Hobby versus business
Many accountants may encourage you to treat your MLM business as a hobby, not realising how successful you are becoming! You can demonstrate that you are running a business by:
1. Register your business name with ASIC
2. Apply for an ABN and register for GST. Even if your turnover has not reached $75,000 yet, surely you intend for it to exceed this! Yes, you will have to remit GST on your sales and commissions but you can also claim back GST on your eligible expenses
3. Prepare a business plan
4. Prepare a marketing plan
5. Establish thorough and accurate record keeping procedures
6. Have public and product liability insurance in place
7. You may even considering structuring your business outside of your individual or partnership, such as through trusts or companies
Non Commercial Losses
In the early stages of your business it is possible that you will produce a loss for tax purposes. If so, you may need to carry this loss forward to following years and offset against your future profit in the business.
There are four tests to apply to these losses to identify if you can claim them against other income in the year incurred.
1. Assessable Income. You pass this test if the total turnover for the year exceeds $20,000.
2. Profits Test. You pass this test if your business has made a tax profit for three out of the past five years, including the current year.
3. Real Property - does your business use in excess of $500,000 in real property in the course of a year?
4. Other Assets Test - does your business use in excess of $100,000 of other assets on a continuing basis.
Industry Specific Tax Deductions
Your particular MLM business will have expenditure specific to it. If you are buying products for samples, on-selling or promotion you need to keep records to be able to identify this.
Additional examples of deductions to consider are:
- Education and training
- Home Office
- Motor Vehicle Expenses
- Portion of Telephone
Also, if there is a specific quota or requirement for you to fulfil before you are entitled to receive commission or other income, this should be documented.
Self Assessment and Benchmarking
The Australian tax system relies on self assessment. This means that the Australian Taxation Office is likely to accept your forms and returns as you have prepared or authorised them. Be aware that they may come back and review those forms in the years to come.
This means that you need to keep records to substantiate your claims for up to 5 years, or longer if fraud is suspected.
The Australian Taxation Office also performs industry benchmarking to see if your tax return fits within the industry standard. They can also access third party information from Centrelink, State Revenue offices and banks.
Good record keeping serves four main purposes
1. It saves you time by ensuring that you only need to look for something once!
2. It saves you money in accounting fees.
3. It also saves you money because you don't miss out on tax deductions because you have forgotten about or misplaced documentation.
4. It means that you can monitor your business performance and make improvements in a timely fashion.
The top 5 considerations for a good record keeping system:
1. An accounting system such as Xero
2. Saving of documentation (Xero can also do this)
3. Timely preparation of compliance reports such as tax returns and business activity statements
4. Recording of business proportions of expenses
5. File notes and records as to the apportionment and purpose of the tax deduction and income producing activity undertaken.
A proactive accountant will be able to assist you in setting up your business structure, record keeping and business monitoring requirements. The sooner you can build a relationship with a trusted accounting adviser, the sooner you can start seeing positive results in your business.