Why paying more tax is a good thing. EP #214 - Blake Jenkins

G', day, guys. Den Lenny here with episode 214 of the how to Scale a Video Business Podcast. Today we're going to be talking accounting and why it's a good idea to be paying tax. I've got Blake Jenkins from Count Out Loud, who are a specialist accountancy firm based in Sydney, Australia, and they focus on helping companies in the media space so they really understand our industry. Now, the goal is to have Blake come on at least once a month to tackle all subjects around tax, accounting, finances, and regardless of where you are in the world, at least give you questions you can take to your own account to make sure you're maximizing your profitability and minimizing your tax obligations. Having said that, paying tax is a really good idea because when you're paying tax, you're making money. So I hope you enjoy this episode.

Blake, I'm really thrilled to have you on the show today. How are you going today in Sydney?

Oh, yeah, not too bad, Jen. Thanks for having me. But, you know, these lockdowns are really making a bit of a struggle for us. Getting a bit sick of these four walls, that's for sure.

Yeah, yeah, yeah, exactly. Well, hopefully that will end soon enough, but you guys are specialist accountants in the film and media space, and I wanted to start this series of episodes with you, and we're hoping to do these every month because I think an understanding of accountancy and financials is such an integral part of running a successful business. And I wanted to start today by asking the question to you.

Why would a filmmaker, why should a filmmaker or a media company be happy to be paying 50 grand in tax?

Yeah, I mean, yeah, Great question. And the simple, simple answer is, when you're paying tax, it means you're making money. Which is. Which is a good thing, right? I think the idea around trying to spend as much as you can to get your tax down is kind of crazy to us because, yes, buying things do reduce your tax, which. Which helps. But if you're spending money where you don't need to spend the money, and you're just shooting yourself in the foot and you're shooting yourself in the cash flow foot down the line. We get questions all the time right around June saying, should I buy a car? Should I buy more cameras? Should I buy this, this and that, and the answer to the question is, do you need it as a starting point? Are you going to buy it in July anyway? If not, what else do you need to think about what that money's going to be used for? Do you have, you know, you got your June super coming up, you've got your GST coming up. You know, you've got your tax coming up. So, you know, using that money to just try to knock down your, your taxable income may not be the best use of those funds if you just kind of throw them out the wall.

It's, it's one of those. It's like, it's like media, media folklore, isn't it? And it's certainly in camera work where I used to cut work. It was like the talk of, like, tax time. It's like, right, you need to spend some money. And, and it's like taking advice from other cameramen on how you should run your taxes is. It's a bit like. And it's a bit controversial. It's a bit like saying, oh, no, the scientists are all wrong about COVID Let's listen to the guy on Facebook who's, who's got an opinion on whether or not you should be vaccinated or not.

Yeah, 100%.

Tell me about. I mean, this must be something that you guys come across all the time. How do we collectively, through this, through this show, help our market in film and TV understand a better way of doing things? What is a better way of managing your tax other than, oh, I don't want to pay tax, so I'll spend the money?

Yeah, look, there's a really wide range of things you can actually do to. I would call it like tax minimization. So we're never really doing anything to purposely avoid too much tax outside the world that you can do it in the rules that you can go through. But structuring your business correctly as one thing is a great start. So as soon as you start, it's best to have the best structure in place which allows you to move money around, obviously, legally that reduces your overall tax. So think of tax as not just the tax rate you pay, maybe in your company or, or your sole trader, but it's gotta be an average rate of tax across the whole lot. So if you've got a company and a trust and a husband and a wife and a couple of kids, then if you can spread things across them, you can reduce your average rate of tax down from 25% to 19%. By utilizing these options, there's other things you can do as well, like setting tax effective wages throughout the year. So you're on top of that. So thinking about, well, the tax rate in Australia for individuals earning up to 45,000 is 19 cents to the dollar. Now the company tax rates 25 cents to the dollar. So you can see as long as you can always push out that extra bit of money up to that amount and still be better off rather than just leaving it in the company and just spending it on assets or cameras as you talk about. But there's also, you need to look at getting money out of your business to you personally if you're in one of those structures because you can't just keep spe spending money on your personal items within a company either. You need to get the money out to you which then allows you to plan for wealth creation personally, which is the next step of business. So your business is going well and then you got to think about what do you want to achieve. I guess personally.

