If there's only one thing businesses do this year, it should be to separate your work bank account from your personal one.
"Separating business and personal accounts is the number one tip I give people,” says Debra Anderson, owner of MYOB consultancy Anderson Tax & Consulting. “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 account.”
At a bare minimum, every business should have two dedicated bank accounts, the first being a business transactional account with a linked debit or credit card.
Once you've set that 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 (goods and services tax) 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.”
Your second account should be where you set aside money for tax and GST liability to avoid any nasty shocks down the track.
“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,” explains Anderson, who sits on advisory boards for the Australian Tax Office and MYOB.
“It's often one of the most painful points for small business if they're not prepared.”
If you're paying for office stationery from the same accounts as your groceries it's much harder to measure how your business is tracking and growing.
“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.”
While separating your 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 likely to save you accounting fees while giving your accountant time to complete tasks that are more valuable to your business.
“I was doing a tax return last week for a client who said, ‘Oh, I don't have many transactions. I keep all my accounts separate’,” Anderson recalls.
“But 70% of the transactions on her bank statements ended up being personal, which is heartbreaking because I think, ‘Oh gosh. I've got to charge you for this’.”
Taking it one step further and opening a bank account that's tailored specifically to your business needs can also help make your life easier and more profitable.
Just like with online dating, the internet has made everything available with just a few clicks, meaning there's absolutely no excuse for mixing your business and personal lives.
“It's a lot easier than people think. You don't have to go into a branch, you can set up an account online in about five minutes,” Anderson says .
The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.
By Michael Bennet
Editor, Westpac Wire