Written by Nathan Watt

You can't plan to go to the beach, after you're already at the beach. The same goes for your taxes, you can't plan your taxes after the year is done. Get on the front foot with your taxes by following these simple steps to estimate your tax for the year and when the payments are due.

Video Transcription

Hey it's Nathan Watt from Watson & Watt, another video here for you today this one's a short one with a step-by-step guide to tax planning or tax planning 101 so i'm going to step you through how we actually do a tax plan and what that really means.

Tax Planning v Tax Minimisation

So there's tax planning and tax minimization and they get used interchangeably but they are really two different things so a plan obviously is looking forward and how much tax we're going to pay and when is it due is all planning.

How can we reduce that tax, that's tax minimisation.

Now sometimes they done together sometimes they're done separately but you know minimization for small business there's only so many things we can do there's no elaborate structuring overseas and moving royalties and all that sort of stuff and if there is you shouldn't be watching a how-to video and you should be paying for some advice.

For everybody else it's you need to spend some money to save some taxes and as I said in a previous video the truth about tax planning you can't spend your way out of a tax bill so this is really looking at a business that we've done what we can for taxes it is what it is and we're going to look at, well how do i know what to budget and when is it due,

Step by Step Tax Planning

So this is just a dummy company a demo company in in Xero and we are going to step through how we actually go about doing that so this is for one July to the 30th of April so we've got 10 months worth of data there they've got a profit as you can see there's been no income tax expense put in there as an accrual and that's pretty standard for a small business who manages their own books if you had a bookkeeper like us or we did your BAS we would be putting in a provision for income tax every quarter but that's you know they're ready so let me just see if i can move my head out of the way

i'll get to that in a second

all right get out of the way

okay so here we go so the easiest way to do this is export it to excel or google sheets or whatever you want to use in terms of spreadsheeting so we've got 10 months worth of data the easiest way to do this is just a simple formula so if we go full year and we say well that one is 10 months so we divide by 10 and multiply it by 12 and that's what it should look like for the full year obviously if we can copy and paste that and that's pretty easy and we do that it's already got the formulas in there because it's smart

i'll just format that so it doesn't look like crap

so it looks like this

there we go

don't worry about the cents because it's not going to be correct anyway it's just an approximation so whether it's 20 cents or two dollars or twenty dollars it's just a you know

an estimate so that's easy if your June and July, your May and June numbers are actually different to the average so if you always have a really big busy May and really busy June then doing this average isn't going to work out terribly well it's going to be incorrect so you need to use some common sense around to put some brain cells to it and say well my May and June is different to the rest of the year or it's not either up or down and make some assumptions on that so if you were doing that you would get this number and then you would just you know add in all my invoicing for May and June's going to be 30 grand each and therefore that's going to be up or whatever it is so right now using this straight annualization method we have a profit there of $113,000. this is a company so it's going to pay tax at 25%

so we just put a little formula in here you do this with a calculator if you want but

you definitely don't need to be an excel genius to work this sort of stuff out so on the full year you're looking at taxes about $28,345 twenty and by the look of this balance sheet no tax has currently being paid so when we when this tax return gets lodged that amount or roughly that amount is going to be payable on the tax return um so when is that well if you haven't