I was talking to.

A client of mine the other day who is a sole trader and they were asking me, you know, oh, should I be going into PTY Limited or should I have a trust? And I think there's, there's a lot of confusion. I sometimes hear people going from sole traders to trusts and not having a PTY limited and I'd love to know from your perspective what are some of the broad benefits of being sole trader versus PTY Limited versus a trust. And I know that it's always very specific on the exact business and there's a lot of parameters. I'm not suggesting you giving any advice here, but I'd love to understand what the differences are between those three structures so that anyone listening to here who's not familiar with that, and you know, you may be listening in the US or the UK where things are called slightly different things, but would you mind just explaining where someone should transition from a sole trader to another. Another structure?

Yeah, look, it's a really good question. It's something that comes up all the time for us because you know, we have a lot of clients that are in that sole trader contract starting out contracting businesses and they're kind of getting to a point where they hear everyone talking about companies and should I be one myself? And as you say, it's really, really specific on each person's individual scenario. And if we're talking other places in the world, it's all have their own tax rules to think about. But realistically a company is great because it can give you concessional tax rate, it gives you less liability. So think of people are contracting with the company, not you personally. So it helps with that liability and it gives you a lot more kind of planning options around tax. So when you're a sole trader, you're getting taxed on your profits in that year and that's it. When you're a trust, all the profits need to be distributed out at the end of the year. So potentially if you saw, if you go into a trust, then you could be distributing to yourself and you're not getting any tax benefit whatsoever, whereas the company can retain those profits. When we start talking about when you should think you should turn into a company, and I might prefix this by saying that in Australia we tend to steer away from trading a business through a trust anymore. It's just a little bit too compliance heavy and you don't get those benefits in a tax kind of world. But yeah, from a sole trader point of view, you usually want to be making sure that transition to a company is one, going to get you a better tax rate. Two, it's worth the cost to actually set it up and to administer because your cost in a company is a lot more than it is as a sole trader because you have all these other compliance issues to think about and it's totally separate to you personally. So all these kind of things go into it. And you know, realistically, as a rule of thumb, I kind of go, in Australia at least, if you're making net profit as a sole trader in excess of 90,000 to 90 to 100,000 and your turnovers in excess of 250, that's probably the point where you really seriously start considering it. The other option as well is a lot of larger production companies will tend to only contract with employees or companies. So if you're a sole trader, they might go, well, you're going to be an employee on my books because we don't want to deal with the insurances and the super and all these kind of things, things. So there's another benefit where someone might go, look, I'm not probably there right on the, on the nose in terms of tax, but it's going to help me with my business to be able to contract as a company because they just want to put me on as an employee and I want more money in my pocket today rather than down the track.

That's a really, really good point. I've heard that many, many times where sole traders kind of get a bit frustrated that when they work with a bigger company they're like, well, if you're not a company, we have to put you on staff. And which means you've then got. You're getting payg tax taken off its source. Super taken off its source. So you're getting net a lot less and then you have to go and do the paperwork. Your accountant has to do the paperwork at the end of the financial year to claw that back. So it sounds to me that Once you're doing 250 a year plus in revenue, having a Pty Limited here in Australia is the next step. So where does a trust fit into that? Because I know how we structure our business and our business is structured whereby I'm a director of my company, which is a Pty Ltd. But the company is owned by the trust. And that's something that I got into just in the last couple of years. Can you explain a little more about how that trust works in relation to a company?

