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Cashflow Tips – Worth claiming personal expenses through business?
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Published on Saturday, 19 November 2022 12:56
Bookkeepers see many different business financial situations, as we work on the business books in different industries. Often the owner is told by fellow business owners (and some accountants), to be claiming business expenses as much as you can to reduce profit and pay little tax. That is sensible to a point, and the Australian Tax Office (ATO) website encourages tax minimisation that is lawful (but not tax avoidance by manipulation with false claims etc).
Personal expenses not to be claimed
However, while assisting with the debt collection and client payments to the correct invoices (one service we provide - we tailor to what the client needs) I notice quite a few personal transactions like F&Veg and Meats, that they want to claim as staff/office expenses, but aren’t aware that it looks like the accountant is allocating them as Entertainment NON-DEDUCTIBLE (it would be hard to justify as “office or staff” amenities to the ATO so frequently as well! And Entertainment is rarely deductible as a business expense any more).
Additionally, IKEA and paint and Bunnings can be legitimate office Repair and Maintenance, but if purchased while your business is closed, it could look suspicious.
So be aware that it looks like the accountant is not going to claim some things for you any way, and that is probably safer for you also, in case of ATO audit
The risk of over claiming personal expenses through business
Often, there really isn’t much value to try claiming as much as possible as business expenses (from what I have seen other businesses do and say).
WHY? -
- If there is an ATO audit they can be denied and reversed and fines imposed – the ATO website is clear that only business-related expenses are claimable.
- The other thing is low profit can inhibit funding if required in the future via bank overdraft or venture capital, or partner investor - Not all will really look into the real detail. And if you want/have to sell, you need to show 3 good years of good profit – otherwise who would want to buy it?
- Doing a year-end “Directors bonus” to reduce profit shows a clear easy message to potential bank or financiers. I have done that in earlier years – it clearly says you are profitable, but reduces the profit legitimately, so less company tax needs to be paid, and can be declared after the year end!
It needs to be discussed with the accountant, but even they misunderstand the disadvantage of claiming lots of expenses to reduce profit, and the harm to your future financing and wealth potential.
Growing wealth paying taxes! (Borrowing for assets)
I have seen that if you want to borrow or expand, it is better to have clean accounts, and take bonus wages if extra Profit and money is there, as wages are fully deductible, and don’t need to be explained or justified as some transactions such as mentioned above, may need to.
And you will also know that a good wage for you and your wife is better when you want to re-finance or borrow for an investment property in the future. The brokers I work with (and even in my own situation this year) have a hard time explaining to lenders the true story – most do not understand business and Profit and Loss (especially “Extra expenses” claimed on the business, or repayment of loan accounts).
Yes you need to improve your home, and you need to do that, but it doesn’t bring in income like an investment property will.
The quicker you access more property or other investments, the earlier you set yourself up for better wealth later, by passive capital growth.
I wish I had that shown to me 10-20 years ago, but no-one did, and I realise only a few see how it can work or how to make it work – owners and accountants alike.
You may be in a good position to be able to get an investment property with your incomes, and growing business turn-over. But if you load up non-business expenses it gives the bookkeeper more work, they may not claim it all any way, so it wastes their time, it makes extra work for a broker to convince a bank you are very profitable etc, so they are comfortable to lend to you as a low risk to them (which is what they aim for!).
So consider the bigger picture so you may be able to do more, but that is up to you and when you have the time/interest to look into it.
Just my observations of other business people and how many limit the possibilities.
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