is it Entertainment?
Entertainment is generally not a deductible business expense. Entertainment rules can be tricky, but in general, the more lavish the meal or event, the more costly, the later in the day and if alcohol is involved then it will generally be called entertainment.
Fringe benefits tax may apply to entertainment benefits provided to employees, and if an event or gift is considered to be entertainment then you cannot claim a business deduction or GST.
A Christmas party for employees, spouses, suppliers and customers may or may not be classed as entertainment. Check with us to see if any of the party costs can be claimed.
Keep it Free From FBT
- If you give gifts to your employees keep them under $300 each. Benefits provided which have a value of less than $300 are exempt from FBT.
- Give gifts to employees that they otherwise would have claimed as a tax deduction. For example, you could pay for a professional development course or give new tools.
- Give gift cards or vouchers up to the value of $300. (Vouchers are not considered to be entertainment).
- Avoid giving ‘entertainment’ gifts over $300, such as membership to clubs, tickets to events or travel.
- Pay a Christmas bonus. Process through payroll like any other wage payment and withhold tax. Remember that superannuation applies to bonus wages.
Enjoy the Party
Talk to us when planning your Christmas gifts and events to check how much may be claimed as business expenses. Once you know the costs of throwing a party and giving gifts and bonuses, you can put your feet up and enjoy your own party!
If you’re looking to scale your business, you’ll need to spend more time working on it than in it. Finding ways to leverage your time is critical, and outsourcing your least favourite tasks is a great way to do this.
Things you should consider outsourcing in your business:
- Digital marketing.
From your content strategy to your social media accounts, if this is not a strength of yours, outsource it! There are many freelancers who have multiple clients at this level, who’ll likely be more knowledgeable regarding SEO and much more effective and efficient in general.
- Graphic design.
Your brand is a key reflection of your product offering. If you don’t have the skill, software and time to do this well, you’ll potentially damage your brand.
- Scheduling and administrative tasks.
A Virtual Assistant can help you manage anything from your appointments to flights, emails and beyond (virtually anything admin). At a lower level, consider adopting software that’ll automate or minimise processes, such as self-booking appointment apps where your clients can schedule a meeting with you, e.g. Calendly.
- Customer feedback.
Many businesses miss this valuable opportunity to connect with customers and improve their experience. A Virtual Assistant can help, but there are also apps (such as Ask Nicely) that automate the process of asking for feedback; directing happy responses to leave you Google reviews and negative responses back to you to quickly resolve!
- Inventory management.
Too much stock can cause cashflow issues and affect sales price (due to resulting discounting), but not enough equals lost sales. Outsourcing inventory management can help you minimise stock-carrying costs and allow you to focus on more important things.
This task is best left to the professionals. Outsourcing payroll will minimise the risk of inadvertently getting it wrong, while saving you time and, most likely, reducing the cost of this task. Utilising a payroll product is another great option.
Do bookkeeping tasks often infiltrate your evenings or weekends? Does the stress of these tasks piling up occupy your mind? Outsourcing these tasks (and the stress) to someone else can be liberating and cost-effective.
- Virtual CFO.
If you find budgeting and forecasting a struggle, a virtual CFO can wear this important hat for you. They’ll monitor the financial health of your business and provide a fresh perspective which will help you make better strategic decisions and improve your results.
Tempted to start outsourcing some of your tasks to free up your time? We can help by taking the last three roles off your hands! We work with a number of our clients in this way, allowing them to focus on what they do best.
While outsourcing takes a little bit of setting up, it’s worth the short-lived pain for massive gain. We don’t have to be jacks of all trades. In fact, this thinking often leads to begrudgingly doing many things poorly rather than doing a few things really well – and enjoying doing them.
Work to your strengths, outsource the rest! Need help? Get in touch.
If you don’t meet PAYG withholding obligations for your workers, by not withholding tax from their payments and not reporting it to the ATO, you could lose your tax deduction.
This will apply to income tax returns lodged for the 2020 financial year and beyond.
If you withhold tax from payments to workers, you must withhold the required amount and report correctly to the ATO in order to receive a tax deduction for your business.
