Most small business are required to pay GST on a quarterly basis. A problem we see a number of small businesses encounter, particularly startups, is that cashflow can been a little tight when the end of the quarter comes around.
An important issue to remember is that when charging customers, the additional 10% invoiced as GST shouldn’t be considered as income or money coming in. The reason is that it will end up being paid to the ATO at the end of the quarter. This is easy to forget, particularly when decisions need to be made about paying yourself or making investments for the business and you look at your bank balance to see what you can spend.
To assist in dealing with this cashflow issue at the end of the quarter, some small businesses put the 10% aside into a separate bank account as soon as the income is received. By doing this, the funds are kept away from the general bank account.
At the end of the quarter, when the BAS is prepared, it is very likely that the GST put aside may be too much because it doesn’t account for the GST refundable on the expenses incurred. So rather being short on cash at the end of the quarter there would actually be a little extra, which has been saved in the separate account. This system works well with a number of small businesses and startups.
Other times, we see business who receive monthly performance summaries as part of a Nudge package look at what they owe the ATO at the end of each month and set that money aside.
Either way, these businesses are planning for the future by managing GST as part of their small business cashflow.
This Tax Tips Tuesday is brought to you with love by Nudge Accounting.