Now that youÍve bought your franchise, and you will need to lodge a tax return for the business, you will also need to decide whether you will use the simplified tax system (STS), writes Tim Kilham, a partner at Mclean Delmo Hall Chadwick.
Choosing the simplified tax system is as simple as ticking a box in the business Income Tax Return.
The simplified tax system offers the following:
_ The ability to pay tax on income (sales) only when it is received in cash (but also then to deduct expenses only when they are paid in cash). Businesses that have not chosen to use the STS normally pay tax on income when the business issues an invoice, even if that invoice has not been paid by the end of the tax year. With the STS system, you pay tax on the income only if it has been received in cash before the year end. Conversely, under the STS, expenses can be deducted only if they have been paid in cash.
_ There is no need to do a stock count at the end of the year if you can reasonably estimate that the value of your businessÍ opening and closing stock has not changed by more than $5000.
_ The ability to claim certain payments in advance which would not otherwise be claimable.
_ Simplified rules for claiming depreciation on fixed assets, including the ability to obtain an immediate deduction for assets costing less than $1000.
_ The ability to claim an extra tax offset (reduction). However, this is only claimable if the turnover of the business is less than $75,000.
You can choose to elect the STS if your business turnover is $2,000,000 or less per annum. For most, but not all tax payers, it will make sense to choose the STS. You should discuss with your accountant whether it makes sense for your franchise.
LetÍs look at Activity Statements. These can be lodged monthly or quarterly _ your choice _ but most small businesses choose to lodge Activity Statements quarterly.
You will pay the following taxes when you lodge your Activity Statement each quarter (although depending on your situation not all these taxes may be applicable to you).
_ Goods and Services Tax (GST)
_ Fringe Benefits Tax (FBT)
_ Pay As You Go (PAYG) withheld from employees or contractors
_ Income Tax instalments payable by your business entity
You will have to register for GST if your turnover is $75,000 or more. If your turnover is less than that amount you have a choice as to whether or not you register. You also have a choice as to whether you pay your GST on an accruals basis or on a cash basis.
The cash basis means that you pay GST on income (sales) when you receive it in cash and you get GST credits on expenses when they are paid in cash. The accruals basis means that you pay GST on income when you charge it to your customer (even though you may not have received the money in cash from that customer) and when you incur the expense (even though you may not have physically paid the expense).
DonÍt forget that if you are an employee of your own business then you need to withhold tax from your own salary and pay that over to the tax office together with employeesÍ PAYG tax withheld.
Activity Statements usually have to be lodged within 28 days of the end of each quarter. In many cases, a further extension of two weeks will be granted by the Australian Tax Office if you need more time to lodge.
And the good news? If this is the first Business Activity Statement that you are lodging, and you did not buy your franchise as a going concern, then you would have paid GST on the purchase of your franchise. You can claim that GST back from the Australian Tax Office in your first Activity Statement.
First income tax return as a franchisee
You started your business sometime before June 30, 2007, and that means you need to lodge the first income tax return for your business for the period ended 30 June 2007. Tim Kilham asks, what is to be done?
The first thing you need to know is the latest date by which you can lodge your tax return (you can, of course, lodge it as early as you wish). Your lodgement date will be before the end of May, 2008 depending on the type of business entity you operate, and depending on whether you are lodging yourself or using a tax agent.
You will almost certainly need a tax agent to help you prepare and lodge the return _ as business and taxation gets more complicated, fewer people are able to prepare their returns themselves. What you should try to do is give as much information as possible to your accountant in a well-prepared form. Doing this will save you and your accountant time, and will save you money as your accountant will charge you less.
DonÍt forget to tell your accountant about any business expenses which you have paid out of your own pocket and which are not necessarily recorded in the businessÍ accounting records. An expense is tax deductible if it is incurred for business purposes no matter who pays it. Many people do not realize this. So if you personally pay a business expense, it is still deductible to the business, but if the business pays a personal expense, it is not tax deductible.
Many people borrow money to buy their franchise, and often this loan takes the form of an additional amount put on the home loan. Any interest on money so borrowed to buy a business will usually be tax deductible. If some of your borrowings are for private purposes, and some are for business purposes, then an apportionment will have to be done to work out what interest is tax deductible.
You will need to decide whether or not to adopt the simplified tax system (STS). Businesses which elect to use the STS can calculate their business income in a different manner to other taxpayers, and STS taxpayers are able to claim amounts that other tax payers cannot claim.
However, the STS will not suit all taxpayers and this is something that you should discuss with your accountant.
´ The deductions that can be claimed for your franchise business will probably be very different if you are working from an office or shop, or if you are working from home. For example, if your home is also your office:
´ You will be able to claim a portion of your rent (if you are renting your home).
´ You will be able to claim a portion of mortgage interest, utilities and rates (if you are buying your home). If you do claim these amounts, however, you will have to pay some Capital Gains Tax when you sell your house, whereas if you donÍt claim these amounts the sale of your house would normally be tax free, because of the principal residence exemption. Seek advice as to what is right for you.
´ You may be able to claim motor vehicle expenses when you travel from your home (which is also your office) to clients. A person who has an office or shop is not normally able to claim travel from home to that office or shop.
There are various methods that can be used to calculate the deductible portion of motor vehicle expenses. The methods that you will be able to use and that will get the best result for you will depend on whether you or your business entity own the vehicle, and also on the age of the vehicle, the business travel you do, etc.
You should keep a record of all your expenses and also keep a log book that complies with Australian Taxation Office requirements. At the end of the year you can then take the information to your accountant who can work out which is the best method for you to use (and depending on your circumstances, it may not be the log book method, even though you have kept a log book).
If your new franchise involved setting up a shop or office, and you have incurred fit-out costs in renovating the premises, make sure your accountant is aware of the money you have spent, and what you have spent it on.
You will be able to claim depreciation on some assets (at rates ranging from 10 per cent to 100 per cent, depending on the tax system you use and the nature of the asset), and on improvements to leasehold or owned premises you will be able to claim depreciation of 2.5 per cent per annum.
Many taxpayers overlook this claim.
If you are working from home and you have spent money on business assets (computers, desks, filing cabinets) you will able to claim depreciation on these assets but you cannot claim depreciation on any private use of these assets.
So if your computer is used one third for private purposes and two thirds for business purposes, you can only claim depreciation on two thirds of the computer.
Remember that the general rule is that you will pay tax on all your income, and you will be able to claim a deduction for all your business expenses.
If you are not sure whether a particular expense is deductible or not, make a note of the expense and tell your accountant about it. Your accountant can then advise whether or not the amount is deductible. If you donÍt tell your accountant, you may end up not claiming something which you could have claimed.n
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