Tax Rules

Hi Scott, I am returning to work post-children. I recently started looking for a part-time job, during which time my husband asked me to do his books and admin work. I am legitimately doing two days’ work a week. When we visited an accountant my husband suggested paying me a wage, but the accountant said this is not possible under PSI tax rules (an associate for non-principal work). Is this true?

Danielle

Hi Danielle,

He can pay you … he just can’t claim a tax deduction for it under the PSI taxation rules. (For those of you reading along at home, Danielle is not talking about tyre pressure -- PSI stands for Personal Services Income). Simply put, your husband can’t claim a deduction for the salary he pays you, because you’re not involved in the principal work. Sounds like you have a good accountant!

Scott

I Ruined My Husband’s Life

Hi Scott,

My husband’s business has taken a massive hit, and I am entirely to blame.

He is a part-owner of a successful business for the past eight years. They have finally reached the stage where they are able to expand, and just a few weeks ago were approved for a significant loan.

Today, they received a call informing them the loan has been withdrawn: because years ago when they were setting up the company I was made a director, and I am bankrupt. (My husband and I have totally separate finances. I have nothing to do with the company, and own no shares. I am just a stay at home mum to three young kids).

When the business’s bank sent the paperwork to the seller’s bank, they were flagged my insolvency. The loan was immediately withdrawn. Because of me. Now I have single-handedly destroyed the future (and present) of my husband’s business partners, and the business they have all worked so hard to build. I am at a complete loss as to what I can do, short of divorce.

Ingrid

Ingrid,

Dial down the drama!

You haven’t ruined the business. And you don’t need a divorce, though a competent accountant would be nice.

You can’t be a director of a company if you’re bankrupt (so you should have left before you went bankrupt). But you can fix this; just call your accountant and have them lodge with ASIC and get it cleaned up. Then have your husband explain the situation to the bank -- that you’re basically a patsy director who owns no shares. If the business’s financials stack up (and the directors can offer the appropriate guarantees), they’ll get the loot. If the financials don’t stack up, they won’t.

Now the thing for me that is drama-worthy is that you and your husband still split the bills like you’re flatmates. That’s going to strain your relationship, if it isn’t already (and it sounds like it is). You need to work as a team, split everything down the middle, and make joint decisions. Do it for your kids.

Scott

Reminder: I first wrote about this years ago and highlighted the low fees. Today there are better bank accounts on offer. How do I know? Because my readers constantly email me about them! So before you do anything, google the best accounts on offer now.

I'm So Worried I Can't Sleep

“I wish I could be like you … and own my own business”, said a friend to me this week.

I bit my tongue.

Far as I can tell, he gets paid a comfy salary to essentially sit in meetings, drink coffee, eat nice pastries, and burp out the occasional “well, moving forward, we’ll cross-collaborate on our KPIs to achieve operational synergy with all stakeholders”.

(Okay, so that’s not all he does. He also spends quite a lot of time emailing … about upcoming meetings.)

Ain’t no small business owner I know who’s got time for that. We’re in the trenches, baby!

Small business owners are a different breed: they work their guts out — risking it all — even though the odds of success are well and truly stacked against them.

Case in point: this week I received this email from Tania, whose small business is at the crossroads.

I’m So Worried I Can’t Sleep

Hi Scott,

I feel sick to the stomach. After five years of owning our cafe (which we bought for $100,000 with a loan), we are still only earning about $45,000 a year. That’s after we pay the interest on our loans, and there are a lot of them!

We now have around $220,000 of debt across around seven sources (mainly one bank) and repayments are around over $1,600 per week. So far we have been able to meet loan repayments but are feeling financially stressed — not to mention the day-to-day running of our business.

The business is profitable but, with the debt the way it is and some bad advice that was given to us, we seem to be going backwards. We need to address this ASAP, so we are considering consolidating all our debts into one loan for $220,000 at 15 per cent, which would be only $1,000 per week.

I don’t want to go bankrupt as we are profitable, but we are experiencing a bad run. I am also wary that we have a portion of debt secured against our in-laws’ home. We are making changes to improve our business but it’s not fixing our debt issue, and I am concerned about being able to pay our suppliers and make all our debt repayments.

I am so scared of what could happen and am losing sleep.

Tania

The answer I have for Tania is applicable to many small business owners. Here it is:

The Crossroads

Hi Tania,

You’re at the crossroads.

Actually … no you’re not.

You were at the crossroads a couple of years ago, but for some reason you decided to put the pedal to the metal, speed through the stop sign and hope for the best.

And now you’re face to face with a huge debt truck that could wipe you out. (Guess who watched a bit too much of the Melbourne Grand Prix last weekend?)

Okay, so I’ve helped hundreds of small business owners over the years. While they were all different — and in vastly different industries — every one of those who went broke had two things in common:

1. They Take on Too Much Debt

Despite the marketing hype, banks generally don’t like lending to small business owners — unless they can get security over their family home (or, in your case, the in-laws’ home!). Then, when they’ve got the security, they’ll give you enough rope (credit) to hang yourself.

Here’s the thing: having the family home on the line compounds your stress dramatically — because it’s a highly emotional investment. No one wants to lose the roof over their head, or your in-laws’ heads.

Strewth! Christmas lunch at your house must be a real hoot. (Don’t even put butter knives on the table.)

2. They Don’t Know Their Number

As a small business owner, I’m obsessed with my ‘break-even number’: how much I need each month to keep the lights on and the employees paid (including my most important employee — me).

It doesn’t need to be fancy. Grab a piece of paper and write down — line by line — all your expenses (both variable and fixed). That’ll give you your break-even number. Then match that number against your expected revenue, minus 25 per cent straight off the top for tax.

