Tomorrow’s Loot Today!
Do your customers pay it forward?
I wasn’t going to do a tax post, but something unprecedented and rather special happened this week.
One of my newest clients asked if she could pay me a chunk of change now for work I’ll do next year.
After deliberating for several nanoseconds, I agreed.
I like this deal very much.
Your customers may too.
Tax Effective
Why would they pay in advance?
To claim you as an expense this financial year.
It seems some clients are real people, just like us.
I pay all my claimable bills by 30 June, even if they’re not due for weeks. I’ve seen this tactic described in every tax-tip article I’ve read.
It makes sense for my clients to do this too.
Of course, not everyone does it. Some accounts payable systems (and people) can’t (or won’t) exceed glacial speed for any reason.
But those who do get a handy tax break.
Future Fund
My client’s pay-it-forward idea is an elegant extension of this principle.
She’s working on a long, complicated article which she plans to let me whack into shape.
As she knows she’ll be using me, why not claim me now?
If you have regular customers, or know they’ll be using you next year, you could float this idea (naturally emphasising the benefit to them).
Risks
If I were a cad, I could make off with my client’s cash and live the high life in Koo Wee Rup – perhaps tormenting her with tart postcards.
Alternatively, she could accost me when I’m elbow-deep in another client’s website and demand that I drop what I’m doing to serve her.
The thing is (and please don’t laugh) we trust each other: we’ll conclude this deal when it’s mutually convenient.
When I sought her permission to write this post she said:
You may want to mention there’s a high level of trust, I wouldn’t do this with every man and his dog.
Also I got the idea because several years ago someone called and asked if they could send me a payment of $5K upfront for some marketing help.
I had no idea who this person was but someone had recommended me! It’s a good way to give yourself a kick up the butt to get work done ASAP.
I heartily concur.
Your Call
For all you know, some of your customers may be awash with funds, teetering on the threshold of a higher tax rate and desperate to pay something (anything!) forward.
I know that some corporate budgets, if not fully spent, reduce subsequent allocations.
As many managers are petrified of diminished funding, this could be your in.
As we’ve learnt from previous posts, you may have only to ask.
Maybe you already have.
- Have you?
- Will you?
- Why not?
- Couldn’t you use the loot?!
I see a bright future, adorned with your comments.
Ideally sooner, rather than later.
But better late than never.
Paul Hassing, Founder & Senior Writer, The Feisty Empire
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G’Day Paul,
It’s a great idea. In my corporate consulting days, I always tried to contact prospective public sector clients who might have funds that had to be committed by June 30. Maybe I can do something similar to rescue my beloved Bombers from a Geelong massacre next weekend.
I was also interested to get more details of the “high life in Koo Wee Rup” My secret ambition’s always been directed towards feckless carousing in Korumburra. That was, of course, after I’d realized that Narre Warren had been gobbled up in the suburban sprawl.
Is my Korumburra dream still a reality? Or should I realign my self development sights towards KWR?
Your professional advice would be invaluable.
Regards
Leon
Hello, Leon. My heart once belonged to Bacchus Marsh, but Koo Wee Rup took the title in my early 20s. Gentrification may yet ruin this bucolic wonderland too, in which case Korumburra could well be the go!
As much as it might make sense it won’t happen here. Payment on the date it is due is what you will receive from us. Yes it is systems and yes it is managing cashflow despite of the tax claim benefits.
I can see the benefits of both but you would need to have the cash handy to give it away earlier than necessary and know that nothing unexpected will popup.
Thank you, MCB. Sounds like you’re a straight shooter. I appreciate your frank response.
Hi folks,
I’d be interested if anyone has any knowledge on this topic with respect to the implications of what type of accounting method both the customer and supplier might be using. i.e cash or accrual.
Excellent point, Jas! It was only after writing this post that I thought to solicit my accountant’s advice. (No response yet.)
I cordially invite all our fiscal friends to hold forth. Or even fifth.
… if only there were an accounting software firm floating around who could give us some idea which way the wind’s blowing on this …
Back in the corporate days this was done years ago to keep the money and not reflect the true profit figure. It was banned in the companies I worked for and anyone caught doing would be sacked. If I remember correctly it also had something to do with the auditors and paying for services not received in that financial year.
One problem with this approach is if your client turns around in the new year and wants a credit for the amount pre billed which can affect your cash flow. It can be due to circumstances outside of their control.
Hi, Susan. The skullduggery angle didn’t even occur to me. I must be moving in the wrong circles!
I was going to ask the ATO to pop in for a comment, but I may well hold fire now!
I’d be MOST displeased if I had to refund my lovely prepayment. I’ve already spent it three ways in my mind. Though I agree about circumstances outside my client’s control.
It’s amazing how we can only truly penetrate a topic in depth when we shine bright minds like yours upon it.
