Too often people are unprepared for their tax bills and stick their heads in the sand and delay lodgement of their returns.
This blog is about why this attitude is crippling your cashflow.
As soon as a tax liability is raised, the ATO automatically enters you into the PAYG Instalment system. Which is a fancy name for prepaying next year’s tax liability based on your performance of the year lodged.
Then, at the end of each year there is a balancing up effect. If your business or passive income outperformed the prior year, then your prepaid tax will be insufficient and a small liability will arise. Similarly, if you underperform, there will be a refund, or during tax planning your final instalment may be varied down.
So, let’s pretend I start a business and despite being advised to stash some money away for tax and GST, I have only kept the GST aside, as I know that it’s not my money. (If you need more information on this please read Abigail’s blog on not your money part one.)
I know, I have a liability, so I don’t lodge until March the following year. I have a great first year in business and earned $50,000 profit. I lodge 2016 tax in February 2017 and get a tax bill of $19,147. This is due for payment by the 21 April 2017, as I left it so late to lodge.
However, as mentioned above I have had a tax bill, as such, the government wants me to prepay next year’s tax being 2017 quarterly. I haven’t paid anything for September quarter or December quarter, as the ATO didn’t realise I had a labiality and as such did not require prepaid tax. However, by the March quarter they are well aware, and hit me with three quarters of by prepaid tax in April. So, now I must find $14,360 by April to prepay the first three quarters of the 2017 financial year AS WELL AS $19,147 by April. Then another $4,787 by July for the June 17 prepaid tax.
MY CASHFLOW IS CRIPPLED AS I AM UNPREPARED AND HAVE NOT PUT ANYTHING ASIDE.
Had I lodged earlier in August, I would have prepaid 2017 tax in quarters of $4,787 each and had 9 months to plan/save for the 2016 tax bill of $19,147. I still must part with the same money but I’m more informed, ears are sand free, (as my heads not buried any longer) and I can plan so my cashflow is not crippled!
Senior Business Advisor
Integra Business Accountants