Managing your finances is one of the biggest challenges copywriters face.
I’ve personally struggled to work out what I should be paying when, what I can claim for, and whether I’m actually making a profit.
That’s why Belinda Weaver and I decided to interview Karen Goad for our Hot Copy podcast. You can head over to iTunes to listen to the podcast, or check out our interview below if you’re more of a reader.
Please note: This information relates to Australia. Some of our tips will hopefully be useful to listeners in other countries. But be advised that every country has different tax laws, and you should consult your local accountant for more information.
And remember: This information does NOT constitute financial advice for copywriters
Who is Karen Goad?
Karen is a small business owner and founder of Goad Accountants and Simply Business Bookkeeping. Simply Business Bookkeeping is an accounting group that specialises in helping business owners know their business better throughup-to-date financial information for better decision making and accurate GST, CGT and income tax advice.
Karen has more than 18 years’ experience working in public practice with small business ranging from startups and sole traders to businesses with more than $20 million in turnover.
HC: Most copywriters set themselves up as Sole Traders. But is there any value in going with a PTY LTD or family trust structure? What are the tax implications?
KG: We get this question quite frequently from sole traders. Before we discuss the tax implications, I’ll just briefly talk about them from a legal side of things.
A PTY LTD or corporate trust structure may have asset protection benefits, meaning the business owner’s personal assets may be protected if they business was to end badly or litigation was involved. This is something a legal guru could expand on.
From a tax perspective, a PTY LTD or company is a tax-paying entity. Currently, for small business companies with turnover of $2 million and under, the company tax rate is a flat 28.5%, falling to 27.5% from 1 July. The top marginal tax rate for individuals is 47%, so one of the obvious advantages of a company is the tax rate.
However, in Australia individuals are taxed on a progressive basis. So the tax rate increases from 0% at income levels up to $18,200, to 45% for taxable income over $180,000. For a company to be worthwhile from a tax point of view, the net profit needs to exceed around $105,000 before the individual’s average tax rate exceeds 27.5%.
A family trust, or discretionary trust, is a different business structure that, with a corporate trustee, can also provide asset protection advantages. But unlike a company, a trust doesn’t pay tax itself. Instead it passes its net income through to its beneficiaries. A family trust lets you have flexibility in who income may be distributed to. So where you have multiple beneficiaries, you can take advantage of different tax threshold to minimise overall tax. A trust can be very beneficial, but Part IVA (the Tax Act’s anti-avoidance rules) may apply if you’re distributing income generated by an individual to a range of different family members to gain a tax benefit.
The tax rules around the use of companies and trusts are fairly complex. And because everyone’s business and personal circumstances are different, it’s vital that you speak with an accountant that knows your situation.
HC: Okay, now on to accounting platforms. What are your favourites? I know Kate and I both use and love XERO. From an accountant’s point of view, are some tools better than others. Or no tools?
KG: Xero is definitely my favourite, and for good reason. It’s simple to use and built with business owners in mind rather than accountants, which makes it great for small businesses to get started on. It also has great time-saving features such as data feeds and an easy-to-understand bank reconciliation screen. Personally I love the nifty features that help our clients get paid faster, such as emailing out invoices with links to pay online using Paypal or Stripe and auto invoice reminders.
But Xero isn’t for everyone, whether it’s from a budget perspective or it just doesn’t gel with the business owner. There are many alternative software options for small businesses, and we have clients on MYOB, QuickBooks, Reckon, and even free software such as Wave.
As a minimum, if you’re choosing accounting software you should be looking for an online or cloud-based option with automatic bank feeds. It must also be capable of producing a profit and loss report so you can reflect on your progress during the year.
Other than our love for Xero, we don’t necessarily recommend one software option over another. But we strongly recommend you either hire a bookkeeper to ensure record keeping is done correctly, or obtain some training in your specific software to ensure what you are producing is accurate for you and your accountant at the end of the financial year.
