Managing Tax ObligationsJun 05, 2023
I've heard of many different ways to manage tax and GST obligations over the years.
I've just read Scott Pape's (The Barefoot Investor) newsletter from a few weeks back where he says he puts 35% of all income aside into one bank account for GST and income tax combined.
I've had clients in the past whose accountants advise something similar - 30-35% depending on a couple of variables.
There's nothing wrong with this necessarily. It puts the money aside and it's there when it's needed to pay tax and GST.
You often end up with more than you need though, which can either feel like a bonus at the end of the year or it can feel like a confusing waste if you could have used that money elsewhere during the year
I've taken on a client with this system who had so much money in the tax account, and no real idea if it was too much or too little but they were scared to touch it because it was the "tax account."
Call me detail-oriented but I would rather know exactly how much I need for GST and how much I will likely need for tax.
If you're using accounting software (and who's not these days) and the accounts are up-to-date and reconciled regularly, then figuring out how much GST is owed is simple.
For that reason, I have a separate GST account, and each week when I do my accounts, I simply run the GST report for the period to date, and top up the GST account to match the figure on the report.
Depending on the structure of the business, saving for income tax might be just as simple in that ultimately we pay income tax based on net profit.
Obviously, there are a few variables with this calculation, so you might want to get some advice from your accountant. But ultimately you should be able to get a % to put aside for taxes into a separate tax account.
This way it's very clear how much is saved for GST and how much is saved for tax.
I'm keen to hear what you do to manage your own GST and tax obligations, and what you advise for your clients. Do you do one account for all, or separate accounts for everything?
PS: I also have a separate account for payroll taxes, and I put regular amounts of money aside for annual expenses. What do you do?
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