Introduction to income tax for builders and tradies

Three things are certain in this life…death, taxes, and when you tell your partner “I'm just going to the pub for 2-3 beers” …you’re 100% guaranteed to cop an earful when you stumble in the front door at midnight. Is that third one just me?

In this article, we are going to talk about the second of life’s great certainties… taxes. First off, this is not financial advice, the mandatory disclaimer to stop me from getting in trouble with ASIC, now let’s get cracking.

If you expect to be told about a heap of smart (and dodgy) tips to help you reduce your tax liability, then you are reading the wrong article. This article is meant to promote thought and discussion with your bookkeeper or accountant about how you can plan for income tax.

Now I want you all you tax tip junkies to repeat with me:

If my business needs to pay income tax, my business is making a profit!

Go back and read it again, because I know it didn’t sink in the first time.

The ultimate goal in business is to make a profit, and this profit can be used to invest back into growing the business or be taken out as owner drawings to take your family on a holiday. If you are not making a profit, then you need to look at the margins you are charging your clients.

We have an excellent article on setting profit targets in your building and construction business here.

Tips to help builders and tradies manage their income tax

  1. Accurate record keeping: I hear this sentence far too often from tradies. “Oh, I just shove all my receipts in a plastic folder and give it to my accountant”. Well, your accountant charges you billable hours to calculate your tax return. So, they will be charging you to rifle through all your receipts and add them up in a spreadsheet. To save yourself money, you need to be tracking all your expenses using either a spreadsheet (basic level) or accounting software, such as Xero, and storing all your receipts digitally. No receipt means no deductible expense to claim, which means more tax to pay.
  2. Planning for the tax expense: You need to plan for the tax liability which means understanding the amount and when it is due. You can work out the due date by asking your bookkeeper or accountant or by researching on the ATO website. Next, you need to engage your bookkeeper or accountant to do some tax planning. By providing them with your financial information for 10-11 months out of the current financial year they will be able to provide a relatively accurate estimate of how much tax you will be required to pay. This will require up-to-date bookkeeping.
  3. Spreading out the cash outflow: What we are trying to avoid is a large surprise when your tax return is filed. You already have supplier bills, BAS, super, and lease payments to juggle. An unexpected tax bill of $50,000 could be the tipping point that causes your business to fall over. One way to smooth out this cashflow is to set aside some money each month in a separate bank account. A good amount to set aside is 10% of your gross revenue. Alternatively, the ATO gives you the option to pay monthly or quarterly PAYG Income Tax Instalments as part of your BAS. Then when you file your tax return these payments will be applied to your income tax liability. If you overpaid throughout the year, you will get the credit amount refunded.

Conclusion

In summary, building and construction business owners need to understand what their tax liability is going to be, and when it is going to fall due. You should talk to your accountant or bookkeeper about doing some basic tax planning work to avoid a large cash outflow when you file your annual tax return.

We would love to provide you with a quick 10-15 minute demo of how JACK can improve your business processes when it comes to tracking the profitability of your jobs and therefore understanding your profit position and also your tax position.

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LIAM COOK IS JACK’S FINANCIAL MANAGEMENT EXPERT.

With 10+ years of experience as a chartered accountant ranging from small business advisory to CFO of an ASX-listed company, Liam can provide important insights into the financial management of your building or trade business.