Why paying more tax is a good thing. with Blake Jenkins

Episode Transcription

Den Lennie (0s):
G’day, guys! Den Lennie here with episode 214 of the How to Scale a Video Business podcast today, we’re going to be talking accounting and why it’s a good idea to be paying tax. I’ve got Blake Jenkins from Count Out Loud who respect just counting as the firm based in Sydney, Australia, and they focus on helping companies in the media space. They really understand are industry. Now the goal is to have Blake come on at least once a month to tackle all subjects around tax, accounting, finances, regardless of where you were in the world, or at least give you a questions you can take to, you do want to count. It is to make sure you are maximizing your profitability and minimizing your tax obligations.

Den Lennie (44s):
Having said that paying taxes are a really good idea because when you are paying tax, you are making money. So hope you enjoy this episode. Blake, I’m really thrilled to have you on the shore today. How are you going today in Sydney?

Blake Jenkins (59s):
A yeah, not so bad Den, thanks for asking me if it’s, you know, these lockdowns a really a make it a bit of a struggle for us and again, and a bit sick have these four walls that’s for sure.

Den Lennie (1m 11s):
Exactly. Well, hopefully that will end soon enough, but you guys, our specialists, accountants in the film and media space and, and I wanted to start this series of episodes with you. And then we were hoping to do this every month. Cause I think an understanding of accountancy and financials is such an integral part of running a successful business. And I wanted to start today by asking the question to you, you know, why, why, why, why, why would a film maker, why should a filmmaker are a media company be happy to be paying 50 grand in tax?

Blake Jenkins (1m 53s):
Yeah, a great question. And that the simple, a simple answer is when your paying tax that makes you make your money, which is, which is a good thing, right? I think that the idea around trying to spend as much as you can to get your tax down is, is kind of crazy to, to us because yes, buying things do reduce your tax, which is, which helps. But if you’re spending money, when you don’t need to spend the money and you’re just shooting yourself in the foot and you are shooting yourself in the cashflow, a foot down the line, and we get questions all, all the time, write around June and saying, should I buy car? Should I buy it more cameras? Should I by this, this and that? And the answer to the question is, do you need it as a starting point?

Blake Jenkins (2m 37s):
Or are you going to buy it in July anyway, if not, what else do you need to think about what that money is going to be used for? Or do you have your, your eating a super coming up that you’ve got your, your JST coming up? You know, you got your taxes coming up. So you are using that money to try to not down here, you have your taxable income may or may not be the best use of those funds. If you just kind of throw on about

Den Lennie (3m 1s):
It is one of those. If it’s like media or media folklore, or isn’t it, and it sounds like an in-camera work or I used to come and park and it was like the talk of like tax time is right and you need to spend some money. And, and it’s like taking advice from other cameraman on how are you should run the taxes. His is a bit like, Mmm, it’s a bit controversial is a bit like saying, or the scientists are, are wrong about COVID let’s listen to the guys on Facebook is, and whether or not you should be vaccinated to not to tell me about, I mean, this must be something that you guys come across all the time.

Den Lennie (3m 43s):
How do we collectively through this, through this show or help are market in film and TV understand a better way of doing things. W what is a better way of managing your tax other than, or I don’t want to pay a tax or spend the money

Blake Jenkins (4m 2s):
And yeah, look, this is, there’s a really wide range of things you can actually do to, I we’ll call it a, a tax minimization. So we are never really doing anything to purposely avoid too much tax outside the world that you can do it in a rules that he can go through, but, you know, structure and your business correctly, as one, one thing is, is a great start. So if you were saying, he just does his best to have the best structure in place, which allows you to move money around legally that reduces your overall tax. Do you think of the tax as not just a tax, right? You pay may be in your company or all your sole traders, but it’s got to be an average, right. A tax across the whole one. So if you’ve got a company in a trust and a husband, a wife, and, and couple of kids than if you can spread things across them, you can reduce your average rate of tax down from 25% to 19%.

