- 28th of April 2022: Superannuation Guarantee payments for the period 1st of January 2022 to the 31st of March 2022 must be made by this date otherwise Superannuation Guarantee Charges will apply and you’ll lose the opportunity to claim the expense as a tax deduction.
- 16th of May 2022: Any outstanding 30th June 2021 Income Tax Returns must be lodged.
- 23rd of May 2022: Fringe Benefits Tax returns must be lodged and paid. Remember: lodging an FBT return, even if it’s $Nil, limits how far back in time the Tax Office can go if it decides to take a closer look.
- 26th of May 2022: March 2022 quarter Business Activity Statements are due.
How is your business going? Do you know off hand how profitable you are? If not, it might be time to take a closer look at your numbers.
Analysing your income statement (profit and loss) and balance sheet on a regular basis will help you identify ahead of time any areas of success or concern that may be arising. Knowing what your business’ strengths and weaknesses are can give you an incredible sense of control and power. You can use the insight into your financial performance to enhance your profit-making capabilities and reduce your exposure to risks.
Over the course of the coming months, we’ll be taking you through a series of business ratios you can calculate to further examine your business activity and deepen your understanding of the reports your accounting software produces and the end-of-period financial statements we prepare. To use this information, however, it will be important that you’re working with up-to-date information. If you have any outstanding bookkeeping that needs doing, we suggest you get that done first. That way, the reports you refer to will be representative of your current situation and the various ratios you calculate will be meaningful.
Your Gross, Operating and Net Profit Margins
A quick way to determine your business’ profitability is to look at your gross and net profit margin ratios. Margin ratios provide feedback on your ability to convert sales into profits at various points along your income statement.
Gross Profit Margin
Your gross profit margin is calculated by dividing your gross profit amount by your total revenue figure. This calculation occurs before we even think about your expenses so it’s not the full story by any means. Still, it’s a helpful metric to know.
Here’s how to work it out:
Gross Profit Margin = Gross Profit / Total Revenue
= $80,000 / 150,000
= 0.533 or 53.5%
That means that for every $1.00 coming into your business, $0.533 is gross profit.
Typically, gross profit margins will remain relatively stable throughout the course of a business’ lifetime so it’s important to keep an eye on it as significant fluctuations either up or down can be an early warning signal that something has gone wrong. For example, if you’re looking at your income statement and find you are averaging a gross profit margin of 15% each period, suddenly seeing a reduction to 2% could highlight a problem. You may be incurring increased costs of raw materials; the business may be being mismanaged; you may be the target of fraud; or, simply, there may be an error with your record keeping somewhere that needs fixing. Unless you first know your numbers, you won’t know where to look to make changes.
Of course, gross profit, operating profit and net profit are all different things and so there is still more to consider than just your gross profit margin. Next edition, we’ll cover how to calculate your operating profit margin.
Asked & Answered
Outstanding Tax Lodgements
Question: My mother will be 66 years old this August. She has not worked in the last decade and has essentially been retired (although ineligible for the Age Pension) since that time. In November 2021, a parcel of land she owned through a Unit Trust was sold and she received a share of the proceeds which included a capital gain. While she will obviously need to have her 30th June 2022 income tax return prepared and lodged, she is concerned that the Tax Office might subsequently request that she lodge income tax returns for prior years despite the fact that she has no income to declare.
The last time Mum had any dealings with the ATO, she was advised there was an outstanding tax return due (2012 year, I think). Given she has moved house since she stopped working, Mum is concerned that all of her old records have since been misplaced or destroyed/disposed of and she would have no realistic way of providing the Tax Office with information from so long ago.
My question is: how far back in time can the Tax Office make people to go in terms of lodging their tax returns? Is it okay if Mum ignores the older tax return and just focuses on this financial year (and perhaps Returns Not Necessary for the previous ~four financial years)? She expects to qualify for the Age Pension in the next couple of years and does not intend to work again. She also has no other assets to speak of and so no further capital gains will apply. What are people expected to do if they cant provide substantiation for income they might have received in prior years?
Answer: Australia’s tax system is one based on self-assessment whereby individuals are required to advise the ATO of obligations to lodge and/or notify the Tax Office if no lodgements are required. Ignoring the older tax returns is not an option — in fact a WA doctor was recently sentenced to jail for his failure to lodge tax returns and BAS — however, this issue isn’t as difficult to rectify as you might think.
When your mum appoints us to act on her behalf, we will be able to see which additional financial years (if any) the ATO wants her to address. Then, if your mum confirms she was not required to lodge a tax return for the years in question, we can simply lodge a “Return Not Necessary” (RNN) with the ATO for each applicable year.
If your mum believes she wont have a further obligation to lodge tax returns beyond the 2022 financial year, when preparing her 2022 tax return we can update the front cover to say “Final” which will let the ATO know that she has no obligation to lodge tax returns in the future.
For those people who are not required to lodge a tax return, instead of lodging an RNN each year, there exists the option to lodge a “Further Return Not Necessary” (FRNN) instead. This can either be done via a Tax Agent or using ATO Online Services.
Although you didn’t ask, it is common for fines and penalties to apply in instances where a tax return with an amount payable has been lodged late. It has been our experience, however, that where a client had no tax liability, no penalties were issued.
Lastly, with respect to providing evidence of income and deductions where records may have been lost of damaged, the Tax Office has produced a helpful guide.
Xero Quick Tip
Chasing debtors can be an all consuming process, however, Xero can be put to work to save you precious time.
Under Settings > General Settings > Invoice Settings, you will see an Invoice Reminders button. Here, you can turn on invoice reminders to allow Xero to automatically send your clients reminder notices based on how far past due an invoice is. What’s particularly great is that the software gives you the opportunity to get quite specific. For example, you can:
- choose to set your reminder emails to go out at a certain number of days past due dates, or at any other interval that best works for your business;
- include a link in the reminder email to your outstanding invoices, for ease of payment purposes;
- choose to only send out reminders for late payments if the relevant invoices are over a particular amount; and/or
- turn off reminder emails for particular clients or invoices.
To customise what each reminder email says, you simply need to click the Edit link.