For clients who are just starting out and don’t want to invest in Xero or other software, we’ve developed an Excel spreadsheet cashbook where they can record all of their business income and expenses. I’m happy to share this with anyone needing to get started with record keeping.
HC: Okay, let’s start with GST. In Australia, all businesses have to pay Goods and Services Tax (like VAT in the UK). GST needs to be paid when we reach a certain income level, right? What is that income level?
KG: Yes, that’s correct. In Australia businesses must register and pay GST on their sales when their current or projected annual turnover reaches $75,000 or more.
HC: And if I reach the GST threshold partway through the year, do I have to register for GST for the whole financial year or just from when I reach the threshold?
KG: Essentially, if you’re required to register at any point in time, you pay GST on all sales from that point forward. However, there is sometimes a difference between when a person physically registers for GST and when you are actually required to register. And this comes down to working out when you meet the GST threshold of $75,000.
To work this out, we need to look at two tests, and if your turnover is $75,000 or more under either one then you must be registered from that point in time. The two tests are:
- The “current turnover” test — your turnover for the current month and the previous 11 months.
- The “projected turnover” — your total turnover for the current month and the next 11 months.
For either test, if your turnover is likely to be $75,000 or more then you must register for GST.
HC: Some copywriters believe that not charging GST makes them look small-time, and that charging it makes them look more professional. So they charge it anyway and pass it all on to the government. What are your thoughts on this?
KG: This is a common concern for small and micro business in general, particularly sole traders. As the GST threshold is so well known, by not being registered for GST you are immediately holding up a flag saying “I’m a small guy”. In different industries this can be “make or break” for landing a new client, so we see sole traders wanting to register for GST from very early on in their business journey.
But being registered for GST can be cumbersome as you need to not only prepare and lodge a BAS each quarter, but also make sure you have the available cash to pay that BAS.
I would recommend that where your client base is small, or you have a micro business that on average isn’t registered for GST for consumers, that you remain not registered for GST as long as you can.
But if you’re dealing mostly with larger businesses registered for GST, and feel that not registering for GST yourself will hinder your growth efforts, then register for it and add 10% to your current prices. Don’t try to absorb all or part of the GST yourself.
HC: When is a good time for sole traders to review their accounting setup? What sort of turnover should they have, both in terms of their own income and their family income?
KG: Good question, Belinda. There is probably two key points in time when a sole trader should examine their accounting setup.
The first is at startup, when they’re just starting their business. They should have a chat with an accountant about the best structure to start with, when to register for GST. and record keeping issues.
The second is when their business is expanding fairly rapidly.
HC: When is a good time to change? What are the flags?
KG: Some of the flags that a detailed chat with your accountant may be needed and a possible change may be required include:
- When you’re getting close to meeting the GST threshold
- When your net profit is around the $80,000 to $100,000 range
- When your family income is or exceeds $180,000.
HC: Okay, so what can we claim? We know that many copywriters work from home, so what can they claim in relation to that? If they have a study where they work, can they claim for that part of their mortgage? Or are any tax benefits actually offset by capital gains tax?
KG: Home office expenses can be a significant portion of business-related tax deductions for copywriters and creative businesses using a home office. However, there’s a distinction between a “home office” and your home being a “place of business”.
If it’s a home office and you perform some work there but otherwise operate from a commercial office or serviced office, then your deductions are limited to a “cents per hour” claim for:
- heating and cooling
- depreciation on home office equipment
- telephone and internet usage.
If it’s a place of business (i.e. you only operate from home and do substantial work there), then you may be eligible to claim what we call “occupancy costs”—a proportion of rates and insurance, as well as a percentage of interest on the mortgage (or the rent if you aren’t a homeowner). And this is on top of the business percentage of electricity, gas, water bills, rates, depreciation, telephone and internet costs.
The downside of operating from home is the potential CGT implications. In Australia you can generally ignore a capital gain or loss you make when you sell your home or main residence. However, when you use it as a place of business or for income producing purposes the full exemption may be reduced, and on disposal of your home you may have a partially assessable capital gain.
