How I turned my tax payable into a tax refund

Tax can be crippling if you aren't prepared. You'd think that would never happen to an accountant right!? We do this all the time so surely we nail our own tax... well, let me tell you, some lessons are best learnt first-hand. 

I've always had employment and a side hustle small business - over the years that has been involved promotional modelling, dancing, running a dance school, and now it's business coaching and education on tax and accounting. So for tax, this has meant I have employment income, and an employer who withholds tax for me, and then business income. The business income is my responsibility... there is no one withholding the tax for me so I have to put some aside in case I have a tax payable at the end of the year.

Well... things were going well, until the first year I earned (employment + business income - deductions) over the HECS threshold. You see, as far as my employer was concerned by income was under the threshold, so they didn't need to put the additional HECS stuff aside. But when you added in my business income it tapped me over... and it meant I had to pay a % of my TOTAL INCOME toward the HECS debt. I should have known better, but unfortunately I learnt this lesson the hard way. It came to tax time and I owed thoughts of dollar. Everything I had saved for an overseas holiday went to the tax man (or woman or person). 

Small business owners often get a rude shock at tax time... maybe it's nothing to do with HECS, maybe it's because you're self employed and no one was withholding that tax for you, or maybe it's because your profits grew and put you in a new tax bracket (applicable for individuals / sole traders). Whatever the reason, if you run around all year with your eyes closed ignoring the looming tax season, then prepare the tissue box and chocolates because it could be devastating news. 

Now look, I'm not saying there is a (legal) way to get out of paying your tax.

What I am saying is that I learnt the value of being prepared. 

So how did I turn a massive tax payable one year, into a decent tax refund the next year?

1. Estimate my total assessable income and deductions for the next year

I build myself a little spreadsheet that summarises everything I think I will earn (employment + business) based on last year and on what I know about the year to come. Then I enter everything I will spend that I can get a deduction for (website, travel etc.). This gives me an estimated taxable income so then I can figure out which tax rate applies and therefore roughly what I will likely owe in total for HECS and tax at the end of the year.

From here, I can either... 

2. Ask my employer to withhold more tax than they have to

My employer calculates what tax I owe the ATO based on what they pay me (my gross employment income), and then withhold that... I just ask them to give the ATO a little more than necessary as far as they are concerned, because I know I actually earn more than that employment income. If I never see the money then I can't accidentally spend it!

and / or...

3. Put some money aside myself

The money I receive from clients for The Real Thiel goes into a separate bank account to my personal one. I then transfer some of it into a "tax savings" account that I don't (read as: try not to) touch before the end of the year. This gives me the piece of mind that there is some cash available to pay any tax necessary when I lodge my return.

Technically I suppose I didn't make money this tax season... it's the same amount of tax I would have always had to pay, but because I sort of prepaid it and put it out of sight out of mind, it certainly felt like it! Ideally we get our estimate bang on and pay just exactly the right amount of tax... but that takes next level skills and plenty of time in reassessing your position throughout the year. Honestly, I've got better things to do than recalc my tax (... things like help you calculate yours!).

Now the only question is do I splurge on some new clothes, go on a holiday, or invest it back into the business? Honestly, I'm a nerd and will probably do the latter...

I hope to be celebrating tax refunds with you over a champagne breakfast next year!
xxx
Lauren

Please remember that each of us has a different situation and what worked for me might not be best for you. Speak to your tax accountant about what you need to do to prepare and manage your tax affairs in the best way.