Ep43: Structuring Your Finances For Success & Understanding Tax

Good day, everyone. Welcome to another epic episode of the Profit, Leverage and Lifestyle show. The PT Profit, Leverage and Lifestyle Show. Should I say. Hope everyone's having an amazing day. I've got a bit of a juicy topic today talking about tax and structure of your bank accounts to ensure that you're not getting screwed over by the tax man. So the reason why I'm making this video is because I'm having a lot of conversations with my clients regarding tax and setting up their business correctly. And I was talking to one of my clients and we both had the same mentor when we first started. We didn't get any type of tax advice, like not super specific tax advice, but just setting up the structure of your finances to, you know, prepare for tax time. So I'm going to go through that and then I'll go through essentially how I kind of manage my money. So I don't have that massive tax bill at the end of the year. So let's get straight into it, team. So this is how I suggest you set up your bank accounts. For business. You need three bank accounts. And to start with personally, I have a business account separate to my personal account as in different banks. So personally I use ing my personal account and then for my business account I use Commonwealth Bank. I have them completely separate. So there's no confusion, okay? Because otherwise if you have everyone with everything with Commonwealth bank, it's very easy to, you know, miss transactions and stuff or pay for things out of the wrong account, etc. Etc. So you need three accounts for business. That business account, the first account is an everyday transactions account. Now the everyday transactions account will have a card associated to that and that'll be like your spendings account. That's where all your client payments will come into and like your rental come out your, you know, your phone bill, etc. Etc. And I might even go through some things that you can claim as tax deductions as well. Now the second account, the second and third account are going to be online savings accounts. You do not get a card associated with these accounts and they're usually high interest accounts. So if you do have some money in there, you'll get some bonus interest from the bank. Okay? Now the, the first online savings account is going to be an account called War chest. Now a war chest account is essentially a if shit hits the fan account. So you want to save between three to six months of expenses in that account just in case you get sick, someone in your family gets sick, you need to look after them and you can't work, you need to have a buffer. The next account is going to be a tax and GST account. Okay? Now I'm going to tell you what percentage you should be putting away each week into those accounts, but that's all you need. But keep it nice and simple. Three accounts, Everyday account, Savings watched account, and a tax account. Now, depending on how much you make, you want to transfer and depends if you're a company or not as well. But I'm just going to give you a range. Between 20 to 30% of your income should go into your tax slash GST account. So if you're making more than 75,000 per year, you'll need to register for GST. And most of the time it's probably better off that you actually become a company because you actually get a fixed tax bracket and it's 27.5%. Whereas if you're a sole trader and you're earning like 150k, it's like 40%. So it's a huge difference in tax. Okay. Which we can talk about more if you want, but once you earn over 75k, it's conversation needs to happen with your accountant if it's better for you to register as a company rather than a sole trader. Okay, just lost my train of thought there. Sorry. By the amounts. So 20 to 30% of how much you make gross or how much money comes into your account, 20 to 30% should go into your tax account. Now, GST is 10%. GST is 10% of everything you make goes straight to the government. Once you register for GST and you're making over 75k a year, if you're not making that much, you don't have to worry about GST yet. Now, the reason why I said 20 to 30% is because you'll have a lot of deductions in business. So even though, let's just say for example, you're making 10k a month, that's not your profit, right? That is your gross revenue. So if you put aside, if you put aside 3k from that, that's great. What's it, 120k a year. So you might, you, your tax bracket will be like 35% for most of it, roughly, give or take. But because you've got tax deductions, meaning the rent that you pay, your phone, your laptop, your computer, your fuel for your car, your insurance, your registration, all that type of stuff. And obviously talk to your accountant about this stuff, about specifics on what you can claim. There's a very specific way to go about it. But all that type of stuff for me all comes out of my business account. So my car is registered with my company. So the business car, I claim everything to do with the car on tax, fuel, maintenance, insurance, registration, everything. The rent that you pay, all the subscriptions, the 0 subscription, the Trainerize. If you're spending money on ads, all that stuff is tax deductible. So let's say for the example, the example before you're making 10k a month, you might spend 5k a month on expenses. So your taxable income, your taxable income is actually only 5k, which means you only need to put aside 30% of 5k, not 30% of 10k. However, I'm suggesting to be safe, still put aside 20 to 30% of the gross revenue. So you might, you might say if you have a lot of expenses, you might put aside 20%. So you might put aside $2,000 for tax. Just as an example, like get some specific advice. But this is just what I do. So for me, I put aside, let's work it out. Yeah, I put aside 20% personally, but I've got a lot of tax deductions as well. Now the war chest account. 10% of how much you make should be going into your war chest account every single week. Now you should be able to automate this process. So you should know like if your clients are set up on direct debit, you should know how much you should get roughly every single week without fail. So you should, you should be able to set up an automation every single week. The day after you get paid, 10% goes into, or the set figure, 10% goes into the war chest. Even if you have to start at 50 bucks a week and then an XYZ amount goes into your tax account. That way you're not going to have that big tax bill at the end of the year and you actually can manage your money because all that money that comes in is not all your money needs to go to the government. A portion of it needs to go to the government. So that is my suggestion for structuring your finances, those three accounts. Now the next thing is I suggest you doing a bookkeeping software. Me personally, I use Xero. So X E R O. It's a paid subscription for those who are just working on, working as a, as an individual, as in you don't have a team or anything. You can just use the 35amonth option. Otherwise, if you have a team, you have to do payroll and that type of stuff. You'll need the Higher, higher tier, which is I think 80, 80amonth, something like that. But Xero is essentially reconciling all your accounts so you can actually see your profit and loss and you can specifically