I think Susan has indrectly picked up on my question, in that if you have a business using accrual accounting the payment is considered to be received when the work is done rather than when the money lands in your bank account.
I’m afraid I don’t even know the difference between cash and accrual accounting, Jas.
I seem to have a reverse hybrid system, which is eminently unsuited to accruing cash!
Speaking of the devil, here’s the ATO’s take:
http://www.ato.gov.au/businesses/content.aspx?doc=/content/00149636.htm&pc=001/003/084/008/004&mnu=0&mfp=&st=&cy
I tried to read it, but my eyes glazed over.
Can anyone summarise this, as for a four-year-old?
Paul – I was going to post the same link
http://www.ato.gov.au/businesses/content.aspx?doc=/content/00149636.htm&pc=001/003/084/008/004&mnu=0&mfp=&st=&cy
Unfortunately I’m not an accountant/bookkeeper – but can see if one will visit!
Thank you, Naomi. The accounting modules of my business degree damn near killed me. Numbers are SO not my field it ain’t funny!
Hi Paul
Interesting piece this week. I can see this being a big issue for large corporates, perhaps even has a whiff of Enron about it? However for small businesses it sounds like it could be a good way to keep the momentum going on projects that are in early progress. Or a good way to get the commitment of clients on projects that are always being put on the backburner.
Thanks, Bella. I particularly like the motivational aspect you mention. Once I’d forked out the one-third deposit for my new website, I felt extremely driven to give my IT guy the data he needed to proceed apace.
Cash vs. Accrual explanation: http://www.finos.com.au/cash-vs-accrual-accounting-%E2%80%93-which-one-is-right-for-you/
Thank you, Jason. I fried two eggs on my brain after reading that and they were done to a T!
Hi Paul
Prepayment of expenses is in no way a rort or skullduggery – it is common business practice – however you must understand the implications of prepayments both from a customer and a supplier perspective and also from a tax deductibility and GST perspective
The link you posted is addressing the implications of the immediate tax deductibility to the SBE (small business entity – which is an individual, partnership, trust or company with aggregated turnover less than $2 million) of claiming a full deduction for the expenditure if the expenditure covers a 12 month period or less (and the period ends 30 June 2012)- you will generally see these being expenses of an “annual nature” – such as subscriptions, insurance, rental payments, advertising and the like –
You will also be able to claim a full deduction for prepaid expenses under $1000 regardless of the period in which they are actually incurred
(All figures are GST exclusive)
The next thing you have to consider is the GST implications of “prepayments” – GST is levied in consideration of the exchange of goods and services – therefore is there has not been a exchange of the service for the payment of the cash the question of when do you account for the GST is brought into question – consider a deposit, a layby – the GST is not paid until the exchange has taken place – the deposits and layby payments sit in the balance sheet of the business as a liability until work is complete or the goods are fully paid for – the GST is not claimed or paid until the transaction is complete
Now to answer your question – I believe (please remember this is my personal opinion)that as this was a voluntary payment and there was no requirement for payment under a contract of service and no service has been exchanged – if the expense is over $1000 then there is no advantage to prepayment and no immediate deductibility – if the payment is under $1000 – then trust a lovely customer has been a bonus to your week – BUT you still have to do the work!!!!
Cheers
Leann
Maximising Your Business Profits
boy it must be late – grammer and spelling are terrible – my apologies – hope you understand my late night thought processes
Cheers
Leanne!
Leanne I wasn’t suggesting it was skullduggery. It was what happened in a couple of large multinationals I worked for years ago and the reason they did it. Just wanted to clear it up in case anyone there was any confusion.
Thanks for the explanation for SBE.
I know this is a very busy time for you Leanne, so thank you so much for stopping by and shedding some light on the prepaying treatments! Much appreciated.
Ditto, Leanne. That was very generous of you!
Hi Paul,
Better late than never. People have any number of reasons to show income at certain levels, income tax, Centrelink Family Tax and Health care card benefits, Medicare surcharges and from today the new flood levy. I know it goes on for child support purposes too.
In the olden days, you could increase your Superannuation but poor fund performance, reporting of Superannuation contributions and halving the amounts allowed to be contributed (about to happen once again for those over 50 years of age) has had an impact. It makes sense to use whatever legitimate method to reduce your income, even if it comes back to haunt you in next year’s return when you don’t get the deduction twice. If that means a delay in paying the tax or taking advantage of another year of centrelink concessions.
If its legal, we do what we need to do to take advantage of the tax concessions. Get them while you can I say, the way things are going, the rules might be continue to be changed for the worse soon enough.
Thank you so much, Gary! I’m elated to get your expert take on this matter. You’ve kept the Empire from sinking more than once and I’m very grateful for your latest contribution.