Blake Jenkins (4m 53s):
Are you utilizing these options is, and this is another things you can do that as well. And like, you know, setting tax effective wages throughout the year. So your on top of that, so, you know, thinking about the tax, right, and Australia for individuals going out to 45,000, his 19 cents of a dollar, now that our company tax rate is 25 cents of a dollar. So he can see is as long as you always push out or that extra bit of money, it’s up to that a man and still be better off rather than just leaving it in the company and just spending it on, you know, assets on, or your cameras that you could talk about. But, but there’s also, you needed to look at getting money out of your business to you personally, if you’re in one of those structures, because you can’t just keep spending money on your personal, autonomous, within a company, or that you need to get the money out to you, which then allows you to plan for wealth creation personally, which is the next step of business, or you do this, this is going well.

Blake Jenkins (5m 48s):
And they are going to think about where do you want to achieve? I guess, a personal,

Den Lennie (5m 53s):
I, I was talking to a client of mine the other day, who is a sole trader. And they were asking me, you know, or should I be going into Pty limited or I should, they have a trust? And I think there’s a, there’s a lot of confusion. I sometimes hear people going from the sole traders two trust and not having a Pty limited. And, and I I’d love to know from your perspective, what are some of the broad benefits of being sole trader versus Pty limited vs of trust. And, and, and that, I know that there’s always a very specific on the exact business and there’s a lot of parameters.

Den Lennie (6m 33s):
Some I’m not suggesting you’re giving any advice here, but I’d love to understand what the differences are between those three structures, so that anyone listening to hear, who’s not familiar with that. A near you, you may be listening in the U S or the UK where things are called slightly different things, but they, would, you mind just explaining where someone should transition from a sole trader to another, another structure?

Blake Jenkins (6m 56s):
Yeah, look, it’s a really good question. It’s something that comes up all the time, a for us, cause a, you know, we have a lot of clients that are in that sole trader, constantly our contracting business’s. And they’re kind of getting to a point when I hear everyone talking to our company’s and our, who should I be won myself. And if I just say it’s a really, really specific on each person’s individual scenario, and if we’re talking about the places in the worlds it’s, or have their own tax rules to think about, but, but realistically, our company is great because they can give you a, a concessional tax rate. It gives you a less liability. So I think of people are contracting with the company, not you personally.

Blake Jenkins (7m 37s):
So it helps with that liability. And, and it gives you a little more kind of planning options for our, our tax. So when you are a sole trader are getting taxed on your profits in that year, and that’s it when you are a trust or the profits need to be distributed out at the end of the years. So potentially if you solve, if you’ve gone into a trust and you could be distributing to your self and you not getting any tax benefits whatsoever, whereas the company we can retain those profits. When we start talking about, when you should think you should turn into a, a, a company. And, and my practice is the bus saying that, you know, Australia, we tend to steer away from trading a business through a trust any more is because it’s just a little bit too compliance heavy, and you don’t get those benefits in an, a task kind of a world, but you from a sole trader point of view, do you usually want to be making sure that transition to a company is one going to get you a pen or a tax write a two is worth the cost, actually set it up and to administer because you’re costing the company is a lot more than it is as a sole trader cause you have all of these other compliance issues to think about, and it’s totally separate to you personally.

Blake Jenkins (8m 47s):
So it, all of these kinds of things go into it. And, you know, realistically, as a rule of thumb, I kind of go in Australia, at least if you’re making net as a sole trader in excess of 90,000 to 90, to a a hundred thousand, and your turnover is in excess of two 50, that’s probably a point where you really seriously start considering it, the other options, as well as a, a lot of larger production companies will tend to only contract with employees or companies. So if you’re a sole trader, they might go, or you’re going to be in employee on my books, cause we don’t wanna deal with the insurance’s and, and the super or, and all of these kinds of things.

