4 reasons to separate business banking from personal
As a sole trader or small business owner it can be tempting to use your personal bank account for company finances. But that may not be the best banking solution for your business.
One of the most useful things you can do when starting a business, is to keep your business finances separate from your personal arrangements. This is the view of Debra Anderson, who is the owner of leading MYOB consultancy Anderson Tax & Consulting and a member of Australian Tax Office advisory boards.
“The minute you've got an ABN, open a separate business account,” she says. “It will save you money in the long run – and if you don't keep them separate, you're creating a headache for yourself down the track.”
There are four key reasons for following Debra's tips:
If your grocery and office purchases are all on the same statement, it can make it harder to measure how your business is doing and where all the income is going.
“A lot of sole traders don't use small business accounting systems, so the only way they can really work out how their business is going is by how much is in the bank,” Anderson explains. “I got stuck a few years ago myself, as I didn't know whether it was me or my business sucking the money out of the account. And I'm an accountant. How is someone else supposed to work it out?!"
A separate business bank account1 can record only your business ingoings and outgoings, so it's simple to see if your expenses are outgrowing your income.
It's easy to accumulate funds in your account, forgetting that at some point down the line there's tax to pay. “When you first start trading, you’re not paying tax on your earnings. But the year after you lodge your first tax return in net profit, you get a tax bill for that year, plus all of a sudden you also have to pay PAYG instalments,” Anderson explains.
One way to help avoid any nasty shocks at tax time is to have at least two business bank accounts:
"Once these are set up, quit cash and try to do all your transactions electronically," Anderson advises. “If you're paying cash out of your wallet it's very easy to lose your receipt or forget about the payment, but if you pay electronically out of your business account you can always go back and find the transaction.”
This approach will ensure you don’t miss out on claiming GST - if you are registered for it - or claiming other tax deductions.
Tip: Before opening additional accounts, it's worth checking if they will cost you any additional fees.
While separating your business and personal bank accounts could be a good way to make sure you don't miss out on tax deductions, it can also help to guard against mistakenly claiming for personal expenses. In the event of an ATO audit or request for information down the track it could also be useful to recall your transactions if you can refer back to your business bank accounts.
“This one always scares people,” Anderson says. “If you've kept everything in the one account the ATO is going to say 'What's this? What's that? How do I know this is business and that is personal?' They're going to have to look through all your transactions.”
Keeping things clear cut is also likely to save you accounting fees, while giving your accountant time to complete tasks that are more valuable to your business.
Spending some time researching and selecting accounts you feel best meet your business needs could help make life a little easier as your business grows – and registering for online banking1 can further simplify things. For instance, you might wish to move money in and out of a savings account at short notice and with minimal fuss, which online banking may be able to enable.
Your invoicing could be simpler too, with the right accounts. If you're a Westpac customer with a Business One Low Plan or Business One High Plan account you can use our handy Biz Invoice invoicing tool, which is complimentary with your account. It is available within Westpac Live Online Banking and lets you create an invoice template, then generate, email and manage invoices from your smartphone, tablet or PC1.
Separating your personal banking from your business banking makes good sense, and the more your business grows the happier you will be that you followed Debra Anderson's tips on the matter.
* Open a new Business One - Low Plan account online between 1st October and 30th November 2019 to receive a $0 Monthly Plan Fee for the first 12 months. At the end of the 12 month period the standard Monthly Plan Fee at that time, currently $10, applies to the Business One Low Plan. Other fees and charges, terms and conditions, apply to the Business One Low Plan. This offer may be repeated from time to time, withdrawn, varied or extended at any time. This information does not take your personal objectives, circumstances or needs into account. Consider its appropriateness to these factors and read the disclosure documents for your selected product or service, including the Terms and Conditions or Product Disclosure Statement at https://www.westpac.com.au/business-banking/bank-accounts/, before deciding.
1. Westpac’s products are subject to terms, conditions, fees and charges; and certain criteria may apply. Before making a decision, read the disclosure documents for your selected product or service, including the Product Disclosure Statement and T&Cs for Westpac business bank accounts, business savings accounts and Westpac Live Online Banking, by clicking the above links; and consider if the product is right for you.
Any statements made by third parties are those of the individual and do not necessarily represent the views or position of Westpac.
The information in this article is general in nature (including any tax information provided) and does not take your objectives, financial situation or needs into account and does not constitute tax advice. Consider its appropriateness to these factors; and we recommend you seek independent professional legal and/or financial advice about your specific circumstances before making any decisions.