Yeah, yeah, for sure. And that's like I kind of look at this as the ideal accountant structure. The ideal business structure is the company that's trading at the top and then the company is owned by the way of its shares on issue by the trust. So the shares are held within the trust and then the beneficiaries and the trustees of that trust would be your mom and your dads and your kids, depending on their age and what that allows you to do. So when you think of from a company perspective, one there's that liability issue that we've already kind of touched on. Having the shares owned by the company gives you that extra level of protection between you as the individual and your business trading. But it also allows for you to, once you pay tax in your company, you can then pay dividends out with franking credits attached to that, which is basically tax credits that you've already paid within your company that get attached to that so you don't get double, double taxed. Having that trust structure then allows you to pay the dividend into the trust and then send the money to whoever the beneficiary may be to allow you to smooth out that tax rate which we're talking about. So if you own just shares personally, let's say, and you paid a dividend out, bang, that goes into your name and that's it. But let's say.

You stay at home with the kids and your wife's out there running the business and making a lot of money and you've got say 20,000 worth of income just from bits and pieces here and there and she's got 180 sitting over in the company. Well, you can push some of that money down to you personally to then smooth out that tax rate. So you basically give yourself the option to get more tax planning option, I suppose, which is the ideal kind of situation to be in.

So essentially what's happening is if you were earning at home $20,000 for doing bits and pieces of work, your wife's earning $180,000.

She decides that she's going to pay herself 120 and there's $60,000 of profit left in the company. Once the tax is paid on that profit, that can be distributed to the trust and then it could be paid as a franked dividend to you, whereby if you're only earning 20,000.

You could be given another 20,000, for example, or 25,000 from a franked credit and only pay 19% tax at the base rate rather than being taxed multiple times. And, and I think the reason is so important, and it's only recently I got my head around this after 12 years in business, is that instead of seeing the profit in the company as something you have to spend, if you are structured correctly, you pay the tax due, which is the right and proper thing to do. But then those profits get distributed through a trust and you actually get the money at a lower tax rate than if you were to do it another way. And that to me seems like a much more sensible idea than buying another car or another. Another bit of camera equipment.

Well, exactly. It's another way of getting, as you say, getting money out of the business and then allows you to build your own wealth outside of it as well. So if you're thinking maybe you want to buy your first home or maybe you want to buy that investment proper, you got to get money out of the business to you in cash ways to be able to afford those kind of things. And having these structures in place mean that pushing that cash out, you're no longer getting whacked with a huge amount of tax and you've got the profits to do it and the money sitting there to do it, rather than that fancy new car in the business.

Another huge advantage is that if you have retained profits in the business, your business is healthy. When you go to get commercial finance for a vehicle or for an asset, they look at your company tax returns from the last two years. And if you have good profit and good books and a growth in your business, what I've discovered is you can get asset finance at 100% with no money down much, much more easily. This is something that I feel a lot of sole traders perhaps don't understand and I'd love for them, if they get nothing else out of this podcast, is understand that it is important to pay tax. It's not about tax avoidance. There are Plenty of legal ways, morally legal ways to minimize your tax liability. In fact, I think my accountant back in the UK said to me many years ago, he said two things. He said, one, then there's money in paperwork, so do the paperwork. The second thing was, it was a phrase around the lines of, you are legally obliged to pay the minimum amount of tax due. And so by employing a good accountant, a firm who understands your industry. And I think this is really important, you know, without wanting to sound like a massive plug for you guys, although I want to say that is. Is that you want to choose an accountant who understands your industry and you guys, that's predominantly what you do, isn't it? Tell me a bit more about. I think it's important to share for someone who doesn't know who you are, where there might be some benefits for them having a conversation with you guys.

Yeah, yeah, no worries. So we're a boutique accounting firm here in Sydney. So basically we have a director called Carmel Creswell, and she's been in the industry for over 10 years. Used to work at a larger kind of film, entertainment accounting firm. And we.