Blake Jenkins (9m 27s):
So there’s another benefit where someone might go look, I’m probably their write a book on the nose in terms of tax, but it’s going to help me with my business to get out of a contract as a company. Coz I just wanna put me on is an employee and not a lot more money in my pocket today, rather than down the track.

Den Lennie (9m 44s):
That’s a really, really good point. I’ve had that many, many times where sole traders kind of get a bit frustrated that when they work with a bigger company that they’re like, well, if you’re not a company we have to put you on staff. And which means that you’ve then got your getting PAYG tax taken off this source, super taken off that source. So you have getting nets a lot less and then you have to go and do the paperwork with your accountant as they have the paperwork at the end of the financial year to claw that back. So it sounds to me that once you’re doing 250 a year plus in revenue, having a Pty limited here in Australia is the next step. So, so where does a trust fit into that?

Den Lennie (10m 26s):
Because I know, I know how we structure our business and our business is structured whereby I’m a director of my company, which was a Pty limited, but the company is owned by the trust. And that’s something that I go into just in the last couple of years. Can you explain a little bit more about how that trust works in relation to a company?

Blake Jenkins (10m 45s):
Yeah, yeah, for sure. And that’s why I kind of look at this as the ideal account Instructure or the idea of business structure is the company that’s trading out at the top. And then the company is owned by the why of it’s shares on issue, the trust. So the shares held within a trust and then the beneficiary’s and the trustee’s of that trust would be a mum and your dad’s and you have the kids depending on their age and what that allows you to do. So when you think, or from a company perspective, what is that a liability issue though, with that we’ve already kind of touched on having the shares are owned by the company that gives you that extra level of protection between USA individual and your business training, but it also allows for you, you too much, you pay tax in your company.

Blake Jenkins (11m 30s):
You can then pay dividends out with franking credits attached to that, which is basically tax credits, where we pay you within your company. And they get attached to that. Say, you don’t get double a double tax or having that trust structure then allows you to pay the dividend into the trust and then send the money to whoever with a beneficiary may be two, allow you to smooth out that tax rate, which were we about it. So if you own this, year’s personally that say, and he paid a dividend out and that goes into your name and that’s it. But let’s say, you know, your stay at, or they use their home with the kids and your wife’s out their running the business and make him a lot of money. And you gotta say 20,000 worth of income just from bits and pieces here.

Blake Jenkins (12m 12s):
And then she’s got a 180 is sitting over in the company. We can push some of that money down to you personally, to then smooth that tax rate. So you’ve basically give yourself for the option to say, do you have a more tax planning officer? And I suppose, which is, which is the idea of a kind of situation, a debate.

Den Lennie (12m 32s):
So essentially what is happening as if you are earning at home $20,000 for our are doing bits and pieces of work your way, starting a $180,000. And she decides that she’s going to pay a set of 120 in a $60,000 profit left the company what’s the tax is paid on that profit that can be distributed to the trust. And then it could be paid as a Frank dividend to you or whereby if you only adding 20,000 or you could be, or you could be given another 20,000 for example, or a 25,000 from a Frank credit and only pay 90% tax at the best rates rather than being tax multiple times in.

Den Lennie (13m 14s):
And I think the Regan, this is so important. And it’s only recently, I got my head around this after 12 years in business, is that instead of seeing the profit in the company, as something that you have to spend, if you are structured correctly, you pay the tax Jew, which is the right and proper thing to do, but then those profits get distributed through a trust and you actually get the money at a lower tax rate than if you were to do it another way. And that to me, seems like a much more sensible idea than buying another car or another, another put a camera equipment.

Blake Jenkins (13m 53s):
Well, exactly. It’s, it’s another way of getting, I just like getting money out of business and then allows you to build your own wealth, our sign, a birth as well. So if your thinking, maybe you want to be the first time and or maybe you wanna buy an investment property, or you got to get money out of the business too. You and cash wise to be on a a for those kinds of things. Then having these structures in his place mean that pushing that cash you out, you had no longer getting blacks with a huge amount of tax, and you’ve got the preference to do it, or the mind sitting that its, or a rather than that fancy new car or the business.

