One of the most useful things you can do when starting a business, is to keep your business finances separate from your personal.
“Separating business and personal accounts is the number one tip I give people” says Debra Anderson, owner of leading MYOB consultancy Anderson Tax & Consulting.
Anderson who sits on advisory boards for the Australian Tax Office and MYOB advises “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.”
It's never too early, Anderson stresses: “The minute you've got an ABN, open a separate business account”.
1. Track how your business is doing
Paying for office stationery from the same account as your groceries can make it harder to measure how your business is doing.
“A lot of small business people don't use 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. She admits even she struggled to keep up before making a clean break between personal and business accounts.
“I got stuck a few years ago saying, 'where's all my money going?'” Anderson recalls.
“I didn't know whether it was me or my business sucking the money. And I'm an accountant. How is someone else supposed to work it out?
“I ended up working out I just like champagne a little too much, but at least once I started separating everything out, I knew where the cash was going.”
2. Doing your tax returns
One way of being prepared for tax time could be through two separate business accounts:
a. A business transactional account with a linked debit or credit card for your expenses
b. Another transaction or savings account where you can set money aside for your tax and GST liability so you avoid any nasty shocks down the track1.
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 it but if you pay electronically out of your business account you can always go back and find the transaction,” she explains.
“That means you're not missing out on claiming GST if you've registered for it and you're not missing out on claiming tax deductions.
“Whether it's $3.50 for coffee or $5 for parking, over a year it really adds up.”
“Until you lodge your first tax return you're not paying any tax on your earnings then, usually in year two, you get a tax bill for year one plus all of a sudden you also get hit with provisional tax,” Anderson explains.
“It's often one of the most painful points for small business if they're not prepared.”
However, do check if the additional account will cost you any additional fees.
3. Easier accounting
While separating your business and personal accounts is a great way to make sure you don't miss out on tax deductions, it also helps to guard against mistakenly claiming personal expenses. And if the ATO audits you three years down the track it will be much easier to recall your transactions.
“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.
4. Saves you time
Opening an account that's tailored specifically for business needs can help make life a little easier. Online banking means your business banking and personal banking information are available at your fingertips - so there's no excuse for mixing your business and personal lives.
It could also save time when applying for other banking products, for example, when you start taking payments you may need a business bank account to do this.
“It's a lot easier than people think. You don't have to go into a branch, with some banks you can set up an account online in about ten minutes,” Anderson says.
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Things you should know
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Any quotations referenced in this article represents the views of Debra Anderson and not necessarily those of the Bank. You should seek independent financial advice before acting on any matters set out in this article.
Any taxation position described in this proposal is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. You must seek your own independent tax advice in relation to their individual circumstances.
*Open a new Business One Low Plan account between 1st February and 28th February 2019 to have the Monthly Plan Fee waived for the first 12 months. At the end of the 12 month period the standard Monthly Plan Fee, 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. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.