Focus especially on film and entertainment industry because we've realized that it is so incredibly niche. It's differently structured to everything every other industry there is out there. You're talking contractors and you're talking acquittals and you're talking, you know, big shoots with money in, money out, income in advance, all these kind of things. So you might get 100 in, but your profits only produce a fee at, you know, 5% or whatever it is that doing. Yeah. So for us, having that extra kind of experience means that we can really take your situation, understand it, and get you the best outcome from a tax perspective, but also structuring perspective, also where you want to go over the next 12 months and make sure that when we're doing things, we're looking into the future, we're not looking into 18 months ago. So the worst thing that we find is when someone comes to us at the end of the year and we're looking 12 months into the past and there's nothing we can really do with that. But if we're onto the stuff right now in advance, then we can plan for that next 12 months that people need to grow, because you can really, if you understand it and you know what tax you're potentially going to be paying the next 12 months, then you can plan for the next 12 months. So then you're almost two years ahead and ready to go on to the next thing.

It's, it's enormous.

In the last few years, I've really gotten on top of this. And so I come to this from a place of real, like, genuinely quite, quite new to a lot of this stuff. And I think there's a lot of businesses who've been in business 5, 10 years who don't understand the power of proper tax planning.

What is the first step for someone who is maybe a sole trader, maybe they're pty limited and they're currently just, you know, end of the year sending their accountant a box of receipts. What is a better way of approaching that from a tax planning perspective?

Well, 100%. Anyone who's got a box of receipts has really got to reevaluate everything. There's so many options out there now to collate that data electronically.

That you'd be crazy not to look at it. Right. So I'd say your first steps is always to make sure you're on a software that is tracking your bank account live data, and you can look at your profit and loss and your balance sheet at any point in time, instantly, which allows you to, you know, someone calls up, calls me up on the phone and says, blake, I'm thinking about buying a car, right? And then we go, well, what are you looking like for the year? We can actually go into that file and see the year to date data and tell them, one, is there a benefit? Two, is there cash there to do it? And three, what's the tax outcome instantly? Whereas if you get everything in your shoebox and you send it off once a year, now, the accountant might not look at that for six months because of the timing between the end of financial year when they look at it, then you can't make those strategic decisions. And if the bank comes along and says, can I have your profit and loss for the last year? Or don't need proper financial statements, just drafts are okay, so how are you going to get that information out? Or how are you going to know where you're landing at the end of the year? Because most, you know, realistically, you should be able to know where your profit is going to land at the end of the year, on that day or close to, rather than six 12 months down the line.

I'm amazed at how many business owners I talk to and I say, so how's your half year looking? How's your last quarter looking? Or what did you do last month? And they literally look at me blankly and go, oh, I don't know, let me check. And I find that absurd. I really do I find it absurd and maybe I learned the hard way. But looking at profit and loss statements, from my perspective, these are historical documents. That's what's been invoiced and what's been received, or not even received it from a profit and loss statement. Here's what was invoiced and here's the receipts for what we spent. But the second part of that is tracking cash flow. And I suffered from this many, many years ago, but I was obsessed with the profit and loss going, wow, we're doing okay. But I wasn't paying attention to the cash flow. Is this something that you see commonly in the film and TV space? And what advice would you give to business owners and sole traders to find a better way of managing that?

Yeah, I mean, it's huge and I think it's massive, especially in film, film and entertainment world, because sometimes you're on projects for weeks or months and you've really got to be on top of the money coming in. It might be you get 50% up front and 50% on completion. So you've got, you know, three months worth of lead time where you need to make that money work for you.

So in terms of better, better ways to do it, like just, you gotta be making sure that you're keeping your data in these systems, tracking debtors, tracking creditors. And yes, he's saying, preparing those cash flow statements. So you should be planning 6 to 12 months in advance if you can, on that data. So yes, you might not be able to do it within an accounting program itself, although there are plenty of plenty out there. But when you've got jobs coming in, you really need to be budgeting that whole job out to the end and comparing it against actuals to see where you're landing. You know, I know that's historical, but again, then, you know, okay, why am I way under on this? So why did I spend so much on contractors, subcontractors for this job? Or, you know, my travel was huge, so I've underbuilt it. I should have built more, you know, so having that clarity over the numbers allows you again to make those strategic decisions.

I think another pitfall that I see a lot is.

Is, is filmmakers and production companies winning a large project.

And.