if you haven't got any overdue amounts and using a tax agent all that sort of stuff a company's tax return isn't usually due until May the following year so we're in 2022 in May 2022 this 2022 financial year tax return is not due until May 2023 so that tax won't be payable until May 2023 even if you lodged it on the first of July 2022 that tax of $28, 345 still won't be due for payment until May 2023 so you've got some time to save it up if you haven't already but obviously if you haven't already saved it you need to be saving not only for this year that's gone it was ten months that have gone but you also need to be saving for each month that goes on after this otherwise you'll never get ahead so once we lodge this tax return there's going to be a couple of things are going to happen one is you're going to pay this tax in the following May and once you've lodged that tax return the ATO is then going to say okay great you've got tax payable we now want you to start paying tax in advance in the PAYG installment system and that comes down when your BAS each quarter and the ATO basically say well last year you had $28,000 tax to pay we want you to pay 25% of that each quarter and that way at the end of the year you won't have this large catch up if your taxes aren't looking that good anymore so next year you don't invoice as much or whatever it is you can vary that down there are penalties if you go and vary it to zero or vary it to more than 15% of what the actual tax is that way it stops people varying to zero when that shouldn't be but if it is actually going to be zero for whatever reason you can vary to zero you just need a valid reason for doing it so once you lodge this they're going to start on the PAYG installment system now that can cause some big cash flow issues if you don't understand how that's going to work so let's have a look into this spreadsheet here so this is just 12 months or 13 months worth of um in the next year and what we're going to do is map out when these taxes are due so we're not going to pay any June 22 installment because we're not yet on the PAYG installment system so the 2022 income tax return is not going to be due until May 2023 and it was $28,345

and then so let's assume we don't lodge anything until the latest which is a fairly common strategy for a lot of people

so let's just move try and move me out of the way again there we go no other taxes are going to be payable until May 23 and then what's going to happen is on the June 23 BAS he's going to say well you haven't paid any taxes for 2023 yet we want you to pay the same amount again so that less the other installments that you've paid would equal your June installment you haven't paid any other installment so you need to pay that as well even though that tax return the 2023 tax return is not due until May 2024 we need you to pay that now as an installment towards that tax bill so you're essentially paying two years of tax in two months three months but this doesn't just stop here in the July in the September 2023 there'll be one quarter again which will be due in November so you're paying two and a quarter years worth of tax in about four months so you need to be really careful about what you're doing here and making sure you're saving for this in a bank account now let's have a look at what would happen if you actually did lodge it in the September quarter let's say you lodged it in August now this tax return in August what will happen is i say okay great it was 28 grand then but that's not due until May but we do want you to start pre-paying for the 2023 year so at a simplest it's just divided by four some years they gross this up but they're not at the moment so in December that's not due until February that's going to be the same amount and this is going to be the same amount and this one's actually due in August but we'll put it in here because i can put an extra column

so your tax payments are going to look like this which is if you look at it exactly the same amount as before it's just in a different sequence of events so you're not paying any more tax it's just the timing of it and how it impacts your cash flow so this is a tax plan, we worked out what the full year profit was going to look like we then worked out well okay what tax have we already paid in this case it was zero if you've already paid installments obviously these numbers change but then we map it out into a calendar like this and go okay this is what our tax payments income tax payments you know i mean this doesn't include gst doesn't include PAYGW withholding doesn't include superannuation or anything else this is just the income tax part of it so in your cash flow that you should be having should be running in your business you can enter in these figures in these months and then know what your drawdowns are going to be for tax purposes so that's it quick video today on the basics of tax planning this is an actual plan you can't plan to go to the beach after you're already at the beach and you can't plan your taxes after the end of the year is already over you need to do it now before the 30th of June because if you plan this and go okay what can we do about this 28 grand um we've got some extra money should we go and buy some equipment should we go and buy or invest in the superannuation and put some more into super what can we do is there anything that's worthwhile spending our cash on or should we just suck it up and pay the tax um so you need to plan this before the end of the year there's no going to your accountant after the years finished and saying hey i want to reduce my tax what can we do well you can't do anything because it is what it is and yeah so plan it out work out your cash flow start saving these amounts going back into your your zero file you can see the 28 grand over

the sales if you're looking at a budget to say okay well how much of each dollar do i need to put away you need to be putting away call it 18 in this example of every sale excluding gst so that's just for income tax that's not gst that's not super that's not anything else that is just for the income tax so um you need to be putting this away diligently otherwise that can add up real quick and you just won't simply just won't have the cash for it so you can do this quickly for your business as follow these steps and let me know in the comments you've got any questions

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