Hey guys, welcome back to another business accounting guide.
This one is for all of the recruiters out there…
So, if you’re looking at starting your own recruitment business,
there are a couple of things you need to consider before starting.
For example, how are you going to structure your business?
Are you going to set up a company or are you gonna operate as a sole trader?
There are also different types of taxes and compliance obligations you need to consider
on top of that, like income tax, GST and Fringe Benefits Tax.
In today’s video, I’m here to navigate it all… So make sure to stick around…
There could be some useful tips you don’t want to miss out on.
Let’s start with your business structure.
As I mentioned earlier, you can set up your business through a sole trader structure,
or you could set up a company.
Look, a sole trader option is definitely the most
cost-effective structure and requires very little admin at all.
But if you already fall into a high-income tax bracket,
it may not be the best option for when it comes to minimising your tax.
So you’re earning over a $180,000, then you shouldn’t consider a sole trader.
This is because if you’re running a sole trader business, you’ll have to
pay income tax on your individual marginal tax rate… Which could be as high as 45%!
A company, on the other hand, is taxed at a flat tax rate of 25%.
So this may be a better option from a tax perspective.
You’ll also have a far better asset protection because a company is a separate legal entity…
So if creditors want to touch your personal assets, they can’t because it’s separate.
But setting up a company comes with a tonne of administrative responsibilities.
Some people also consider setting the business up in a Trust,
this was a popular structure back in the day due to the ability to distribute
profits to family members, succession planning and asset protection purposes.
I find that as much as this sounds like a good
idea, there are alot of circumstances that need to be met for this to be worthwhile.
For example, you need to have a lot of family members that have a low income
and your family members must be over the age of 18 years old.
If you don't meet all those criterias then
the taxes can be high because you’re distributing to a high income owner.
So you’ll need to figure out what works best for your circumstance when setting up your business.
They both have pros and cons, but you need to establish how
these pros and cons translate into specific circumstances.
So there is a 4th option that you could consider.
You could set up a company then a discretionary
trust - which will essentially be the shareholder in your company.
This allows you to choose between retaining profits in the
trading company or distributing your profits to the trust beneficiaries via the trust - who
will then pay the tax at their individual marginal tax rates and possibly distribute
the profits to investment entities within the family as well, like bucket companies.
This could result in lower taxes for the family,
especially if your beneficiaries fit into the tax bracket of below 32.5%.
But remember, the bussiness structure only works if it’s set up
with consideration with your own circumstance for your whole family.
It’s not a one-size-fits-all situation. So
make sure to chat with a good accountant to go over your structure.
Okay, so now that the structure is out the way, what comes next?
Well, there are a couple of things.
First, you need to register your business with
the ATO for any tax that applies to the operations of your recruitment agency.
Generally speaking, this will include registering for GST,
fringe benefits tax and PAYG withholding, also known as pay as you go withholding.
A business must register for GST if your GST turnover is more than $75,000
or more in a twelve-month period.
If your business is registered for GST, you must include 10% GST on your recruitment services.
You then need to report your GST to the ATO via business activity statements also known as BAS.
You lodge your BAS to the ATO on a monthly, quarterly or annual basis.
Most businesses do it quarterly, and those quarters are usually
January to March, April to June, July to September and October to December.
The BAS allows the ATO to collect the taxes you have to pay to the ATO
earlier so you don't get hit with a huge tax bill at the end of the year.
It also allows you to report the total income and taxes to the government.
So then the ATO uses these figures to cross check it with your income tax returns
for your employees, for your business and your personal tax return to ensure it all matches.
Fringe benefits tax is 47% tax payable on benefits you provide to one or more of your employees.
Common examples of fringe benefits include the private use portion of
your company car or non-business accommodation for your employees.
Sometimes you could also pay private health insurance or gym fees on behalf of your employees.
But if you do, you’ll have to deal with FBT as well. FYI, even directors
such as yourself could be subject to FBT if the company provides that benefit to you.
On that note, if your business has employees, you must withhold
tax from their wages and salaries paid to them.
Your recruitment agency must forward the tax withheld
to the ATO at regular intervals when lodging your Business activity statements.
The ATO then credits the employees taxes at
the end of the financial year when lodging their tax return on behalf of the employer.
This is known as PAYG tax withholding. So when you pay your BAS, it's not just
for GST, it’s actually for your wages tax for your employees and for yourself as well.
As part of your business payroll obligations,
you also have to consider superannuation responsibilities.
Under the superannuation guarantee scheme,
most employees are entitled to a compulsory super contribution for their employees.
As an employer, you must contribute 10% of your employee’s ordinary earnings
into a complying super fund or retirement savings account.
You must pay the superannuation for the employees and directors at least
per quarter. I always recommend to my clients to pay monthly at least so you don’t forget!
One last thing about your payroll is that you must prepare a payslip
and submit the single touch payroll to the ATO for your employees.
This allows your employees to know what their pay consists of - gross wages, hours, taxes,
super and annual leave and sick leave.
It’s important to consider using an accounting software such as Xero, Quickbooks or MYOB.
I have done a great video about this so please watch it.
As a business owner, deciding whether you should
hire an employee or use a contractor can be a huge deal.
What you decide will affect things like how much tax you pay,
superannuation, insurance your business pays, as well as ensuring you comply with employment laws.
So we’ve covered employees, but what happens if you hire contractors?
I’ve broken down all this information in another video, so make sure to check that out as well!
Next up, we have tax deductions.
Tax deductions are a great way to minimise your tax obligations,
so you should definitely make sure you’re claiming every single one of them.
Some common tax deductions include the cost of claiming your car when driving between
different jobs or going to see clients on the same day or to and from alternate workplaces.
And if you’ve been working from your home (which most of us have been, it’s COVID),
you can claim a tonne of home office expenses as well.
Other common deductions include travel expenses,
phone and internet costs, parking fees and professional association fees.
Those are the most important things you need
to consider when setting up or managing your recruitment agency.
But… I have some bonus tips for you before I head off.
When it comes to referral partners and commission,
you need to make sure that they have an ABN if you want to claim a tax deduction for this.
But many referral partners in this industry operate
as an individual and may not be a sole trader, so this may get tricky if they don’t have an ABN.
A handy trick is to buy gifts or gift card in replacement of referral fees.
As long as the expense is directly linked to your business and encourages more referrals,
then the ATO sees it as an advertising expense - which means it’s tax-deductible!
And if you’re buying gift cards for your
employees - as long as they are less than $300 and infrequent
and minor, the gift card will be FBT exempt, and you can claim tax deduction on that as well.
Another important consideration is when your business starts generating profit.
Remember to set aside enough money for income tax so that you’re
not blindsided when you see your tax bill.
We always advise clients that a good rule of thumb is to take at
least 30 to 40% of your profits to allow for GST and income tax.
A big problem for your business owners is that they think that they have money in the business.
If you think like this you will always run into problems.
A business is a separate legal entity and it has its own bank account.
This is used to pay for bills, taxes, employees, etc.
Just because there is money in the business bank account it doesn't mean it’s yours.
The last thing before I sign off is to make sure to have key experts in your team such as lawyers,
insurance brokers and financiers on your side when it comes to dealing with
employees, referral partners, clients and candidates.
Make sure they’re done properly so that you’re protected
in the instance of something happening or going wrong.
Anyway guys, that’s it from me.
Thanks very much for watching.
I hope you found this video useful. And if you did, make sure to like and subscribe,
we post a tonne of videos like this and help you navigate the business world with taxes.
And if you have any questions, we’d love to hear from you in the comments.
See ya next time!