There may be a tax and cash flow benefit of claiming a percentage of the mortgage interest, rates and insurance now, but it’s the future unknown quantity of the assessable capital gain that can put people off doing so.
No matter whether you have a “home office” or a “place of business”, you should determine the proportion of the floor space your dedicated office takes up to enable you to proportion your deductions correctly.
HC: There’s a persistent rumour that us creative types can claim all kinds of creative activities. I write for a living, so can I claim my Kindle purchases? And what about movies?
KG: To work out if you have a valid tax deduction you should ask yourself, “Would I be incurring this expense if I didn’t operate my business?” If the answer is “Yes” then it’s likely to be a business deduction.
As for Kindle purchases, if it’s reference books or guides these will generally always be deductible. Movies and fiction books would need to be considered on a case-by-case basis. If you do have an expense like this, that may be questionable as to whether its personal or business. Keep a notation on the invoice as to why you purchased it and how it relates to a current job or prospective client.
HC: Now onto superannuation, which for our overseas listeners is a government-supported pension scheme here in Australia. Most people put 10% of their salary into super, right?
The Government will put in a co-contribution of up to $500. But this is only for low- and middle-income earners (i.e. a taxable income of less than $50,454, with the entitlement reducing by 33 cents for every dollar over $35,454), and needs a super contribution of $500. And you can’t claim a tax deduction for the super contribution.
HC: As a sole trader I’m not legally obligated to pay super, am I?
KG: That’s correct. As a sole trader there is currently no obligation for a business owner to contribute to super. But it should be considered as an overall part of your retirement and investment planning though.
HC: What should sole traders know about putting money into super for themselves?
KG: From a tax perspective, you’re responsible for making your own contributions. To claim a tax deduction for personal super contributions made for the current 2016 financial year, you need to meet what we call the 10% rule. This means that if 10% or more of your assessable income comes from salary or wages from an employer, then you won’t be eligible to claim a tax deduction. This rules applies even if the rest of your assessable income comes from running your own business.
Just as a side note, the 10% rule may be removed from the 2018 financial year, as announced in the Federal Budget, if the Coalition wins the upcoming 2016 Federal Election.
The most important step in ensuring you can claim a tax deduction for your super contributions is to ensure you pay the contribution before 30 June. It must reach the fund by 30 June, so allow at least 3-7 days if using electronic transfer.
HC: Are there any tax incentives open to low income earners? Say, copywriters in their first year of business?
KG: Australia has a progressive tax system, which means low income earners have a reduced tax liability. The current tax rates mean that individuals with taxable income of $18,200 or less pay no tax. Depending on family income, with low income tax offsets an individual could earn up to approximately $20,500 without incurring a tax liability.
A word of warning for those starting up their copywriting business while transitioning from employment. If you incur a loss from your business, and want to apply that loss against your wages, you need to meet a few criteria. One is that your assessable income from business for the year was $20,000 or greater. If not, you may be required to quarantine that business loss and use it in a future income year.
HC: Let’s talk about depreciable assets—computers, furniture etc. Sandy Forbes Taylor wants to know what the dollar limit is for assets that you can claim 100% in the same year.
KG: The general limit for assets has been $1,000 or less for small business entities. The cost is the GST inclusive price less any GST your business is eligible to claim.
These assets can be written off as a tax deduction in the year they are incurred.
HC: There’s lot of talk about the small business $20,000 and asset depreciation here in Australia. But how does that really apply to sole traders?
KG: Yes, there’s currently a lot of end-of-financial-year advertising for the $20,000 “instant asset write-off” from car dealers and tech stores as we lead up to 30 June.
The $20,000 is an increased threshold, up from the $1,000. It’s available to all small business entities—sole traders, companies, partnerships and trusts. It’s not a bonus tax deduction, but rather brings forward the depreciation on business assets into the year it is acquired.
The $20,000 is also the GST-inclusive cost of the asset less any GST tax credits the business is entitled to claim.