Den Lennie (14m 26s):
And another huge advantage is that if you have retained province in the business, your business is healthy. When you go out to get a commercial finance for a vehicle or for an asset, they look at your company tax returns from the last two years. And if you have a good profit and a good books and, and, and a growth and your business, what, what, what I’ve discovered is you can get asset finance at a hundred percent with no money though are much, much more easily. This is something that I feel a lot of sole traders, perhaps don’t understand and I’d love for them if they get nothing else that you have this podcast is to understand that it’s important to pay a tax, its not about tax avoidance.

Den Lennie (15m 15s):
If there are plenty of legal ways, morally legal ways to minimize your tax liability. In fact, I think my, I kind of back in the UK certainly many years ago, you said two things. This is one then that money and paperwork. So do the paperwork. Second thing was, there was a phrase around the lines of you are legally obliged to pay the minimum amount of tax jus. And so by employing or a good accountants, a farmer who understands your industry. And I think this is really important. You know what I want, it sound like a massive plus for you guys. Although we want to stay there is is that if you want to choose an accountant who understands your industry and, and you guys that, that that’s predominantly what you do, isn’t it.

Den Lennie (15m 59s):
Tell me, tell me a bit more about Count Out Loud. Cause that I think is important to, to share for someone who doesn’t know who you are or they might be some benefit for them having a conversation with you guys.

Blake Jenkins (16m 8s):
Yeah, yeah, no worries. So we’re, we’re a boutique, a accounting firm here in Sidney. So basically we have a direct, a code common for us as well. And she’s up in the industry for five or 10 years, she used to work in a larger kind of a field where it’s the same an accounting firm is we focalized vocal a focus, especially on film and entertainment industry because we realized that it is so incredibly niche differently, structured to everything. Every other industry there is out there in talking contractor’s and you talking acquittals and you talking big chutes with money and money and income in advance, all of these kinds of things that you might get a, a a hundred and, but your profits or the, your producer for you, you know, a 5% of whatever it is, I’m that doing?

Blake Jenkins (16m 54s):
Yeah. So if we’re us having that extra kind of experience and things of, we can really take your situation, understand it and get you the best outcome from a tax perspective perspective, but also structuring perspective. Also, you know, where you want to go over the next 12 months and make sure that when we’re doing things were looking into the future, we are not looking into to 18 months ago. So the, the worst thing that we find is when, you know, someone comes to this, that the end of the year, and we’re just, we’re looking at 12 months until the past. And there’s nothing we can really do with that. But if we’re on to this stuff, but right now in, in advance, then we can plan for that next 12 months that people need to grow because he can really, if you understand it and you know, what tax we potentially going to be paying in the next 12 months, then you can plan for the next 12 months.

Blake Jenkins (17m 44s):
So he, then he is almost two years ahead and ready to go into the next thing.

Den Lennie (17m 51s):
It’s, it’s an enormous, I am, in the last few years, I’ve really gotten on top of this. And, and so I come to this from a place of real, like genuinely quite, quite new to a lot of that stuff. And I think it was a lot of businesses that have been in business five, 10 years. You don’t understand the power, have proper tax planning. W what is, what is the first steps for someone who, who is a sole trader are maybe there are a Pty limited and they are currently just, you know, any of the year sending that our cans in a box of receipts, what is a better way of approaching that from a tax planning perspective?

Blake Jenkins (18m 32s):
Well, a a hundred percent that anyone’s got a box or a seats is really just to re-evaluate everything there. So many options out there now to collate that data electronically. I’m that you’d be crazy not to look at it are, right. So I’d say your first steps has always to make sure you are on a software that his tracking your bank account lines of data, and you can look at your profit and loss and your balance sheet at any point in time instantly, which allows you to, you know, someone calls up that pulls me up on a phone and says like, are thinking about buying a car, right? And then we go we’ll what are you looking right for the year? We can actually go into that file and see the year to date data and tell them one, is there a benefit too, is that cash?