see the categories into what you're actually spending money on and how much is actually profit. So if you're, you know, your accountant will probably set you up with something like this and show you how to do it. But like, for me, for the first two years I didn't do any of this type of stuff and I had to go back through and try and reconcile every single transaction. It was horrible. So trying to help you guys avoid that process. But essentially what, what a bookkeeping software is like zero. And there's other ones you can get, but this is just the one that I use is you basically link your bank account and every single transaction that you have will go into Xero. And you need to reconcile that transaction into certain categories. So for example, the categories that you might have, you'll have, you have sales, you'll have, you can make categories as well. So you might have rent as a category, you'll have general expenses, you'll have motor vehicle expenses, office expenses, hacks. So basically all the transactions that you're doing, you're linking that into a category. And then what you do with that, once you've reconciled all your transactions, everything every month, you can actually have a look at what your profit and loss is. So you're going to look at, you'll look at the gross revenue, you look at the revenue, you'll have all your expenses listed out in the categories. So you can see what you're actually spending money on, what you've actually got left over for the month. So, you know, like, let's say you're making 10k a month, let's say this month you profited 2k, which is great. So you paid yourself a set amount each week. And by the way, I'll discuss my thoughts on paying yourself a set amount each week in a second. But you can see straight away, like where you're at in business. You can analyze that data and if you need help analyzing the data, let me know and I can show you what that looks like. But then you can actually make educated decisions on what you need to do in business rather than just thinking emotionally. And you can actually track the data and use the data to make your decision. Now let's quickly talk about if you should pay yourself a wage each week. Again, this is not financial advice. This is just my opinion. And this is what I do now personally, I have, I pay myself a certain, not so much a wage. I pay myself a director's fee, which I can change at any time. Whereas if you put yourself on payroll as if you're an employee, then I mean, you can change that, but it's set every week to pay you the same amount, which is fine, by the way. There's nothing wrong with that. Personally, I do a director's fee. There's pros and cons to different scenarios, right? So the reason why I do this is because I have flexibility. So if I, if I needed to pay myself more, I can do that, or if I need to pay myself less, I can do that as well. But I just pay myself, I pay myself a thousand dollars a week. Now that covers all of my personal expenses for me and my family. And my wife pays a certain amount as well each week. Now all my business expenses are still coming out of my business account, but I'm transferring into my personal account my quote wage for the week. So technically I'm making, you know what, 50k, 50k a year, which is great. That's all I need to live comfortably. Now the reason why I'm doing that is because, because I'm a registered company, my tax rate is actually cheaper in the business rather than personal. So if I personally paid myself 90 or $100,000 a year, I'll be paying more than 35% tax. However, if I left 90, 90 or 100k in the business account, I paid 27.5% on the profit. Can you see why I would do that? So actually minimize my tax that way. But, but the other thing as well, I can, I'm very good at budgeting, so I pay myself a set amount each week and that's, that's it. I don't pay myself anymore. Worrying about top start. Now if you want to pay yourself super and prepay your tax and all that type of stuff, it might be a good idea to put yourself on payroll. The reason why you would do that is you, for one, you get pay slips. And again, you do this in 3, 0. The second thing is you can set it up so you automatically pay yourself super. So whatever that is, 11 or whatever. And you can also set it up so it automatically doesn't automatically take it out, but it preamps. So let's say for example, you want to pay yourself 2k a week. You obviously pay yourself 10 or 11% to go to super, which is like 200 bucks a week. And then let's just say your tax rate, you pay yourself $600 in tax. So your net you might get, you might pay yourself 1400 net into your bank account. And I hope this isn't getting too confusing. So you're paying fourteen hundred dollars net into your bank account, but you're actually sending that $600 to the, to the government. But you actually don't pay that until every quarter, every three months you pay your tax. So you've still got to put that money aside. But it literally tells you how much to put aside if you, each week, that's the difference. If you put yourself on payroll, then it tells you how much money to put aside the tax. But, but at the, at the same time that's just your personal tax. That's not the business tax. So for, for me personally, like I have put myself on table before and just, just a side note on that, if you ever want to get approved for like a house or a loan, it's much easier if you give yourself pay slips. It's a, it's a lot easier to get approved for pay slips rather than relying on profit and loss statements and that type of stuff. But it can still be done. So I wanted to give you guys some context. That type of stuff. Now this whole thing is just my opinion, right? I'm not giving you financial advice. This is just what I do. I'm just explaining the differences. Pros and cons. There's pros and cons for everything. Everyone have their own way of doing things. But I do suggest setting up three bank accounts for the business. Make sure the business account is separate to your personal and you're paying. I would pay yourself a wage each week, but I wouldn't do it on payroll for me personally. Hope that gives you some insights into tax. But, but the last thing I'll leave you with is make sure when, when you set up your business account that you have all your business expenses coming out of your business account because then you can reconcile them in Xero and then you can basically give that to the accountant and say here, here's all my expenses for the business claim, all that stuff on tax, thank you very much. And they'll just do it, do it for you. So I'll leave it there team, before it gets too confusing, but if you want me going to a more in depth, you know, training on, you know, zero and that type of stuff, then, then let me know. But a lot of people, I'm talking to a lot of people at the moment that don't have any type of strategy for managing money or setting up the bank accounts correctly or, you know, putting money aside for tax. So make sure you get that done. And as always, I'm getting a few people message me about, you know, they're enjoying the podcast and stuff like that, which is. Which is awesome. So if you do learn something or if you're enjoying it, send it to a friend and send me a DM as well. So I know that you guys are enjoying the podcast, but apart from that, I'll see you next week.