Deciding on a whim, oh, well, we got this project. It's worth, it's, it's like three weeks shoot. So let's not rent equipment, let's just buy a camera kit. And they, they oftentimes under underestimate what the true cost of owning another Camera kit is by the time you bought all the accessories and increase the insurance as opposed to renting, because, I mean, depending on the price of the asset. And I know in Australia just now we've got a slightly unusual situation where there's not a capped asset amount, but in previous years where it was like $20,000, some people go and spend 40, $50,000 on a camera package, but you can't necessarily write that off in one go. But I think there's a misconception that whatever you buy, you can write off in one go. So take a vehicle, for example. I believe, if, unless I'm mistaken, that in Australia you can't write a vehicle down under anything less than seven years. Is that the case? And what are some of the pitfalls in buying assets that perhaps are the hidden pitfalls of that, where the perception is that if I spend this money, I'm not going to pay the tax. But in actual fact, spending 50,000 might reduce your taxable profit by 50,000, but it doesn't mean you're going to be paying a lot less tax.

Yeah, well, I mean, from that car perspective, you've got a few things to think about. So from Australia, you've got, if you're a small business entity, you get these concessions and the amount you can write off, which is in full, and it's even gone up to temporary full expensing, which is allowing almost anyone to write off the full cost of assets for this year. So thanks to Covid for that. But the thing is with vehicles that they're limited to the luxury car limit, so you might buy $150,000, I don't know, Maserati or something, but you can only claim 57 of that, which is the limit. So you've then cash flowed 150 grand, or you are cash flowing by finance, but you're only getting a tax benefit of 57. But that tax benefit is then only limited to the percentage of tax rate you're paying. So you're only getting 25%, if you're on the base rate, entity rate in Australia, 25% of that write off as a tax benefit. The other issue you got to look at is if you're writing all these assets off, your profits kind of drop down, down and down. And then if we're talking about going to the bank and getting extra finance for things or like that kind of stuff, then your balance sheet is going to look rubbish because you're going to have huge amounts of liabilities sitting in there and your assets are going to be what? Right down. Because you've written them all off and your profits right down again. So you kind of almost shot yourself in the foot a little bit there in terms of what your maybe your future financial goals are, but then also for the sake of saving 25% on the cost of that asset, was it worth it and did you need it? Yeah.

And so it might be better paying yourself a little more and buying the asset privately.

Yeah, 100%. I would say if you are looking between either paying yourself some more cash and having the company pay your tax and pay your super, which is again, another way of getting money out of the business versus buying that asset, particularly that you might not really need at this point in time, and it might not give you the economic output that's worth it, then definitely that extra payment to yourself is worth it. But again, we can go right back to that. Paying dividends and franking credits. And those franking credits, you can only get those up if you're paying tax. So if you keep knocking your taxable income down and not pushing those dividends out with franking credits, then you're really shortening the amount that you can get out to you personally as the business owner, rather than keeping it within the business and just reinvesting it there.

I love it. Blake, we're just about a time, but I think I'd love to touch back with you and talk about this a bit more because it is a really important topic. And I think what I hope to do with this series working with you guys is just demystify some of the. The. The Fisher Wives tales, if you will, around tax and accounting. So, guys, if you want to catch up with Blake, you can check him out@countoutloud.com and Blake, I look forward to chatting to you again next month.

Oh, thanks so much for having me, Dan. I'm really looking forward to it. I'm looking to give you, hopefully, your. Your base of listeners a good amount of advice or at least cue them to go and talk to their accountants and say, hey, should I be considering this or what should I be doing next? Or how can I do things better? Because you know what excites me is seeing good film businesses grow into their potential and do amazing things. And I can't wait to see those next shows that get up or the next commercials that get up. It's amazing.

Hey, guys, thanks for watching. I hope you got a huge amount of value from that episode. If you're looking for additional support or resources to support. Support your business journey, then head over to Denlenny.com where you can get a whole heap of other resources, free downloads, and access all the other episodes in this series. Be sure to subscribe and I'll see you next time.