PAYG withholding and reporting obligations apply to payments for:
- Salary, wages and other payments to employees
- Directors’ fees
- Religious practitioner payments
- Labour hire arrangements
- Voluntary withholding arrangements
- Payments to contractors with no ABN
Withholding rules still apply to cash payments. Similarly, for non-cash payments such as property or exchange of services, withholding rules still apply even if your worker agrees to receive a non-cash payment in place of money.
The payment of PAYGW to the ATO is a separate issue. The new rules are aimed at getting employers to report correctly and on time. Once you have reported an amount to the ATO, they expect payment of that obligation by the due date.
If you make an honest mistake, such as treating an employee as a contractor, you won’t be penalised. You can correct your mistake by lodging a voluntary disclosure
Book in a call with us to review your PAYGW reporting obligations to ensure you maximise your business tax deductions.
If you sell stock or inventory, it’s essential you understand stock turn and how to increase it.
Obsolete or ‘dead’ stock will harm your cashflow and your ability to increase profit, particularly in a slower-moving economy. The longer stock takes to sell, the longer you have your cash tied up in the stock before it can be sold for a profit. The older the stock, the less likely it is that you’ll be able to sell it for its original retail price.
Use the below formulas to calculate your stock turn:
Stock turn = cost of sales / average stock held
To calculate cost of sales: opening stock + annual purchases – closing stock (where purchases includes all variable costs that show in your trading account).
To calculate your average stock:(opening stock + closing stock) / 2.
For example, where your cost of sales is $150,000 and average stock is $45,000, your stock turn will be 1.33 ($150,000 / $45,000). This means that on average, you sell each item of stock 3.3 times per year.
So, how do you increase your stockturn to sell items faster, free up cashflow and increase your profit, particularly in the current economy?
- Reduce your stock levels. In the above example, if stock was reduced by $10,000, stock turn would increase to 4.3, you would free up $10,000 of cash, and increase your margin.
- Buy stock on consignment. This means you only pay for it when it sells.
- Order ‘just in time’. For example, if it takes two days to receive an item after the order is placed, and you sell an average of five items per day, only hold a maximum of 10 of that item in stock.
- Use display stock. If a customer wants to buy the item, have it delivered straight from your supplier to the customer instead of holding multiple items in store.
- Use a catalogue. Reduce the stock held in store and provide customers with a catalogue to order from.
- Reduce ordering levels. Ideally, calculate the stock turn per item (use the above formula for each item). You’ll then be able to identify the slow-moving stock so you can reduce how often you re-order it.
- Stop stocking slow-moving stock altogether. It’s just tying up your cash for longer. Reassess whether you should be selling these items at all.
- Encourage your sales team. Tell them which items sell more quickly and encourage them to sell more of these items.
- Get rid of obsolete or dead stock. You’re better off to have cash from a discounted sale reinvested in faster moving stock.
- Ask us for 10 more ideas! There are numerous ways to increase your turnover, get in touch and we’ll help you identify the best ways for your business.
A business budget is one of the essential tools in managing your business finances and actively building your business.
A budget shows what you plan to do with your cash over the next year.
For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.
Why have a Budget?
- Forecast sales and expenses according to monthly or quarterly variations.
- Evaluate performance over time, including changes or patterns.
- Get really familiar with where your money goes and where it comes from.
- Clarify targets and goals and use the budget to help you focus and achieve those goals.
- Comparing actual figures to budgeted figures allows you to see potential problems early and plan for unexpected costs.
- A budget will help you to see the big picture and stay motivated over the long term.
Where to start
A basic budget takes known income and expenses, then makes certain assumptions about the timing of income and planned expenditure. The basic budget is based on cash in and out of the business.
Over time, as you start to see the benefits of using a budget, your budget should evolve into a more sophisticated version that includes non-cash elements such as provisions and depreciation.
Most businesses will start with one budget but soon move to having three budgets.
- Business as usual – the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
- Worst case – budget is based on a pessimistic view of next year’s performance.
- Best case – budget is based on an optimistic view of performance over the next year.
A budget is usually for a financial year, but you can also set up budgets for two to five years.
Once you have one budget (or more) set up, you can then run your current financial reports against the budget to see how you are tracking. This allows you to make rational business decisions in real time to adjust accordingly.
You can run your financial reports monthly and adjust your budget as needed.
Now is a great time to put a budget into place for the coming financial year. Book a time with us to help you create a meaningful budget in your accounting software so that you can use it as a proactive part of your business management, strategy and your success.