Blake Jenkins (19m 17s):
They tend to do it. And three, he wants to tax outcome instantly. Whereas if you get everything in Europe, three bucks and you send it off once a year, now the accounts, they might not look at that for six months because of the time between the end of the financial year, when I looked at it that you taught, make those strategic decision. And if the band comes along and says, you don’t have your profit or loss for the last years, we don’t need a proper financial statement just dropped their okays. And how are you going to get that information now? Or how are you gonna know, where are you landing at the end of the year? Because most of you are that realistically, he should be able to knowing where your prophet is going to land. And at the end of the year, on that day, or close two, rather than six or 12 months down the line,

Den Lennie (19m 56s):
I I’m amazed at how many business owners I told you. And I see a, so how are you, how’s your half a year looking, or how, how’s your, how’s your last quarter looking, or when did you do last month? And they literally look at me blankly and go, oh, I don’t have to let me check it. And I find that absurd. I really do. I find that sad. I like, and I’m a be allowed to the hard way, but looking at profit and loss statements, from my perspective, these or historical documents, that’s, what’s, what’s been invoiced and what’s been received, ah, or not even receiving from a profit and loss statement. Here’s what was invoiced and here’s the receipts for what we spend.

Den Lennie (20m 36s):
But the second part of that is tracking cashflow and, and I, and I, I suffered from this many, many years ago, but I was that I was obsessed with a profit and loss going while we were doing a QI, but I wasn’t attention to the cash flow. Or is this something you see commonly in the film and TV space? And what advice would you give to business owners and sole traders to, to find a better way of managing that?

Blake Jenkins (21m 1s):
Yeah, I mean, a huge and I think is massive, especially in films, film an entertainment world, because you, sometimes you are on projects for weeks or months, and you’ve really got to be on top of the money coming in and might be a, you get 50% up front of 50% of the completion. So you’ve got a, you know, three months worth of the lead time we needed to make that money worth for you. So in terms of a better way to do it, I just got to the making sure that you’re keeping your data in these systems and tracking debtors tracking creditors, and, and I guess the same for parents or his cashflow statement that you should be planting six or 12 months in advance, if you can own that data. So yes, you might not gonna do it within a, a accounting program and its itself.

Blake Jenkins (21m 44s):
And that, although there are plenty, plenty out there, but when you got jobs coming in and you really need to be budgeting that whole, whole job out to the end and comparing it against actually to see where are you landing? I, I know that the historical, but again, and you know, why can’t we, why my, why are you wander on this? So why do we spend so much on contractors, subcontractors for this job? Or, you know, my travel was huge. So I’m a builder I should of build the more, you know, so having that clarity over the numbers allows you, you, you have to make a strategic decision.

Den Lennie (22m 18s):
I think another pitfall, or I see a lot, his, his, his filmmakers and, and production companies wanting a large projects and deciding on have women, oh, well, we got a project. Is what is it like three weeks chutes, or let’s not rental equipment. Let’s just by a camera kit and thee the oftentimes under underestimate what the true cost of owning another camera kit, his, by the time you have all the accessories in shoe increase the insurance as opposed to renting, because I mean, depending on the price of the asset, and I knew an Australia just now that you’ve got a slightly new situation, but there’s not a cap the asset at a moment, but in previous years where it was like $20,000 and 40 or $50,000 on the camera a package.