To give you an example, let’s say a sole trader has a taxable income of $98,000 and acquires a $20,000 business asset. At that income level, the asset deduction will result in a reduced taxable income of $78,000 and reduce the tax payable by approximately $7,710 in that year.
HC: So what can I actually buy? And when does it end?
KG: The increased threshold applies for the current 2016 financial year, and expires at the end of the next financial year (30 June 2017).
You can use the $20,000 immediate asset deduction to acquire business assets such as new computers, TVs, iPads, office furniture, software and motor vehicles. Even Xboxes or PlayStations for employee lunch rooms would be eligible for businesses that employ staff.
If an asset is used for both personal and business purposes, then the deduction will need to be apportioned to exclude the personal use of the purchased asset.
HC: A little personal story here is my She shed, which is kinda famous. It cost me around $15k and I thought I could claim this all back. But I couldn’t. I was gutted. Can you explain why I couldn’t Karen?
Yeah, certainly Kate. Essentially your She Shed is a building structure and falls under different depreciation rules called “capital works”. Capital works for building and structural improvements are depreciated under a different section of the Tax Act and aren’t eligible for the $20,000 immediate write-off, which is why the construction of your She Shed was ineligible. Instead it is depreciated at just 2.5% of the building cost each year, which is significantly less of a tax benefit then the $20,000 immediate asset write-off.
HC: What about Cars? Can I claim that as a deduction (or bikes?)
KG: Yes, motor vehicles or bikes that come under the $20,000 threshold can be claimed in full in the year incurred. As mentioned earlier, if the car is used partly for private use a sole trader will need to apportion the deduction.
To determine the business use percentage, a motor vehicle log book should be kept for the vehicle in the year it is purchased. That means starting a log book now before 30 June, and maintaining it for 12 weeks to enable a business percentage to be determined.
HC: Again in Australia, there’s something called the Medicare levy. Can you explain what this is, Karen?
KG: The Medicare Levy is an additional tax on taxable incomes that was implemented to partly fund our Medicare system that provides free or low-cost medical for Australians. The current Medicare Levy rate is 2%, and is paid by all taxpayers with income of more than $20,896 (or $35,261 for couples).
HC: I recently had to start paying it for my entire family. Can you explain why, Karen?
KG: No worries, Kate. As your family income exceeded a certain threshold, you were paying an additional Medicare Levy Surcharge of 1% because you did not hold private hospital insurance that covered all your dependents (e.g. spouses and children).
The “all” part is critical. Even if you hold a single policy but your spouse has no cover, you both would still be liable to pay the surcharge. Now that you have taken out private hospital insurance for the entire family, you will not be slugged the additional surcharge from the time the family policy commenced.
The Medicare Levy Surcharge is an additional levy from 1% to 1.5%, designed to push high-income earners into taking out private hospital cover for their family.
HC: Karen is actually my accountant, and as she knows I’m always asking for a pat on the back when it comes to earnings and profitability.
KG: And you’re doing a fantastic job this year Kate, as always.
HC: What sort of ratios in terms of sales versus net profit should we be looking at? In other words, what are the signs that my business expenses are too high?
KG: One of the biggest items we like to educate clients on is monitoring their own income, expenses and profit during the year, and comparing it to prior years and future budgeted figures as well. When you become familiar with what your profit and loss items generally look like each month, you can spot when expenses are getting too high or income is dropping too low.
Generally, copywriters don’t have significant overheads, and expenses are generally along the lines of home office, subscriptions, and sub-contractors if they use them.
In terms of comparing businesses to an industry average, we see a net profit percentage around the 50-75% mark to be around the norm. If you use subcontractors in your business, then the net profit percentage is generally at the lower end.
What I would suggest is if your net profit is below these benchmarks then it’s a good time to review your financials with an accountant or bookkeeper. It may be a simple case of inaccurate record keeping, or a sign you need to review your expenses and business model going forward.
Over to you
Do you have any other copywriter financial questions? If so please post below.