Just being aware of your number can be enough to boost profitability.

‘Cashflow problems’ are weasel words — a fancy way of saying you’re spending more than your business earns. Other than making more sales, the only way to guard against going bust is to consistently focus on cutting your overheads and transferring those savings into a business Mojo account.

Assume Crash Position

This advice is all well and good for business owners approaching the crossroads, but not for you.

You bought the business for $100,000 five years ago. You now owe $220,000. Your profits haven’t increased.

That tells me the business isn’t paying its way.

Honestly, your chances of consolidating your debts without additional security are slim. More honestly, the biggest beneficiary of your business is the bank, from all the interest you’re paying them!

I don’t like the fact that you’re sick to your stomach and can’t sleep.

I don’t like the fact that you’re earning less than you could earn scrubbing dunnies.

And I certainly don’t like the fact that your parents have mortgaged their home for your business.

I’m all for the thrill of being in the trenches, but sometimes you need to wave the white flag.

Or, to quote esteemed management consultant Mr Kenny Rogers:

“You got to know when to hold ’em, know when to fold ’em, know when to walk away, know when to run …”

In your case, I’d fold ’em.

Tread Your Own Path!

The Real Secrets of Success

Do you know the biggest lesson I’ve learned from answering thousands of people’s questions?

Most people ask the wrong question.

They frame it like it’s black or white. Cut and dried. A hopeless situation with no way out.

(Whether it’s true is beside the point -- it’s true for them.)

Yet every once in awhile I come across a crazy person who asks different questions. Today, I’m going to share with you three examples of thinking different, with three of the major financial decisions you’ll make: a car, a house, and a career.

The Car that Comes with a Year's Supply of Petrol

Car dealerships have their sales process finely honed.

The aim of the game is to upsell you -- that’s why each model has different price points.

Let’s take a look at the difference between the base-model Holden Commodore and the top-of-the-range Calais, which sells for $15,000 more.What do you get for that?

A wankier sounding name for starters.Leather seats, and a heater for your buttocks. Some faux-wood trim. A fancier gear knob. Alloy wheels.

“Do I deserve to have a toastie tushie?” you ask yourself.Yet you’ll make a better decision if you ask a better question: what could I spend 15 big boys on that would make me happier?This question leads to different answers. Fifteen grand could buy you:A year’s worth of petrol, insurance, registration, servicing, car washes, and pine tree air-fresheners.

Or a dirty weekend away each month for a year (with luxury spa treatments), plus a brand-new leather couch, a Sonos stereo system, and one of those over-the-top 60-inch televisions.

Or it could wipe your credit card debt, put three months of Mojo in the bank, plus pay for a slap-up celebratory dinner with an $80 bottle of hoity-toity plonk.

Or you could build a startup coffee-cart business which raises $30,000 a year and channels it to Vanuatu to help build classrooms, libraries and schools. That’s what Andrew Mellody, the 31-year-old founder of the award-winning social enterprise Co-Ground, would do.Then again, Andrew thinks differently.

The Caravan of Courage

Lots of young people complain that they can’t afford to live in a cool inner city area.

Andrew, who doesn’t draw a wage from Co-Ground, asked a better question: “How can I live in the area I love and still devote all my time and most of my money to my charity?”

That question led to an entirely different outcome. In fact, it led to him to Google Maps, where he pinpointed homes, with big backyards, in the area he wanted to live. Then he did a letterbox drop of those homes, explaining who he was, and that he’d like to rent part of their backyard for an old caravan he was doing up.

His plan worked. He got to live in his own four walls (with wheels!), in the area he wanted, for a fraction of the cost of renting. More importantly for Andrew, he got to devote his time and effort to Co-Ground, which he continues to do with impressive results.

The Multi-Millionaire Shoestring Start-up

Another mate of mine sold his financial services business and became one of the wealthiest people on the planet. (You and I are also among the richest people on the planet -- it’s just this guy is richer than all of us -- particularly after he and his partners sold the business for a nine-figure sum).

The business he sold had a thousand staff, offices around the world, and a corner office that overlooked the Sydney Harbour Bridge. Caterers would bring perfectly crafted cupcakes to client meetings, and real coffee (not from a pod).Yet it’s what he did next that’s really cool.

Having spent 30 years helping rich people get richer, he noticed that it didn’t seem to make them (or their families) any happier.

The clincher was that with the windfall from selling his business he was now in his former clients’ position. Yet instead of asking, “How do I turn this pile of money into an even bigger pile?”, he asked “How do I fix these people’s families and their finances?”

That question led him to starting a new business that helps ultra-wealthy families deal with the complexities and stresses of managing intergenerational wealth. And believe me, mix one part unearned wealth with two parts blended family, and you’ve got more drama than an episode of Real Housewives.

His business is doing pioneering work with ultra-high-networth families. He helps them create a legacy -- making meaning from their millions by helping others. He teaches people who are swimming in more money than Scrooge McDuck to spend it in ways that bring genuine joy to themselves and others, instead of living like, well, Scrooge McDuck.

You might think that if you’re targeting the Rich List crowd you’d need swanky harbour-view offices. Not so. He and his team work from their homes -- around their families. When they need to meet with their wealthy clients they use their boardrooms, or take them out to the best restaurants. “I’m having an absolute ball”, he says, “but, more importantly, so are my clients and the people they help!”

Let me close this column with possibly the hokiest thing I’ve ever written -- but it’s nonetheless true: the quality of your life, and your future success, depends on the questions you ask yourself. Ask different questions, and you’ll get different answers.

Tread Your Own Path!