Home – New Forums Money matters Instalment Activity Statement and Expenses

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  • #986151
    eilyk88
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    Hi there! So, after a long time lurking I have finally come to a point where I need to ask a question of my own and hope all you wonderful people can help me out! I have done a search on Flying Solo and across the web, but I can’t seem to find a clear answer to my question.

    I am in my second year of running a casual freelance web and graphic design business. As such, I am now paying my taxes quarterly. I have done one already and opted to adjust my instalment based on the ATO instalment rate provided to me as my income fluctuates as I do this casually on top of a full time job.

    With almost every job I take on, there are costs associated that the client shoulders and I simply organise, purchase and set up (most commonly web hosting and domain costs; and printing costs). These costs are included both in my estimate in the final invoice. The money received for these costs go straight to the supplier. Sorry for my lack of terminology for what these costs are called in accounting land but I just track them in my simple accounting tool under ‘expenses’. More often than not, especially when it comes to printing, these costs outweigh my fees. For example, this quarter I invoiced approximately $4,000. $3,000 of that was expenses I paid to suppliers and $1,000 was all the money that went into my pocket.

    So, my question is, when my Instalment Activity Statement asks for my PAYG Instalment Income (T1) do I just – using the numbers above – state the $1,000 (full invoiced amount minus expenses) as my income or do I need to declare the full $4,000?

    The thing I can’t get my head around here, is that if I have to declare the full $4,000, I will be paying tax on income I’m not actually earning. I know it will then iron out come tax time when I claim deductions but this basically means I am out of pocket throughout the year.

    Halp? :confused:

    #1156533
    Past-Member
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    The first year of instalments is the hardest. I just think of it as compulsory banking. Anything over you get back at the end of the financial year.

    FYI I do the ATO recommended PAYG every quarter together with my GST BAS. I don’t adjust it. I find it works out better for me that way and I prefer not to owe money.

    I have a bank account that I transfer money into to cover GST and PAYG each month and anything over is a bonus at the end of the year.

    If you are concerned, just call the ATO. They can be very helpful.

    #1156534
    eilyk88
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    Thank you, Karen for your reply.

    Sorry to confuse, I don’t adjust the rate, I use the ATO rate but I opted not to use the predetermined quarterly dollar-amount that was based on my 2013 assessment as I will be earning significantly less going from full time freelancing to casual freelancing. I also transfer income as I go based on the rate the ATO provides into a bank account so there is no sting at the end of that quarter.

    However, I have only been transferring amounts for tax calculated from the money I get in my pocket and not the money that, although I invoiced and received, went straight to a supplier. If we were to work off the figures in my original post, if I were to state the entire invoiced amounts without deducting the expenses, the full $1,000 I should be getting in my pocket and using to pay off my mortgage etc, will be going to the ATO for income I didn’t really earn.

    #1156535
    Past-Member
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    When you do your yearly tax, it’s gross minus expenses, and that’s what the ATO works out your PAYG on.

    So, I would think it would be the same. You just have to have records to show how you got to the adjustment that you did if they ask you.

    Read more at the ATO business page here http://www.ato.gov.au/Business/Activity-statements/Pay-as-you-go-(PAYG)-income-tax-instalment/

    #1156536
    eilyk88
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    Oh, of course! :)

    So, it essentially doesn’t matter if you deduct expenses quarterly or at the end of the year as long as you can justify the amount and, of course, I don’t deduct the expenses again at tax time, right?

    #1156537
    Past-Member
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    Eily – when you do you final tax return you have to include ALL your income and ALL your expenses. What you are doing is then justifying what you submitted in your PAYG during the year.

    If the figures are way out, then you will need to make payments or the ATO will refund you; either way you should have a better idea.

    I use an accountant for my annual tax return. The fees are tax deductible for the following tax year and I find them invaluable. I do all my own PAYG and GST but they do the annual tax return. They can pick up things that you miss. Really important to have someone you can talk to about your business.
    Highly recommended.

    Best wishes.

    #1156538
    eilyk88
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    Thanks very much. Appreciate it!

    #1156539
    nighttax
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    To correctly calculate your quarterly PAYG instalment you must use the total gross sales income. DO NOT DEDUCT THE EXPENSES. If you do you will have a bill to pay at the end of the year.

    Simply put the $4000.00 in as income and multiply it by the rate advised by the ATO. You are not being over taxed as the ATO percentage rate is calculated by the ATO to also estimate your expenses so it is a lower rate then what it should be if you only report your income less expenses (or net income).

    regards
    Evan (accountant and tax agent)

    #1156540
    TehCamel
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    I could be wrong here, but, if you’re buying a widget or service from another provider to sell to your client, then doesn’t it become Cost of Goods Sold, rather than an expense ?

    #1156541
    nighttax
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    TehCamel, post: 181310 wrote:
    I could be wrong here, but, if you’re buying a widget or service from another provider to sell to your client, then doesn’t it become Cost of Goods Sold, rather than an expense ?

    Whether you call it Cost of Goods Sold or Expenses it is still an expense incurred in the making of an income. So for this discussion. DO NOT deduct COGS or other expenses from the gross sales. The Income you put on the IAS is the total Gross income less the GST charged on the income of cause because it is not income.

    Regards
    Evan

    #1156542
    eilyk88
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    Hi guys,

    Thanks for the new info. I’m still a little confused. Let me try to use a real world example to see if it helps clarify things for me. Let’s assume this is my only “income” in the entire quarter – a realistic situation for me as I have moved on from freelancing full time to being employed full time but maintain support for my previous clients on the side.

    A client calls me up and requests a reprint of all their business stationery. It costs $2,000. I organise the printing, the printer invoices me and I invoice the client. Then, a clients web hosting needs renewing. I invoice the client $250 for heir yearly hosting.

    Come the time I have to lodge my quarterly income tax instalment, I’ve invoiced $2250. None of which has gone into my pocket. Assuming my instalment rate is 30%. This means I have to fork out $675 to the tax office for income I never made?

    ….what?!

    As far as I know these types of costs were not included by my accountant in my last tax return so really these types of costs haven’t been factored into my instalment rate. Also, it was my first year using this accountant, and I haven’t been back since as I didn’t think he was very helpful. I haven’t had the greatest experiences with accountants so I am currently just trying to figure this out on my own until I find a reliable, helpful accountant. So I apologise for my lack of knowledge but appreciate all the help.

    #1156543
    StellarScott
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    Hi Eilky

    The instalment rate the ATO gives you is based on the priors year income

    Lets assume Income/Sales Revenue 100,000
    COGS and other deductions 70,000
    Profit 30,000
    Tax on 30,000 1,000

    So your instalment rate for the following year will be 1,000/100,000 plus GDP estimate or just over 1 %
    You thus include all your income/revenue if you use the income times rate method.
    You can use the ATO fixed amount method but you must choose to in quarter 1.

    Dont change the ATO percentage without seeking advice as you can incur penalties. You could also incur penalties or ATO questions if the revenue declared differs from the net calculated sales from the GST section of your BAS

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