Den Lennie (23m 13s):
But, but you can’t necessarily write that off in one goal, but I think there’s a misconception that whatever you buy, you can write off in one goal. So I’ll take a vehicle. For example, I believe that if my some mistake and that in Australia, right, you can’t right. A vehicle down under or anything less than seven years, is that it is that the case. And, and what are some of the pitfalls in buying assets that perhaps, or the, the hidden pitfalls have that where the perception is that for spend this money and not want to pay their tax, but in actual fact, spending 40,000 might reduce your tax or profit by a 50,000, but it doesn’t mean you’re going to be paying a lot less tax.

Blake Jenkins (23m 55s):
Yeah. What I mean from that cop’s perspective, if you’ve got a few things to think of that. So you’re from Australia, you’ve got a, if you’re a small business entity, you get these concessions and the amount of you can ride off with his in full and save and gone up to you, you know, temporary, a full expensing, which is allowed almost anyone to ride if the full cost of the assets for this year. But I think thanks to Cova for that. But then the thing is with the vehicles that they are limited to the luxury cars or limits. So you might be a, a $150,000, not as a property or something, but you can really claim a 57 of those, which is, which is a limit. So you’ve then the cashflow a 150 grand, or you, our cashflow by financed, but you’re actually getting a, you know, tax benefit of a 57, but that tax benefit is then only limited to the percentage of tax rate you’re paying.

Blake Jenkins (24m 40s):
So your only getting a 25%, do you like your own, this base rate entity rate in Australia is 25% have that rod off as the tax benefit or the other issues, or you go and look at is if your running all these apps and these assets, all of your profits kind of a drop down, down a down. And then if we’re talking about going to the bank and getting extra finance for things, or, but that kind of stuff, then you balanced shades kind of a loose rubbish, cause you going to have a huge amounts of liability sitting in that I’m and your assets are going to be what rocked down because you’ve written them off and your profits write down again. So you’re kind of almost shot yourself in the foot a little bit then in terms of what your, maybe your future financial goals, but then also for the sake of saving 25% on the cost, all of that asset, what is it worth it?

Blake Jenkins (25m 29s):
And did you need it?

Den Lennie (25m 31s):
Yeah. And so, so it might be better paying yourself a little more and buying the asset privately.

Blake Jenkins (25m 39s):
Yeah, a hundred, a hundred percent. I would say, you know, if you are looking between the pain of yourself, some more cash and having the company pay your tax and pay your a, which is again and other way of getting money out of a business versus buying that asset, particularly that you might not really, really need it this point in time, but it might not to give you the economic output. That’s what that then definitely that extra of that extra payment T itself is worth that. But again, we can go right back to that paying dividends and franking credits and, and those franking credits you can own and get those off if you’re paying tax. So if you keep knocking your taxable income down and, and not pushing those dividends out with franking credits, then why are you really shortening the amount that you can get out to, to you personally, as the business owner, rather than keeping it within the business, or just reinvesting it there?

Den Lennie (26m 32s):
I love it will just do that at a time, but I think I’d love to touch back with you and talk about this a bit more because it is, it is a really important topic. And I think what I hope to do with this, working with you guys, its just demystify some of the, the, the, the fissure wives tales, if you will, I’ve run tax and accounting. So if you want to catch up with Blake, you can check ’em out and countoutloud.com and Blake, I look forward to chatting to you again next month.

Blake Jenkins (27m 1s):
Thanks so much for having me, Den, I’m really looking forward to that, looking to give you that hopefully, you know, your base of listeners as a, a good amount of advice. So at least a cue them to go and talk to their account that and say, Hey he, should I be considering this? Or what should I be doing next? Or how can I do things better? Because you know what excites me is seeing good businesses grow into their potential and to the amazing things and our current way to see, you know, those next shows that get up and have the next commercial is that the hand off is amazing.

Den Lennie (27m 28s):
Hey, guys, thanks for watching. I hope you’ve got a huge amount of value from that episode. If you’re looking for additional support or resources to support your business journey, then head over to denlennie.com, where you can get a whole heap of other resources, free downloads and access all the other episodes in the series. Be sure to subscribe and I’ll see you next time.