There are number of key accounting, tax, insurance and financial considerations when starting out your career as a Barrister. Gone are the days of your employer withholding income tax from your wages and providing superannuation on your behalf. You now need to establish yourself as a Sole Trader (business) and take care of these things yourself.
We have put together a summary outlining a number of key areas for your consideration, along with some practical tips to help you on your way.
Legally, barristers are required to operate as a Sole Trader. Which means you will require an Australian Business Number (ABN) to commence practising. You also need to consider whether to register for GST and as a result commence lodgement of your quarterly business activity statement (BAS). GST registrations are required when your projected annual turnover is greater than $75,000. Whilst under this threshold registration is optional, please make note that if you do not register you are not entitled to claim input tax credits on items such as chamber rent and clerking fees.
*Tip #1 – Typically barristers account for GST on a cash basis. When completing your BAS, GST on income and expenses is only reported when it’s physically collected and paid. An apportionment of input tax credits is required on expenses (e.g. mobile phone plan) or assets (e.g. laptop) you purchase that are used for a mixed purpose (e.g. part business and private).
A particular issue we commonly see in a barrister’s first year of business, is a lack of budgeting for income tax payments. As a Sole Trader the net profit from your services will be taxed in your personal income tax return at your marginal tax rate. The income tax on the business profit in the first year will only be paid to the ATO upon lodgement of your personal tax return, which can be up to 23 months after you commence business. It is then required to be paid in a lump sum payment. Whilst this may be a scary thought for some, it simply highlights how important it is to budget and put money aside for the tax as you are earning the income. This will help to avoid any surprises and/or financial strains in the future.
*Tip #2 – A common approach to budget for tax payments is to setup a separate bank account and put money aside towards the GST and income tax liabilities as you earn the income. Alternatively if you have a mortgage with an offset account you could also use that to maximise the benefit. If you liaise with your clerking office they can (if requested) split payments to you between various bank accounts.
*Tip #3 – When planning for your tax payments you will need to potentially factor in a HECS repayment, based on the ATO repayment thresholds as well as other levies (e.g. The Medicare levy, Medicare surcharge, Temporary budget repair levy etc.)
It’s important to ensure you are claiming as many eligible tax deductions as possible to maximise your after tax dollars.
Some expenses that are often omitted, but can be claimed in certain circumstances are;
- Home office expenses,
- Motor Vehicle costs,
- Mobile phone costs,
Furthermore, with the introduction of the small business asset write-off in May 2015, small businesses can claim an immediate write-off for assets purchased for use in their business that cost below $20,000. Therefore items such wigs, gowns, vests, laptops, mobile phones, books, journals and chamber furniture can be claimed as an immediate tax deduction without the need to depreciate the items over a number of years.
*Tip #4 – One of the larger deductions available to Sole Traders is your superannuation payments. This is often a concern of new barristers when flying solo. Your employer has historically paid superannuation contributions on your behalf and it’s now in your hands to manage. It may be worth discussing with your financial advisor, (dependent on your cash flow position) a strategy that will maximise your business deductions, minimise your tax liabilities and grow your superannuation assets.
*Tip #5 – It’s important to keep good records for your business in order to maximise your tax deductions and ensure you don’tt miss any when preparing your income tax return.
We are often asked whether a software program is required to best manage your records. From a practical point of view in commencing business, minimising your costs is crucial and therefore maintaining a simple spreadsheet or using a smartphone app to keep track of your expenses is more than adequate to maintain your records.
Generally business and taxation records must be kept for at least five years, this includes invoices, receipts, clerking statements and bank statements.
*Tip #6 – Ask your accountant for an excel template to best keep track of your income, expenses and GST obligations.
*Tip #7 – When putting together your filing system, you may consider scanning or photocopying your receipts as they can fade over time.
It is important to have an awareness and put a process in place to meet your ATO obligations. There are numerous lodgements such as the quarterly BAS and your personal tax return due at various times throughout the year. If you are not on top of these deadlines, the ATO can apply penalties and interest for late lodgements and payments which is not ideal.
*Tip #8 – By using an Accountant / Tax Agent they can access extended lodgement and payment dates, up to a month for Business Activity Statements and 7 months for Income tax returns.
Protecting your assets and income – Insurance
Obviously you require professional indemnity insurance to practice, however you should also consider your personal insurance position to ensure you and your family are adequately protected. A key focus should be income protection, to protect your number one asset – the ability to generate income. Given the change in your income type from salary and wages to business income, now would be a great time to assess your current personal risk insurance position.
*Tip #9 – Given the change in your personal family circumstances, it may be worth consulting your financial advisor to discuss your goals and objectives to ensure you have adequate personal risk insurance coverage for you and your family such as life, total and permanent disability (TPD), income protection and trauma insurance.
Personal financial plan
A personal financial plan is a documented strategy to build and protect your wealth. In putting together a financial plan, questions you may ask yourself are:
- Are our assets adequately protected within the family group
- How can I structure my financial affairs to best minimise my tax
- Have we planned for our children’s future school fees
- How can we use surplus funds in the most effective environment
- When is the right time to start planning for retirement
*Tip #10 – It’s important to ensure you have a plan in order to build, protect and preserve your family wealth and assets for the future.
If you would like any further information or would like to discuss any aspects of the above article, please contact your local William Buck advisor.
Disclaimer – The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of a person acting without such advice. Liability limited by a scheme approved under Professional Standard Legislation. This information is current as at 20th November 2015.